Journal of World Economic Research 2014; 3(4): 37-46 Published online September 10, 2014 (http://www.sciencepublishinggroup.com/j/jwer) doi: 10.11648/j.jwer.20140304.11 ISSN: 2328-773X (Print); ISSN: 2328-7748 (Online) Export led growth hypothesis: Evidence from Kenya Grace Muhoro 1 , Manaseh Otieno 2 1 Kenya Institute for Public Policy Research and Analysis, Young Professional: Private Sector Development Division, Nairobi, Kenya 2 Kenya Institute for Public Policy Research and Analysis, Policy Analyst: Trade and Foreign Policy Division, Nairobi, Kenya Email address: gracawangu@yahoo.com (G. Muhoro), manaseh.otieno31@gmail.com (M. Otieno) To cite this article: Grace Muhoro, Manaseh Otieno. Export Led Growth Hypothesis: Evidence from Kenya. Journal of World Economic Research. Vol. 3, No. 4, 2014, pp. 37-46. doi: 10.11648/j.jwer.20140304.11 Abstract: The Export-Led Growth Hypothesis (ELGH) postulates that export growth is one of the key determinants of economic growth. This paper aims to investigate the Export-Led Growth Hypothesis in Kenya using annual time series data from 1976 to 2011 and dynamic time series techniques of Auto Regressive Distributed Lag and 2-Stage Least Squares. The 2-Stage Least Squares is used to correct for the endogeneity problem of the variables involved. A seven-variable Vector Auto Regression (VAR) model (GDP, Exports, Imports, Household Consumption, Government Consumption, Gross Fixed Capital Formation and Foreign Direct Investment) is developed from a national income identity that links output to its contributing factors. The results indicate that there is unidirectional causality running from exports to economic growth. This implies that export-led growth hypothesis can be supported in the Kenyan economy in the short run. Besides, our results suggest that the growth rate of household consumption and Gross Fixed Capital Formation have positive and statistically significant impacts on economic growth. Hence, in the case of Kenya, export enhancing policies that will improve the quantity, quality and value of exports in the overall GDP contribution of exports are recommended in promoting and sustaining economic growth. Keywords: Economic Growth, Export-Led Growth Hypothesis, Causality 1. Introduction Economic growth is a major concern for many countries in the world. Both developing and developed nations are keen to achieving and sustaining high-level growth rates of their output through use of different economic policies. Increasing a country’s output has the potential of attracting resources that are needed to drive other economic activities like investments in key sectors hence uplift the people’s living standards. One such strategy that a country can explore is increasing its exports. Past investigations on the potential of exports to increase the growth of output have produced varied results raising several important questions: Do exports contribute positively to growth of output? Are there other factors that have a statistically significant impact on growth of output? Does Kenyan data support the export led growth hypothesis? Export activities fuel growth in a number of ways including economies of scale on account of larger international markets for goods, production and demand linkages, increased efficiency and productivity because of specialization, generating employment opportunities within various sectors and industries, learning effects and development of human capital and embracing advanced technologies embodied in foreign capital goods (Basu et al, 2000) and (Were et al, 2002). A number of studies have been conducted to validate the export led growth proposition in an attempt to provide policy recommendations geared towards enhancing growth of exports and subsequently economic growth of countries. Despite the numerous studies on this subject, no definite conclusive evidence has yet been reached on the causality: Does export growth lead to economic growth or does economic growth lead to export growth? The mixed results could be attributed to among other factors: different characteristics for various countries and their experiences, different variables used, different econometric analysis methods and different time frames applied in various studies. This study builds on the above to come up with a time frame that encompasses export promotion strategies executed in Kenya and adopts a simple but a comprehensive methodology on the analysis of contribution of exports to economic growth, with the aid of modern time