Effects of Capital Flows on Macroeconomic Performance in the East African Countries

Abstract

Financial crises in economies do have far-reaching ramifications that roll over to following years, and which should spark scholarly studies and restructuring in governance to ensure mitigation. The global economic and financial crisis of 2008 and 2009 brings an opportune moment to re-study the concept of international financial integration. Furthermore, for countries to enjoy economic growth and prosperity, they should conduct thorough researches and embrace their recommendations. This study sought to find out the effects of capital flows on macroeconomic performance particularly in the East African countries (Kenya, Uganda and Tanzania). The capital flows are a major determinant of the macroeconomic performance, with variables FDI Net inflow, FDI Net outflow, Aid flows, Personal remittances and Private equity flows explaining 63.1% of economic performance according to the study. This study picked and investigated the above variables‟ effects on financial performance as measured by the growth in GDP, which is a fair measure due to its futuristic inclination. Data from the respective countries governments and their affiliated regulatory and statistics institutions as well as the international bodies were obtained. Descriptive statistics, regression & correlation analysis, diagnostic tests and analysis of variance were employed in the analysis of data obtained analyzed with the help of statistical software, MS Excel and SPSS. The results showed that flows in terms of Aid flows and private equity had significant positive impact on the GDP growth of the studied economies. They are the most crucial contributors to economic growth. Personal remittances also contribute positively to the growth although on a smaller scale. The variables Net FDI inflows and Net FDI outflows have less significant negative impact on the growth. As such, the study recommends that the governments should incentivize where possible, the private equity and personal remittances to continue posting sustainable economic growth. The governments should also lobby for foreign aid and change the attitude that it leads to the impression that the country is poor. What matters most in an economy is sustainable growth, and anything that contributes to this should be highly adopted and embraced. The governments should not place much emphasis on the FDI Net inflows and outflows since they are of less significance. As observed, this research was limited to a period of 5 years only between the years 2012 to 2016. This might not give a clear view of the economic state in the long-run, and might only reflect the current position in the economic cycle of the studied economies. As such, the study suggests that further research be conducted in the similar economic setting for a longer period of ten years, or be conducted in a wider settings of entire Eastern African region.