MACROECONOMIC POLICY FOR GROWTHAND POVERTY REDUCTION IN KENYA

ROMEO ODUOR OLUOCH

A RESEARCH SUBMITTED TO THE DEPARTMENT OF APPLIEDECONOMICS IN THE SCHOOL OF ECONOMICS IN PARTIAL

FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OFTHE DEGREE OF BARCHELOR OF ECONOMICS AND FINANCE

OF KENYATTA UNIVERSITY.

JULY 2016

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DECLARATION

This proposal is my original work and has not been presented for a degree in any otheruniversity or any other award. Therefore this research does not reflect any form ofplagiarism. Instead all sources of reliable secondary data reflected in this study havebeen clearly referenced and/or otherwise the rest are original.

Name…………………………………………………………………......................

Signature……………………. Date…………………………….

This proposal has been submitted for examination with our approval as Universitysupervisors.

Name………………………….......… Signature……………….. Date…………………

Name………………………………... Signature……………….. Date…………………

Abstract2

It was once said that poverty anywhere is a threat to prosperity everywhere. In the worldtoday poverty still stands as one of the major challenges facing humanity. And this is thesame reason why poverty reduction was one of the eight goals of millenniumdevelopment.

Poverty is universally defined as a state of condition in which one lacks the financialresources and essentials to enjoy a minimum standard of life and wellbeing that isconsidered acceptable.

Kenya, and most precisely in the rural areas of Kenya. This is because most of the poorpeople living in Kenya dominate the rural areas. The Kenya National Bureau ofStatistics estimates Kenya’s rural population at 74.8% as at 2014. And also estimates49.1% of those to be living below the poverty line.

Therefore the objective of this particular study is to go through the poverty levels inKenya and how the government and the poor people themselves try to detach themselvesfrom poverty.

Kenya as most African countries has agriculture as the backbone of their economies.And for this reason, they tend to channel most of their economic solution to theagricultural path.

In Kenya various methods have been employed to try addressing this situation. Thoughmost of those have been farm or agriculture oriented and therefore this study does not tryto dispute or undermine these methods, but just try to test their success so far. Andprobably bring more approaches which probably are not channeled through the samedirection. By the end of this study, we should have better ways to curb poverty in ruralKenya. By this the study tries to expose ways that are business oriented or in one way orthe other they are small investments oriented.

Therefore this research will at some point rely on some of the worldly known methodsemployed to curb poverty such as the microfinance sector.

This study also looks into the economic growth trends in Kenya over the recent past.

Economic growth is the increase in the inflation-adjusted market value of the goods andservices produced by an economy over time. It is conventionally measured as the percentrate of increase in real gross domestic product, or real GDP.

Economic growth has somehow also been viewed as another more powerful instrumentfor reducing poverty and improving the quality of life in developing countries likeKenya.

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This study therefore relates Macroeconomic policy with the growth trends in Kenyatogether with poverty. Macroeconomic policy is usually implemented through two setsof tools: fiscal and monetary policy. Both forms of policy are used to stabilize theeconomy, which can mean boosting the economy to the level of GDP consistent with fullemployment.

Monetary policy often supports fiscal policy through use of the central bank rate torestrain credit. However, the central bank rate is not always an effective instrument.Attempts to constrain credit growth may result in dysfunctional high commercial bankrates that undermine productive investment. To complement a policy of moderately highinterest rates, the central bank can employ instruments that act on the balance sheets ofcommercial banks and influence their capacity to expand credit. Regulation of reservesis a useful approach.

Finally the study will collect more of secondary data on the fields of poverty, growth anddevelopment in Kenya. This will be subjected to statistical analysis for findings andconclusions later on.

Table of ContentsChapter 1 1

1.1 Introduction 14

1.2 Background 2

1.3 Problem statement 3

1.4 Objectives of the study 4

1.5 Research questions 5

1.6 Scope of the study 5

Chapter 2 6

2.1 Introduction 6

2.2 Theoretical Literature 6

2.3 Empirical Literature 10

2.4 Literature review 17 Chapter 3 18

3.1 Introduction 18

3.2 Research Design19

3.3 Sources and Methods of Data Collection 19

3.4 Model Specification 20

3.5 Definition and Measurement of Variable 24

3.6 Sampling Frame 24

3.7 Data Collection Procedure 24

3.8 Data processing And Analysis 24

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Chapter 4 26

4.1 Introduction26

4.2 Empirical Findings 26

4.3 The Regression Analysis31 Chapter 5 32

5.1 Introduction33

5.2 Summary 34

5.3 Conclusions 35

5.4 Policy Implications 35

REFERENCES 37

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CHAPTER ONEI.1 Introduction

This chapter introduces all the first aspects of the study.

The World Bank’s 2000 World Development Report defines poverty as anunacceptable deprivation in human well-being that can comprise bothphysiological and social deprivation. Physiological deprivation involves the non-fulfillment of basic material or biological needs, including inadequate nutrition,health, education, and shelter.

A person can be considered poor if he or she is unable to secure the goods andservices to meet these basic material needs. The concept of physiologicaldeprivation is thus closely related to, but can extend beyond, low monetaryincome and consumption levels. Social deprivation widens the concept ofdeprivation to include risk, vulnerability, lack of autonomy, powerlessness, andlack of self-respect. Given that countries’ definitions of deprivation often gobeyond physiological deprivation and sometimes give greater weight to socialdeprivation, local populations (including poor communities) should be engagedin the dialogue that leads to the most appropriate definition of poverty in acountry.

Since economic growth is the single most important factor influencing poverty,and macroeconomic stability is essential for high and sustainable rates ofgrowth, then macroeconomic stability should be a key component of any povertyreduction strategy.

