The Effect of Ethnic Conflict and Political Instability on Import Demand: Evidence from Turkey

Abstract

The unrest in the city center of Istanbul during the late Spring of 2013 is just one of many in the long list of instability and conflict, events responsible for a presumably underestimated amount of lives during the second half of the 20th century. This paper focuses on the effects on imports of these occurrences. Imports are not only a way to satisfy domestic demand; they also function as an important gate to increased economic growth via importation of more advanced technology. The analysis advances the existing economic literature that incorporates institutional variables into the analysis in two distinct ways. First, internal instability has been the focus, in contrast to previous work that tried to explain changes to macroeconomic variables due to international conflict. Second, the analysis takes into account the endogeneity problem by using the VECM framework. Civil violence, that is, political instability, and ethnic conflict are found to have a positive effect on GDP per capita and import demand per capita. The nature of, and relationship between, civil violence and ethnic conflict in Turkey is pivotal in describing the influence of different macroeconomic variables on the rest of the economy. The VECM framework employed presents another intriguing result which is a characteristic embedded in Turkish ethnic history: there is evidence that ethnic conflict is not significantly endogenous to the economic environment. If the Kurdish problem is indeed the first item on the list that inhibits full-edged Turkish acceptance in the economies and politics of the West, the way to achieve ameliorated relationships between the two ethnicities is mostly through political negotiations, probably via international mediation as the ethnic strife has centuries-old roots.