Political Stability Moderating Asymmetric Growth Impacts of External Capital Inflows and Exchange Rate Volatility in EAC
Abstract
Political stability and absence of violence and terrorism remain the weakest institutional governance dimensions across East African Community partner states, despite their crucial role in moderating the growth effects of external capital inflows and exchange rate dynamics. Extant literature largely overlooks these asymmetric relationships by treating institutions as homogeneous factor under monotonic growth effects. This study is motivated by deepening regional integration amid rising political and geopolitical uncertainties, including the Russian-Ukraine war, US-China trade conflicts, and the recent escalating Middle East tensions, that intensified capital flight to safe-haven and intensified instability within the EAC bloc. This paper examines the asymmetric impacts of external capital inflows and exchange rate dynamics on growth under the moderation influence of political stability across six EAC economies from 1996-2023. The analysis employs advanced second-generation econometric techniques, NARDL and DCCE robust to endogeneity, heterogeneity, cross-sectional dependence and structural breaks that have been pervasive in prior studies. Findings show that, under political stability moderation, positive and negative shocks from external debt and FDI promote growth, albeit with weak coefficients, while ODA and exchange rate volatility significantly constrain growth, from weak political conditions. The results suggest that strengthening political institutions, governance quality, and regional stability is essential for enhancing the productive effects of external capital inflows. Policy prescriptions should prioritise institutional reforms, productive integration of ODA with infrastructure, and exchange rates management aligned with macroeconomic fundamentals to sustain long-run economic growth in EAC bloc.
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