This Chapter also gives descriptions of various areas of the chapter and also thestudy as a whole. It contains the following

Background Problem statement Objectives of the study Research questions Scope of the study

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I.2 Background

Poverty is multidimensional and goes beyond economics. It also includesissues like culture, social welfare and politics, among other factors ofconsideration.Kenya just like most African countries is faced with this problem of poverty.This therefore means that solutions to poverty and/or problems related topoverty cannot be solved exclusively to economic policies. And this studyfocuses on ways of reducing the enormous poverty levels in Kenya, as wellas observing and boosting its trends of economic growth.Kenya ranks among top 10 countries in Sub-Saharan Africa with largepopulations living in extreme poverty.Kenya has made significant structural and economic reforms that havecontributed to sustained economic growth in the past decade. Developmentchallenges though still include poverty and inequality.Kenya also has been viewed to be one of Africa’s great success stories fromits growing and youthful population, a dynamic private sector, a newconstitution, and its pivotal role in East Africa. Addressing challenges ofpoverty, inequality, governance, low investment and low firm productivity toachieve rapid, sustained growth rates that will transform the lives of ordinarycitizens, will be a major goal for the country.On the other hand, macroeconomic stability itself does not ensure high ratesof economic growth. In most cases in order to sustain high economic growth,very key structural measures are put into consideration. And again growthalone is not sufficient for poverty reduction. Therefore growth is onlynecessary condition for poverty reduction but never sufficient. And also forgrowth to have an impact on poverty reduction it rather be that associatedwith progressive distribution changes.

I.3 Problem Statement

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Economic growth is being considered as the most important factor influencingpoverty. This section therefore seeks to address the problem of poverty andeconomic growth, and how macroeconomic policy can really be efficient inreducing them.

Kenya's prospects for long-term growth are among the most favorable in EastAfrica. Sustained by its investments in infrastructure, its location as a regionalbusiness hub, and gradual improvements in governance and public-sectorcapacity, it is expected to keep growing steadily, according to projections by theWorld Bank and the International Monetary Fund. While Kenya is on the path toeconomic growth, however, poverty alleviation remains a challenge. Nearly halfof the country's 43 million people live below the poverty line. A big chunk ofthis poor population however lives in the rural areas of Kenya.

Kenya ranks 145th among 187 countries in the United Nations DevelopmentProgramme's Human Development Index, which measures development in termsof life expectancy, educational attainment and standards of living.

First we have to consider how the problem of poverty arises in Kenya. Thecauses of poverty in Kenya as revealed through the consultation process are:

Low agricultural production and marketing Insecurity Unemployment and low wages Poor governance Landlessness Lack of roads/inadequate roads Cost sharing policies Gender imbalance and vulnerability

The above mentioned concerns are so important to the development of a growthstrategy for addressing poverty thus leading to a sustained poverty reduction.The problem of this project is therefore to outline the priorities and measuresnecessary for poverty reduction and economic growth creation in Kenya. And inthis case, Microeconomic Policies are being tested as the main tool to be used toaddress poverty and economic growth in Kenya.At the same time, this project, in this chapter tries to close an information gap byoutlining the link between macroeconomic policy and poverty reduction.

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The connection between Macroeconomics, Poverty and Growth

1. Macroeconomics for Growth.With a keen observation, it can be said that poverty rates are related to thegeneral well-being of the economy as a whole. This means that as the economygrows, so do the opportunities for employment and income growth. It’s beenobserved that poverty rates move somehow together with changes inunemployment rate. Therefore macroeconomic stability is the pivotal point forany efforts to propel economic growth in a country.However, macroeconomic stability depends not only on the macroeconomicmanagement of an economy, but also on the structure of key markets andsectors. To enhance macroeconomic stability, a country like Kenya needs tosupport macroeconomic policy with structural reforms that strengthen andimprove the functioning of these markets and sectors.In conclusion macroeconomic stability depends on a number of factors like thestructure of key markets and sectors.

2. Macroeconomics with PovertyLow and sometimes negative growth rate can have a very negative effect on thelives of poor people in a country, or may act as a factor that steers some livesinto poverty for that matter.

Therefore through this Chapter, this research project tends to close the gap that isthe link between Macroeconomic policies, Growth patterns in a country andPoverty levels.

1.4 Objectives of the study And Research Questions

As stated earlier the objective of this study is to showcase the relationshipbetween Macroeconomic policies, Growth patterns in a country and Povertylevels.

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I.4 Research Questionsi. What is the major cause of poverty in Kenya?ii. What are some of Kenya’s most favorable and least favorable

macroeconomic policies?iii. What is the link between macroeconomic policies and poverty

reduction together with growth of the Kenyan economy?iv. What specific policies can be adopted to improve macroeconomic

performance?v. What macroeconomic policies can thereafter be used to protect people

from poverty, or uplift the social and economic welfare of the poor?vi. How does poverty relate to growth strategy?vii. what specific policies can be adopted to improve macroeconomic

performanceviii. What links macroeconomic policies to growth and poverty levels to a

country like Kenya?

I.5 Scope of the study.

The study is of course on poverty levels and particularly covers the Kenya as thespecific location of interest. Then the study narrows its focus on the rural areasof Kenya since they are the most poverty stricken. Kenya being a developingcountry, most of her population resides in the rural areas.

The scope of this study will define the limitations and boundaries limiting theresearch. It will tell the time, geographical locations and knowledge that isrelevant in the formulation of this particular research proposal.

So precisely this research covers a critical topic about poverty reduction butlimits it to Kenya and so all data and knowledge here are confined to thegeographical boundaries of Kenya. Also the study narrows its research to waysof reducing poverty using non-farm or agricultural means.

