Global Journal of Human Social Science, E: Economics, Volume 21 Issue 4

Effect of Foreign Exchange Rate on Maritime Sector Performance in Enhancing Economic Growth in Kenya Sudi Amani Mwasinago α , Dr. Richard Siele σ & Dr. Thomas Agak ρ Abstract - Maritime transport remains backbone of globalized trade and manufacturing supply chain, as more than 80% of world merchandise trade by volume is carried by sea. Maritime transport in Kenya takes care of 90% of Kenya’s international trade by volume. The objective of this study was to establish effect of labor productivity on maritime sector performance in enhancing economic growth in Kenya. Target population was Kenya Ports Authority and Kenya Ferry Services while Kenya Maritime Authority coordinated implementation of policies relating to maritime affairs. The study was guided by the Solow growth model and the production theory. The study adopted explanatory research design employing panel data using data on annual basis over the period 2000-2019. Simple Linear Regression and GMM Models were utilized. Using STATA 13.0 and applying Simple Regression model, results indicated that coefficient of foreign exchange rate was 3.5694 which was positive and significant at 5% level, , implying every one percent increase in coefficient of foreign exchange rate, output increased by 3.5694%. Applying GMM, results indicated that coefficient of foreign exchange rate was positive and significant at 5% level of significance, implying that for every increase in 1% of foreign exchange rate, output production increased by 3.2744%. On comparing results using Simple Regression and GMM models, effect and direction were the same with slight differences in quantity of coefficient of foreign exchange. Policy makers could consider improving on policies which could strengthen foreign exchange rate in order to increase output in maritime sector in Kenya. Keywords: maritime, labor productivity, generalized method of moments, Kenya. I. I ntroduction competitive maritime sector is important to global economic growth, since international trade is underpinned by waterborne transport. Maritime activity has a key role to play in the alleviation of extreme poverty and hunger as it already provides an important source of income and employment for many developing countries, such as the supply of seagoing personnel and ship recycling, ship-owning and operating, shipbuilding and repair and port services, among others. Waterborne transport has historically underpinned international trade and contributed to global economic growth. Waterborne transport is facilitated by ports, which provide a fundamental role in linking navigable water and surface transport. As is the case for most transport services, demand for port services is a derived demand that depends ultimately on the demand for freight at a destination and the demand for travel by passengers. Ports are therefore only one component in a chain of services that deliver the outcome of the movement of people and goods (OECD, 2011). The neoclassical growth theory, Solow-Swan Model, is grounded on production functions with strict neoclassical assumptions including constant returns to scale, diminishing returns to inputs and the perfect competition assumption. Only two factors, capital and labor, were considered in the production function. According to this model economic growth performance of a country was influenced by exogenous factors, namely, technology and population growth (Solow 1956). According to Solow (1956) time was the only variable that affected the level of productivity. More specifically, he used the following aggregate production function: Where Y is the level of aggregate output, K is the level of the capital stock, L is the size of the labor force, A is total factor productivity and t is time. The most important prediction of the neoclassical theory was that the poor countries would eventually converge to the per capita income levels of the rich countries. But in reality the gap between the rich and some poor countries in the world has increased (Acemoğlu (2008). This theory ordinarily presents the producers as successful optimizers by maximizing production, minimizing cost, and maximizing profits. Econometric techniques build on the basis to estimate production/ cost/profit function parameters using regression techniques where deviations of observed choices from optimal ones were modeled as statistical noise (Furková, 2013). Therefore, econometric estimation techniques should allow for the fact that deviations of observed choices from optimal ones are due to two factors: by either failure to optimize i.e., inefficiency or due to random shocks. ( ) LKFA Y t , = A Volume XXI Issue IV Version I 25 ( E ) Global Journal of Human Social Science - Year 2021 © 2021 Global Journals Author α : Ph.D in Economics Student, Department of Economics, Moi University, Kenya. e-mail: sudi90589@gmail.com Author σ ρ : Lecturer, Department of Economics, Moi University, Kenya.