The Impact of Political Instability on Foreign Trade (2000–2023): An Econometric Study of the Libyan Case Using the ARDL Model and Structural Break Tests

Abstract

The study aimed to analyze and evaluate the impact of political stability on foreign trade performance in Libya, while controlling for key macroeconomic determinants, namely global oil prices, Gross Domestic Product (GDP), and the exchange rate. The research problem lies in attempting to systematically separate the impact of external oil market shocks from domestic institutional and political shocks within a highly sensitive, rentier environment. To achieve this objective, the study employed an econometric approach utilizing the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration, alongside an Error Correction Model (ECM) to capture short- and long-term dynamics, in tandem with the Chow test to detect structural breaks. The econometric estimations yielded several substantive empirical results, most notably confirming the existence of a long-run equilibrium relationship between foreign trade and its independent determinants. The findings revealed that oil prices exert a statistically significant positive effect in the long run, underscoring the persistent structural dominance of the hydrocarbon sector and the linkage of the external sector to global price fluctuations. The central finding of the study demonstrates a statistically significant, independent positive impact of political stability on the level of trade openness. This implies that the institutional environment constitutes a standalone explanatory variable, and that foreign trade performance cannot be reduced solely to oil price shocks. Conversely, the Chow test provided no evidence of a distinct structural break in the year 2011, indicating that the impact of instability has been cumulative and protracted over time. This methodologically justifies the preference for using a continuous political stability index rather than binary dummy variables.