CHAPTER TWO

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2.1 Introduction

Different schools of economic have a range of views on poverty and growth inan economy. From 19th century classical and neo classical definition through theKeynesian/neo-liberal shift, this brought poverty to the forefront of the policyagenda, to the most recent theories.

This chapter is all about reviewing of the relevant literature applied in theformulation of this research problem.

These will include:

Theoretical literature Empirical Literature Critique of the literature

2.2Theoritical Literature

Theoretical literature involves the reviewing of the existing theories in the areaof interest. Theories on the causes of poverty are the foundation upon whichpoverty reduction strategies are based.

While in developed nations poverty is often seen as either a personal orstructural defect, in developing countries (like in Kenya) the issue of poverty ismore profound due to the lack of governmental funds.

Some theories on poverty in the developing world focus on culturalcharacteristics as a retardant of further development. Other theories focus onsocial development. Other theories focus on social and political aspects thatperpetuate poverty: perceptions of the poor have a significant on the design andexecution of programs to alleviate poverty.

Under this theoretical literature also featured are the various theories concernedwith economic growth.

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They include:

Poverty as a structural failing by Rank, Yoon and Herschl

This theory is mostly about the United States so it does not prove that relevantfor this study.

Poverty as cultural characteristics

Since development plays a central role in poverty reduction in third worldcountries (like Kenya), some authors feel that the national mindset itself for acountry to develop and to thus reduce poverty.

This theory is strongly supported by the works of Mariano Grodona (2000),Lawrence E. Harrison (2000), and Stace Lindsay (20000).

Poverty as a label.

Some theorists believe that the way poverty is approached, defined and thusthought about, plays a role in its perpetuation. Maia Green (2006) explains thatmodern development literature tends to view poverty as agency filled.

It further explains that the terms are given to the poor because the poor lacksocial and economic capital, and thus have little to no influence on how they arepresented and/or perceived in the larger community.

Poverty as restriction of opportunities

The environment of poverty is one marked with unstable conditions and a lackof capital (both social and economic) which together create a vulnerabilitycharacteristic of poverty.

This theory is further explained by Arjun Appadurai (2004), who says that thekey to the environment of poverty which causes the poor to enter into this cycle,is the poor’s lack of capacities. Therefore a person in poverty lacks adequatevoice and exit (capacities) with which they can change their position.

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Other than these some recent scholars such as Paul Ryan have come up withworks on poverty reduction and in his case the work is anti-poverty plan.

Theories of poverty.

Theory One: Poverty Is Individual

This views poverty as an individual phenomenon. It holds that people are inpoverty because they are lazy, uneducated, ignorant, or otherwise inferior insome manner. And commentary on this theory views that if this is true the n wecould whip poverty by helping the particular 15% of the population to figurethings out and climb out of poverty.

Theory Two: Poverty Is Structural

This views poverty as a structural phenomenon. It holds that people are inpoverty because they find themselves in holes in the economic system thatdelivers them inadequate income. Because individuals’ lives are dynamic, peopledon’t sit in those holes forever. Though the holes don’t go away they are insteadinevitably inhibited by others since they are a persistent defect in the economicstructure.

Economic Growth Theoretical Literature

Economic growth is the increase in inflated adjusted market value of goods andservices produced by an economy over time. It is always projected as a percentrate of increase in real GDP, usually in per capita terms. Here we focus on otherfactors other than macroeconomic policies that affect growth, and a goodexample is political institutions.

Although economic growth is the engine of poverty reduction, it works moreeffectively in some situations than in others. The two main factors that appear todetermine the impact of growth on poverty are distributional patterns and thesectoral composition of growth.

Theories and Models of Economic Growth.

Through the various schools of economics rest a number of growth theoriesand models.

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They include:

-Classical Growth Theory.

-Solow-Swan Model.

-Endogenous Model.

-Unified Growth Theory.

Classical (Ricardian) Growth Theory

Production and growth are based on the law of variable proportions,whereby increasing either of the factors of production while holding theother constant and assuming no technological change, output increases.However, this happens at a diminishing rate that will approach zeroeventually.

Critics of this theory however point out that technology, which is the mostimportant factor in economic growth is held constant and that economies ofscale are ignored.

Solow-Swan Model

It assumes that there are diminishing returns to capital and labor.

Capital accumulates out of saving but its level per worker decreases due todepreciation and population growth. As a result of diminishing returns to capitaleconomies eventually reach a point where, absent technological progress, capitalper workers remains constant and economic growth ceases. This point is called asteady state.

Note: Poor countries have lower steady states.

The model also notes that countries can overcome this steady state and continuegrowing by using new technology. In the long run, output per capita depends onthe rate of saving, but the rate of output growth is independent of the saving rate.

The major shortcoming of the approach is that it does not explain the sources oftechnological change.

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Endogenous growth theory

It basically explains the technological advancements mathematically. Then itincorporates a new concept of human capital. Unlike physical capital, humancapital has increasing rates of return.

Unified Growth Theory

It majorly addresses the inability of endogenous growth theory to explain keyempirical regularities in the growth process of developed economies over theyears.

2.3 Empirical Literature.

This is the literature on studies that has been conducted by others based on reallife observations.

Poverty in Kenya has been increasing rapidly in the past (PRSP), 2000. There isa marked increase in the number of people unable to access clean water,clothing, shelter, health services and education. Unemployment is also a problemin Kenya. The average unemployment is a 23%

The government of Kenya has tried over the past to come up with povertyalleviation strategies, some of which have made tremendous progress.

