Does Trade Policy Matter in an Isolated Economy? A Case Study

This study empirically investigates the role of trade policy along with physical capital, human capital and labour force on economic growth in an isolated economy (i.e. North Cyprus). We use a sample of quarterly and seasonally adjusted data covering the period 1978Q1-2002Q4 to evaluate whether the North Cyprus economic growth during this period is better explained in an ‘old’ or ‘new’ growth modelling framework. Multivariate cointegration techniques are applied to test the validity of our model and the relative importance of different variables which may have an impact on both the long-run and the short-run growth of the North Cyprus economy (NCE henceforth). The empirical findings show that physical and human capital investments as well as labour force are the major causes of growth in the NCE, whereas the indices of trade policy proxies have a perverse effect on economic growth due to the peculiar economic and political position of North Cyprus.