The Relation Between Political Stability and Economic Growth: The Turkish Case

This study investigates the long run relationship between political stability and economic growth of Turkey in between 2002 and 2016. Political stability has been referred to be one the causes of existence of strong institutions together with democracy for economic development for countries around the world. Empirical investigations have shown that strong institutions will be supported by political stability and democratic governance, and that these institutions will bring about robust economic growth. This work first focuses on how political stability index is related with the country's economic output level (GDP) and then the focus moves on to see the long run relation between political stability and several other prevalent macro-economic variables such as inflation rate, exchange rate and short term interest rates. For this purpose, a bivariate regression models were used by running ARDL method. The study found that the political stability index, when used as sole independent variable, had no long run relationship with each of the selected macro-economic variables including gross domestic product when testing by Bound test of Pesaran. Later, a multivariate regression was used to see the effect of political stability index together with selected macroeconomic variables on economic growth of Turkey. Upon building our econometric modeling for long run relation, the multivariate regression results suggest that, while political stability has positive relation with economic growth in the long run, it seems to be irrelevant in the short term. In addition, inflation is found to have a negative relation with economic growth in the long run, that is, when inflation increases the economic growth slows down in Turkey. One of the finding is that lagged value of exchange rate implies that decareasing value of Turkish lira put downward pressure on the economic growth.