The early efforts geared towards poverty reduction included;

Land resettlement programs The District Focus For Rural Development Strategy The Social Dimensions Of Development programs

Some of the efforts employed by Kenya so far were:

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1. The Swynnerton Plan (1952-1954)

The period preceding independence was marked by implementation of measures to pacify an increasingly restive African population especially about the expropriations policies pursued by the then colonial government; that had resulted in alienation of large tracts of African land. The policies relegated the Africans to the reserve lands, which were congested and less productive. Besides losing land, unemployment was high among the African population. To mitigate the ill feelings, the colonial government decided to draw up a plan for accelerated agricultural development of the Native Land Units in Kenya. The task was assigned to the Assistant Director of Agriculture, R.J.M. Swynnerton, and became known as the Swynnerton Plan (Heyer et. al., 1976). The Swynnerton Plan recognized that a sound agricultural development is dependent upon a system of land tenure that would guarantee the African farmer a unit of land and a system of farming whose production would make the African self-sufficient in food and raise their level of income through saleof excess produce.

The major aspects were: i) Security for the African farmer in the form of land title deeds;ii) Consolidation and registration of all holdings in any given area;iii) Access to agricultural credit through the creation of a Loan (or Land) Bank for African farmers;iv) Provision of extension services to the African farmers; andv) Allowing farmers to grow cash crops such as tea, coffee and keep dairycows which were hitherto prohibited.Even though the plan was meant to assuage the agitated African farmers and reduce poverty levels, the Swynnerton Plan, like all other colonial policies “were specifically designed for the protection of the European mixed farm settlers…the policies initiated to develop African agriculture were formulatedin such a way that they mainly assisted the more prosperous farmers to the exclusion of the majority smallholders” (Heyer, et. al.1976: 147).The independent government inherited some colonial policies on agriculture. For instance, the Maize Marketing Board, the precursor of the National

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Cereals and Produce Board was set up in 1967 after an amalgamation of provincial marketing boards established in the 1950s. These were poverty reduction efforts intended to provide markets for farm produce for both the large and small-scale farmers. The KANU Manifesto borrowed extensively from the Swynnerton Plan and other colonial agricultural policies. Indeed “it still form(ed) the basis of much of agricultural development policy in Kenya’s small farmareas in the 1970s” (Heyer, et. al. 1976: 11). The continuous revision of agricultural policies shifting emphasis to the small-scale farmers has tended to improve their economic status, which by implication reduces the incidenceof poverty. However, the basis of the later policies on poverty alleviation through increased agricultural production was the Swynnerton plan of 1952-54.

2. The KANU Manifesto

The Kenya African National Union (KANU) was the political party that formed the first post-independences government and continues to rule to date. Its philosophy revolved around its objective: “to achieve the fastest economic independence for Kenya…to attainthe fastest rate of economic growth and to secure a just distribution of the national income both between different areas of the country and between individuals” (KANU Manifesto, p.2).

In addition the manifesto intended to reduce the burden of taxation among thelow income groups and to give priority to rural development by raising agricultural and nonagricultural infrastructure.The policies enunciated in the manifesto focused more on economic growth, which on its own has not guaranteed poverty alleviation. Though economic independence by implication would mean reducing poverty levels countrywide, this was not explicitly brought out in the manifesto. Much as it recognized the role of the voluntary sector in helping achieve the desired ends, the manifesto failed to outline a realistic strategy and framework for implementing poverty alleviation activities. This is an indication that the genesis of weak poverty alleviation strategies or a lack of specificity in poverty based reduction programs began with the manifesto.

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3. Sessional Paper No. 1 of 1965 on African Socialism and Its Application to Planning in Kenya.

The policy document was prepared against a backdrop of ideological debates and differences within the ruling party, with one group advocating for a command economy while the other extolling the virtues of capitalism and free enterprise. The document was to establish a system for political, social and economic progress that is embedded in pragmatism and a free market economy. It recognized the importance of both the public and private sectors in accelerating economic growth and development. The paper envisaged a growing economy providing for basic needs to the citizenry. Some of its striking features (Goldsworthy, 1975: 235) included emphasizing growth firstand distribution later; foreign investments to boost growth; a limited ambit for state intervention and nationalization; and incentives for private enterprisedevelopment.Though the policy document intended to rejuvenate economic development, some of its critics argued that it was neither African nor socialist but merely introduced to close further debate within the party on patterns of development. This could be the truth for, in the introduction, it was indicated that the document “should bring to an end all conflicting theories and academic arguments that have been going on” (Republic of Kenya, 1965).In the intervening period, the government was to continue producing regular policy documents aimed at poverty alleviation though not directly.

4. Decentralization in Development Planning: District Focus for RuralDevelopment (DRFD) – 1983

Though officially launched in 1983, the roots of DFRD could be traced to thelate 1960s when the government launched the District Development Committees (DDC) to involve district staff and stakeholders in planning for their development. This was followed in 1971 with the establishment of a Grant Fund and the Rural Works Programme Fund in the mid 1970s with the goal of stimulating the DDCs into active participation in development planning (Oyugi, 1985). In another effort, the 1974/78 Development Plan endorsed the idea of making the district the focus for rural development to raise the level of economic growth at the household and improve level of economic development countrywide.

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In 1983, the DFRD began shifting the planning and implementation of policies from the central government to the districts. The shift was to stimulate rural development and encourage local initiatives to complement the government’s effort in problem identification, prioritization, resource mobilization, and project implementation at local level. It also aimed at guiding the allocation of national resources on a more geographically equitable basis.More funds were to be allocated to the less developed regions to encourage and support local development initiatives. This was to raise income levels of the people at community level and by extension reduce poverty levels.

