Government Spending on Infrastructure and Private Investment: A Disaggregated Analysis

Abstract

Limited empirical studies have disaggregated the government spending into infrastructure and consumption expenditures in this thematic area. More so, Kenya has witnessed a tremendous increase in spending on infrastructural projects such as highways, road, ports, fiber optic, standard gauge railway, and massive investment in road management and maintenance. All these efforts are meant to accelerate the realization of the Kenya Vision 2030 as well as the ‘Big Four’ agenda of the Kenyan government. The aim of this research was to investigate the role of infrastructure sector spending on private investment in the country. The study used secondary data for 1963 to 2018 from annual statistical abstracts and economic surveys report. To achieve the outlined objective, the study adopted Autoregressive Distributed Lag (ARDL) technique and the Error Correction Model (ECM) estimation approach. Infrastructure outlay in health, agriculture and roads was found to positively impact private investment in the long run. On the contrary, defense and education development spending influence private investment negatively in the long run. This paper concludes that public sector infrastructure outlays are key in determining private investment and that different public spending component affect investment differently in both long- run and short- run. This study recommends that the government should consider increasing and sustaining spending on infrastructure development projects like roads, ports, fiber optic, railways, highways maintenance, agriculture mechanization, improving public health infrastructure to stimulate further the economic activities.