Rule of Law and Economic Stability: Corruption, Inflation, and Exchange Rate Volatility in South Africa

Purpose: This study examines the impact of the rule of law on corruption, inflation, and exchange rate volatility in South Africa, a key emerging economy. The rule of law, which encompasses the effectiveness of legal institutions, governance, and enforcement of contracts, plays a significant role in economic stability. Design/Methodology/Approach: Johansen Cointegration testing was performed to establish the integration between variables. The results of the Johansen tests suggest that the model presents a long-run relationship and that there is a cointegration between political instability and the exchange rate. The Vector Error Correction Model (VECM) was performed to establish a long-run relationship between variables since cointegration was established between variables. The Granger causality test was performed to examine the causality between variables and to examine the drivers and causes of exchange rate fluctuations. The impulse response function (IRF) was conducted to determine the shock of the rule of law on corruption, exchange rate, and political instability. Findings: It was found that there is cointegration between variables. Findings suggest that a stronger rule of law mitigates corruption by increasing accountability and transparency, leading to improved governance. Reduced corruption, in turn, supports a more stable inflation rate by promoting fiscal discipline and reducing inefficiencies within the economy. Practical implications: By addressing governance gaps and reinforcing legal institutions, South Africa can reduce corruption, stabilize inflation, and mitigate exchange rate volatility, ultimately fostering sustainable economic growth. This research contributes to the broader discourse on governance and economic stability in emerging economies, with implications for policy recommendations aimed at bolstering legal frameworks to improve economic outcomes. Originality/Value: Through case studies of countries like Venezuela and Zimbabwe, this study highlights the cyclical nature of political instability, legal erosion, and economic downturns. It also discusses strategies for reinforcing the rule of law to mitigate exchange rate volatility and attract foreign investment, providing a pathway to greater economic resilience for emerging markets.