5. Sessional Paper No. 1 of 1986 on Economic Management for RenewedGrowth.

This document marked a transition in the economic management from an inward looking structure to a more altruistic approach. It was prepared against a backdrop of poor economic performance spanning a decade, and a worsening poverty situation. The economic shocks triggered by the 1973 oil crisis virtually ended the honeymoon of sustained economic growth of the first decade after independence, as measured by GDP growth rate which averaged about 6.5 percent. The paper outlined measures to tackle the problem of economicstagnation on three policy fronts: promoting the private sector, managing high budget deficits, and correcting restrictive or distortionary foreign trade policies.Economic growth became the major objective of national development policy. In a sense, it gave tacit approval for the Structural Adjustment Programmes (SAPs) which were implemented without a human face and ended up impoverishing Kenyans more. It was to become increasingly clear in the subsequent years that the implementation of SAPs (includingliberalization) made many Kenyans poorer, with increases in prices of commodities and services including education and health particularly due to cost sharing. The implementation of the Policy Paper drifted the government away from its sustained efforts towards poverty alleviation to release the

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population to the jaws of poverty through withdrawal of subsidies to social services.

6. National Poverty Eradication Plan.

The National Poverty Eradication Plan provides a national policy and institutional framework for action against poverty. The vision is to halt the current increase in the incidence of poverty through implementation of well-planned poverty alleviation programs. This approach is resorted to after failing to combat poverty through national development plans and other specially designated programs. Based on this realization the plan intends to bridge the gap between national development plans and address the needs of the poor; come up with a charter for social integration setting out pro-poor policies and planning; improve access to essential services by low income households that currently lack basic health, education and safe drinking water; develop a strategy for broad based economic growth; increase access to education for children of low income groups; eliminate shortfalls in the poor household’s access to mother and child health care services; and enhance theassets and income streams of the poor to build and maintain group corporation.Once put in place, the productive capacities of the households would be improved for sustained economic growth, which is equitably distributed.Through NPEP, the GoK recognizes the need for balanced economic growth and poverty reduction. This could be achieved through facilitation capacities needed at local government levels; support from national level agencies delivering productive services; and balanced development for rural urban areas.

The specific goals and targets for the NPEP are: 1. Reduce the number of the poor in the total population by 20 percent by 2004; and by a further 30 percent by 2010.2. Increase enrolment rates by fifteen percent over the first six years of the plan.3. Increase completion rates by 19 percent, especially for girls in the six-year period.

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4. Universal Primary Education (UPE) to be achieved by 2015.5. Universal access to Primary Health Care to within 5 km of all rural households orwithin one hour of local transport by 2010.6. Increase by 8 percent each year until 2004, access to safe drinking water by poorhouseholds and create universal access to safe water by 2001.7. Reduce time spent by women on fuel (wood) and water collection.8. Publish “best practice” guidelines for rural and urban social development by 2000.9. 20 percent of communities to draw up action plans by 2004.10. Ensure that forty percent of all extension messages are relevant to very poor farmers (Republic of Kenya 1999).

7. Poverty Reduction Strategy Paper, 2000-2003

The Poverty Reduction Strategy Paper (PRSP) outlines the priorities and measuresnecessary for poverty reduction and economic growth. This document recognizes that the primary development goal for Kenya is to achieve a broad based sustainable improvement in the standard of welfare for all Kenyans, and that the role of the government should be to spearhead action and create a positive framework for poverty reduction measures.Other key features of the paper include recognition of other non-state actors as key stakeholders in poverty reduction efforts; a re-statement that economic growth that outpaces population growth is a prerequisite for poverty reduction and that economic growth on its own cannot ensure poverty reduction; and, identification of a number of targeted short-term measures to directly address some critical causes and manifestations of poverty.The paper outlines four basic components and policy objectives in the fight against poverty, to facilitate a sustained, rapid economic growth; improve governance and security; increase the ability of the poor to raise their incomes; and improve the quality of life of all citizenry, especially the poor.Before then, poverty eradication efforts remained in the hands of the civil society such as NGOs, welfare associations (women, youth and religious

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organizations). So far, PRSP is the most comprehensive and most focused policy document in the fight against poverty since independence. This is because, it draws from the failures of the past policies and the consultative process that marked its preparation, and the involvement of stakeholders –government, the donors, civil society, the private sector and the citizens. Second, the government is going through a budgeted expenditure within the MTEF which addresses short term, medium term, and long-term strategies of alleviating poverty. This particularly highlights projects which could be initiatedand implemented to realize sustained development within clear time frame and budgeted resources.

In June 2000 Kenya adopted the interim PRSP. The objectives were to:

Facilitate sustained and rapid economic growth Improve governance and security Raise poor people’s ability to earn a living Improve quality life Improve equity and participation.

2.4 Literature Review

The failure of traditional poverty reduction programs in achieving deeper outreach to the very poor is a growing concern, as evidenced by the United Nation’s Millennium Development Goals (MDGs) which envision extreme poverty to be halved by 2015.

Designing services to help the very poor often means taking into account the historic and socio-political factors that contribute to the persistence of poverty. The very poor often lack even the most basics of services such as food, healthcare, sanitation and access to clean water. In addition to economic development programs aimed at the very poor need to focus on livelihood security and social protection, including micro grants, subsidies, cash transfers, etc.

Financial services of the very poor include microloans, savings programs and micro insurance: while non-financial services can range from social intermediation for functional literacy and social capital development, and

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business development services (BDSs)to develop entrepreneurship through business training, information and market linkages.

Programs tailored for the extreme poor may include provision of basic services such as health, nutrition, education and empowerment.

CHAPTER THREE

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3.1 Introduction

This final chapter of this research proposal brings out mostly the methodology ofthis study. It contains the following:

1. Research design 2. Theoretical framework3. Sources and Methods of Data Collection4. Model Specification

3.2 Research design

Research design is a blueprint which guides the researcher in his scientific inquiry, investigation and analysis.

This study mostly covers Kenyan macroeconomic policies with relation to growth and poverty reduction in the country. Therefore this particular study is a basic and applied type of research. This type of research came into choice mostly through the passion of the researcher in matters of macroeconomics together with development economics and poverty happened to be a real site of interest.

