ECONOMIC GROWTH, FINANCIAL DEEPENING, INCOME DISTRIBUTION, FINANCIAL EFFICIENCY AND POVERTY LEVEL NEXUS: A COINTEGRATION AND CAUSALITY ANALYSIS IN KENYA

Abstract

The growth -finance - poverty nexus has been an area of interest to scholars and practitioners who
seek policy measures to counteract poverty. The study sought to establish the relationship between
economic growth, financial deepening, income distribution, financial efficiency and poverty level in
Kenya. The key objectives were to determine the co-integration between economic growth, financial
deepening, income distribution, financial efficiency and poverty level in Kenya and to establish
whether economic growth, financial deepening, income distribution and financial efficiency granger
causes poverty level in Kenya. The study was underpinned by the Liberal theory, financial
intermediation theory and public choice theory of distribution. The study was based on descriptive
research design with annual 30-year period data sourced from the World Bank, Central Bank of
Kenya websites. The study adopted Vector Error Correction (VEC) Model given the cointegration
among study variables. Based on Johansen cointegration test, the study revealed that there were at
least two cointegrating equations implying long-term relationship between economic growth,
financial deepening, income distribution, financial efficiency and poverty level in Kenya. The study
also established that the long-term effect of economic growth, financial deepening, income
distribution and financial efficiency on poverty level in Kenya was statistically significant.
Additionally, the study revealed that economic growth and income distribution granger causes
poverty in Kenya with causation running from economic growth to poverty. However, financial
deepening and financial efficiency did not granger cause poverty in Kenya. The study therefore
recommended that the government of Kenya should stabilize economic growth rate as a mechanism
to eradicate poverty. Additionally, the state should come up with policies of equitable income
distribution such as progressive taxation and direct transfers to poor sections of the society.