Hopefully this study therefore can justify itself as a very important addition to the fight against poverty globally, but first in Kenya and more precisely in the rural areas. And also prove essential in pointing out the importance of macroeconomic policies on growth.

This research brings out how poverty can be reduced in rural Kenya through better macroeconomics policies in Kenya. This is also expected to propel growthof the economy. Most people in the rural areas as stated before in this study do not have that full opportunity to reduce their own levels of poverty.

The willingness is obviously there but they do not have all it takes to curb poverty. This is stated comparing the poor people in the rural areas and those in the urban areas. By lack of opportunity the study tries to bring out certain factorssuch as the lack of proper information may be due to inadequate education, or lack of proper financial systems to motivate and support their projects; talk about microfinance for lending and even savings platforms.

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A successful strategy of poverty reduction must have at its core measures to promote rapid and sustained economic growth. The challenge for policy is to combine growth-promoting policies with policies that allow the poor to participate fully in the opportunities unleashed and so contribute to that growth. This includes policies to make labour markets work better, remove gender inequalities and increase financial inclusion.

Therefore in this study the final design is adopted in obtaining, analyzing andinterpreting data relating to the objectives of the study.

3.3 Sources and Methods of Data Collection

Data were collected from secondary sources. These include relevant textbooks,journals, internet, Kenya National Bureau of Statistics (KNBS) bulletin, CentralBank of Kenya (CBK) publications and World Bank publications.

3.4 Model Specification

This study specifies a functional relationship between Macroeconomic policies,growth in Kenyan economy and poverty reduction ways in Kenya. The studywill use a set of variables to actually outline this.

In developing poverty reduction strategies for a country like Kenya,policymakers would benefit from a quantitative framework that they could useto assess the distributional impact of the macroeconomic policy options underconsideration.

These variables include;

1. The Fiscal Policies (Taxes)

The tax system in particular should not in any way attempt to affect savings andinvestments.

The tax system should be assessed with respect to its direct and indirect impacton the poor. It is difficult to have a tax system that is both efficient andprogressive, particularly in those countries without a well-developed taxadministration. Therefore, governments should seek to determine a distribution

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of tax burdens seen as broadly fair rather than use the tax system to achievedrastic income redistribution.

The best tax systems typically include most or all of the following elements:

A broad-based consumption tax, such as a VAT, preferably with a single rate, minimal exemptions, and a threshold to exclude smaller enterprises from taxation.

Excise taxes should apply to petroleum products, alcohol, and tobacco; should be collected at the point of production or import; and should apply equally to domestic production and imports.

Taxes on international trade should play a minimal role. Import tariffs should have a low average rate and a limited dispersion of rates, to reduce arbitrary and excessive rates of protection.

The personal income tax should be characterized by only a few brackets and a moderate top marginal rate, by limited personal exemptions and deductions, by a standard exemption that excludes persons with low incomes, and by extensive use of final withholding.

The corporate income tax should be levied at one moderate rate. Depreciation allowances should be uniform across sectors, and there should be minimal use of tax incentives other than permitting net operating losses to be carried forward for some reasonable period of time.

The use of a simplified regime for small businesses and the informal sector maycomplement these major taxes. Real property taxes may also be used if they canbe administered appropriately, though this may be difficult in developingcountries.

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2. The Monetary Policies Inflation Inflation hurts the poor because it acts as a regressive tax and curbs

growth Output

Fluctuations in output clearly have a direct impact upon the incomes of the poor

3. Exchange Rate Policies (the specific exchange rates)

Exchange rate policies affect these fluctuations in two ways: first, changes in themoney supply can have a short-run effect on real variables such as the realinterest rate, which in turn affect output

4. Kenya’s GDP over time

The level and rate of economic growth in Kenya with time.

5. Kenya’s poverty levels over time.

This projects therefore precisely shows the relationship between

Taxes and growth, then interest rates and growth and finally exchange rates andgrowth. It then tries to relate Growth and poverty levels in Kenya.

Taxes and growth

Interest rates and growth growth and Poverty levels

Exchange rates and growth

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This research is trying to get the relationship between growth and poverty levels,with specific macroeconomic policies as intermediaries. Therefore it has two submodels that eventually form the final model of specification.

G = f (e, r, t)

Where; G is economic growth.

e is exchange rates.

r is the interest rates.

t is the taxes (income taxes)

The second model is;

P = f (G)

Where; P is the poverty levels observed

G is economic growth.

Thus the model;

P = f {(G) = f (e, r, t)}

This follows that the final statistical model of this particular project is

P = f (Gx1+ ex2+ rx3+tx4)

Where; P is the poverty levels observed

G is economic growth.

e is exchange rates.

r is the interest rates.

t is the taxes (income taxes)

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x1, x2, x3 and x4 are the coefficients or multipliers that describe the size of theeffect the independent variables (G, e, r, t) are having on the dependent variableP (poverty levels)

3.5 Definition and Measurement of Variable.

This model assumes that the main factor affecting poverty levels is levels ofeconomic growth in an economy like Kenya.

From this model poverty levels are going to be described depending on the dataanalysis of the given variables on which it depends.

Taxes to be considered in this case are those imposed on income of individuals.

3.6 Sampling Frame

This research is heavily analyzing Kenya as a whole though the data may only consider a definite scope of time. Preferably 5 to 10 years. The scope of this research was to analyze various elements of macroeconomic policy formulation such as taxes and interest rates. It also narrows only to growth in terms of GDP.

3.7 Data Collection Procedure

This research is an applied and explanatory research in nature. Therefore thisresearch relies heavily on secondary data collected from relevant textbooks,journals, internet, Kenya National Bureau of Statistics (KNBS) bulletin, CentralBank of Kenya (CBK) publications and World Bank publications, among others.

3.8 Data processing And Analysis

The data information collected from different sources was organized into tables. Data analysis comprises examining, categorizing and tabulating the data sets obtained from various sources, and or developed by the researcher.

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The secondary data collected was then compared to each sets of data thus helping realize the relationship between any two or three give sets of variables. This was done through summation and averaging of a wide set of data. The final data set was then later tabulated into one final table and a regression analysis was run on the data thus outlining further the relationship between the dependent variable (growth) an the independent variables (inflation rates, exchange rates and growth rates)

CHAPTER 4

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4.1 Introduction

This is the chapter that collected the relevant data to support the study. The data was analyzed and processed using various mathematical and statistical tools. This chapter then reports the findings from these analyses.

This chapter therefore includes:

Empirical Findings The Regression Analysis

4.2 Empirical Findings

This project majorly relied on secondary data obtained from various relevant sources.

Table 4.1

Kenya Growth Rate Trends

Year GDP Growth (%)

2005 5.8

2006 6.1

2007 7.1

2008 1.7

2009 2.7

2010 8.4

2011 6.1

2012 4.6

2013 5.7

2014 5.3

2015 5.5

Source: Developed by data from the Kenya National Bureau of Statistics

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The table 4.1 shows the growth trends in Kenya over the years since 2005 to 2015. It specifically shows the annual growth rate in terms of percentages over the years.

Table 4.2

Annual (Average) Exchange Rates

Year Average Exchange Rates (Kshs./USD)

Average Exchange Rates(Kshs./Sterling Pound)

2005 75.30 136.492006 72.05 133.432007 67.21 134.612008 69.64 127.482009 77.30 121.162010 79.47 122.632011 88.72 142.432012 84.65 134.782013 86.21 135.002014 88.08 144.822015 98.67 150.64

Source: Developed by data from The Central Bank of Kenya

The table 4.2 shows the mean exchange rates that were experienced in Kenya over the past period of between 2005 and 2015.

The averages are found from the monthly interest for every year in the period as provided by the Kenya National Bureau of Statistics.

Table 4.3

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Annual (Average) Inflation Rates in Kenya

Year Inflation Rates2005 10.122006 6.412007 4.262008 16.232009 9.3852010 3.972011 13.972012 9.642013 5.712014 6.882015 6.57

Source (Table 4.3): Developed by data from the Kenya National Bureau of Statistics

Table 4.3 shows the mean inflation rates experienced in the country during the period given monthly rates of inflation experienced in every year.

Poverty Trends in Kenya

Poverty trends in Kenya however have been rather more consistent. Ever since the British granted independence until around the 1980s, Kenya has had a consistent percentage of 51% of her population live below the poverty line.

Since the dawn of the 21st century, the percentage has rather been going down over the years even though not progressively.

Different researches o poverty have been conducted in random time frames over the years. This has estimated poverty levels at 45.9% in 2005, 51% in 2008, 43.4% in 2012 and 46% in 2015.

This research will therefore use the mean average of these percentage and use it to estimate the poverty levels in Kenya over the past ten years, i.e. 2005 to 2015.

Table 4.4

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Percentage of Kenyan population living under the national poverty line

Year Estimated % of population living belowthe national poverty line.

2005 45.92008 512012 43.42015 46

Table 4.4 shows the estimated percentage of Kenya that might be living below the national l poverty line in Kenya over the years.

The relationship between macroeconomic (policy) and growth.

Graph 4.1: GDP Growth (%) and Inflation rates Inflation Rates

0

5

10

15

20

25

30

Inflation Rates

GDP Growth (%)

As observed from the chart derived from data obtained over the period of 2005 to 2015, there exists a very interesting relationship between inflation rates and growth rates in a country.

From the above graph there is an inverse relationship between inflation rates andgrowth.

Whenever the inflation rates rise, the growth rate in the country seems to decline.

Graph 4.2: GDP Growth (%) and Exchange Rates

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0

20

40

60

80

100

120

140

Average Interest Rates

GDP Growth (%)

The above graph 4.2 represents a snapshot of how exchange rates over the period between 2005 and 2015.

This research has developed this graph to outline the relationship between exchange rates over time and the level of growth rate in a country. From the above graph it is seen that the exchange rates relate directly to the growth rate

4.3 The Regression Analysis

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The Model

P = f (Gx1+ ex2+ rx3+tx4)

Where; P is the poverty levels observed

G is economic growth.

e is exchange rates.

r is the inflation rates.

t is the taxes (income taxes)

x1, x2, x3 and x4 are the coefficients or multipliers that describe the size of the effect the independent variables (G, e, r, t) are having on the dependent variable P

Note:

In this regression analysis, under the variable ‘exchange rate’ only the (Kshs./USD) will be used hence ignoring the (Kshs./Sterling Pound).

Table 4.5

Year G E r2005 5.8 75.3 10.122006 6.1 72.05 6.412007 7.1 67.21 4.262008 1.7 69.64 16.232009 2.7 77.3 9.3852010 8.4 79.47 3.972011 6.1 88.72 13.972012 4.6 84.65 9.642013 5.7 86.21 5.712014 5.3 88.08 6.882015 5.5 98.67 6.57

Viewed representations

Estimation Command:

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=========================LS G E R

Estimation Equation:=========================G = C(1)*E + C(2)*R

Substituted Coefficients:=========================G = 0.0933348653056*E - 0.26532390061*R

Viewed estimation Output

Dependent Variable: GMethod: Least SquaresDate: 07/26/16 Time: 12:26Sample: 1 11Included observations: 11

Variable Coefficient Std. Error t-Statistic Prob.

E 0.093335 0.014442 6.462950 0.0001R -0.265324 0.126807 -2.092352 0.0659

R-squared 0.302428 Mean dependent var 5.363636Adjusted R-squared 0.224920 S.D. dependent var 1.864013S.E. of regression 1.641052 Akaike info criterion 3.991518Sum squared resid 24.23747 Schwarz criterion 4.063863Log likelihood -19.95335 Hannan-Quinn criter. 3.945915Durbin-Watson stat 1.320539

The "t'' statistic is computed by dividing the estimated value of the parameter by its standard error. This statistic is a measure of the likelihood that the actual value of the parameter is not zero. The larger the absolute value of t, the less likely that the actual value of the parameter could be zero.

F: Statistic tests the hypothesis that all of the slope coefficients are zero.

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R: Coefficient of determination is the fraction of the variance of the dependent variable explained by the independent variable.

CHAPTER 5

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SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS

5.1 Introduction

This is the final chapter of this project and therefore it gives the last of everything about the project done by the researcher.

This chapter will give a view of the whole project in a brief summary. It will alsodraw the conclusions that are very evident from the project carried out by the researcher.

Finally about this particular project, this chapter will come up with necessary policy implications.

5.2 SummaryThis research project was project was carried out as part of fulfilling the researcher’s interest in matters macroeconomics and development economics. This field of research had and still will have vast open areas to research on.This project is all about poverty, macroeconomic policies and growth. This is of course on a smaller scope with is limited to Kenya as a country. Poverty is viewed as an obvious problem and discussed to greater lengths in terms of its causes, its level in the country the ways the government views poverty in Kenya and almost all the possible measures the government has taken towards trying to curb the extreme poverty conditions in Kenya.Poverty is one of the main reasons why the country is classified as a developing country.This research also addresses the growth trends of Kenya in the past and tries to draw a pattern from the results obtained from various sources.This research touches on the macroeconomic policies in brief and tries also tries to draw a trend from the policies over the years. Especially the ones picked.Finally this research project clearly outlines the relationship between macroeconomic policies and growth together with poverty levels in Kenya.

5.3 Conclusions

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From the research conducted it’s very evident that there is a very strong relationship between any two of the variables, or even among all of them together.

Consider graph 4.1 showing clearly the relationship between GDP growth (%) and inflation rates inflation rates, which turns out to be inverse. Whenever inflation rates rise, the level of growth in Kenya tends to declines. Graph 4.2 also shows the relationship between GDP Growth (%) and Exchange Rates.

As a developing Kenya has tried to have some of the most favorable macroeconomic policies in the region. This is evident since the population of Kenya is at least less poor than those of her surrounding neighbors.

Therefore this research concludes that Macroeconomic policies, poverty levels and the level of growth in a country are very much related. So if one was to formulate good policies for poverty reduction in Kenya, then greater consideration should be given to the macroeconomic policies within the given economy or country.

Monetary policies would revitalize the financial sector, avert inflationary hikes and stimulate private sector investment. Exchange rate policies would focus on maintaining international competitiveness.With good macroeconomic policies, comes improved economic growth thus reducing the level of poverty.

5.4 Policy Implications

As the concept of sustainable development has been refined and developed, many new perspectives on economic theory and policy have been introduced. Anoverview of work on sustainable development recently published by the Global Development and EnvironmentInstitute (Harris et al. 2000) includes significant contributions on the topics of: natural capital, current and inter-generational equity, “green” accounting, “green” tax reform, growth and the environmental Kuznets curve debate, trade and structural adjustment, globalization, and 5cchykinternational institutional reform. It seems evident that these multi- faceted theoretical and practical issues arising out of the overlap between environmental, social, and economic analysis should have major implications for macroeconomic policy. But there is as yet little work on reforming macroeconomic theory and policy to take account of sustainability.

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There has been discussion of a variety of microeconomic policies which can promote environmental sustainability (e.g. Panayotou 1998) Since Herman Daly first called for an environmental macroeconomicsa decade ago (Daly 1991), there has been relatively little forward progress on this issue certainly none that has penetrated the mainstream of macroeconomic theory, practice, and teaching. There have been new approaches to macroeconomic measurement, taking into account economic and social factors (World Bank 1997a).

Some of the basic functions of macroeconomic policy, broadly conceived are; Economic stabilization, avoiding excessive inflation or recession, the best known function, which has often but mistakenly been viewed as the only appropriate goal for macroeconomic policy.

Distributional equity: This played an important role in early Keynesian analysis.

REFERENCES:

Cashin, Paul. P. Mauro, C. Patillo., R. Sahay (2001). “Macroeconomic Policies and PovertyReduction: Stylized Facts and an Overview of Research,” IMF Working Paper,WP/01/135.

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Cooley, Thomas F. and Stephen F. LeRoy (1985) “A theoretical Macroeconomics: ACritique,” Journal of Monetary Economics, November, 283-308.

Development Programme (UNDP), New York.

Economies: The Role of Economic Policies”. Policy and Programme Document,Discussion Paper, United Nations.

Foster, J., J. Greer, and E. Thorbecke. 1984. A Class of Decomposable PovertyMeasures. Econometrica 52.

Hailu, Degol, Sara Rendtorff-Smith, Cosmas Ochieng, and Uyanga Gankhuyag (2011). “Conflict Prevention in Extractive

Literature Review on Poverty Reduction Strategies Aimed at the Poor by ZahraCampell-Avenell in 2009.

Literature Review on Poverty Reduction Strategies Aimed at the Poor by ZahraCampell-Avenell in 2009.

Myles, G. D., 2009. “Economic Growth and the Role of Taxation ‐ Aggregate Data”, OECDEconomics Department Working Papers, No. 714.

Poverty Reduction Strategy Sourcebook, published by the World Bank

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