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Premature Liberalization, Incomplete Stabilization: The Ozal Decade in Turkey

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  • Rodrik, Dani

Abstract

In late 1979 Turkey found itself in the throes of a foreign exchange crisis, with widespread shortages, negative growth and three-digit inflation. A decade later, Turkey has a comfortable balance-of-payments situation, and holds considerable foreign exchange reserves. The economy has achieved a remarkable transformation from an inward to an outward orientation. Yet, despite some initial success in the early 1980s, inflation remains high and the public sector budget is out of control.This paper provides an interpretation of the Turkish experience in the 1980s. It argues that foreign capital inflows in the early 1980s cushioned the fiscal squeeze, and allowed a relatively painless reduction in inflation alongside a process ofexport-oriented growth. The outward-oriented reforms should ideally have taken sufficient hold by the mid-1980s to allow the public sector to undertake the delayed retrenchment as the inflows came to an end, at no great cost to output. Instead, policy combined liberalization with patronage politics in a mixture detrimental to monetary discipline. Financial liberalization reduced demand for base money at the same time as fiscal balances came under increasing strain due to the external transfer. Inflation was rekindled under the dual influence of fiscal deficits and a shrinking base for the inflation tax.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 402.

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Date of creation: Apr 1990
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Handle: RePEc:cpr:ceprdp:402

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Keywords: Inflation; Stabilization Policy; Turkey;

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References

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  1. Rodrik, Dani, 1995. "Political economy of trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 28, pages 1457-1494 Elsevier.
  2. Dornbusch, Rudiger & Reynoso, Alejandro, 1989. "Financial Factors in Economic Development," American Economic Review, American Economic Association, vol. 79(2), pages 204-09, May.
  3. Ritu Anand & Sweder van Wijnbergen, 1988. "Inflation, External Debt and Financial Sector Reform: A Quantitative Approach To Consistent Fiscal Policy With An Application to Turkey," NBER Working Papers 2731, National Bureau of Economic Research, Inc.
  4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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Cited by:
  1. dogru, bulent, 2013. "Seigniorage Revenue and Inflation Tax: Testing Optimal Seigniorage Theory for Turkish Economy," MPRA Paper 47885, University Library of Munich, Germany.
  2. Uctum, Merih & Uctum, Remzi, 2011. "Crises, portfolio flows, and foreign direct investment: An application to Turkey," Economic Systems, Elsevier, vol. 35(4), pages 462-480.
  3. James Levinsohn, 1991. "Testing the Imports-as-Market-Discipline Hypothesis," NBER Working Papers 3657, National Bureau of Economic Research, Inc.
  4. Levent, Korap, 2006. "Seigniorage revenue and Turkish economy," MPRA Paper 20106, University Library of Munich, Germany.
  5. Merih Uctum & Remzi Uctum, 2005. "Portfolio Flows, Foreign Direct Investment, Crises," Computing in Economics and Finance 2005 224, Society for Computational Economics.
  6. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.
  7. Levent, Korap, 2006. "An empirical analysis of Turkish inflation (1988-2004): some non-monetarist estimations," MPRA Paper 19630, University Library of Munich, Germany.
  8. Demir, Firat, 2004. "A Failure Story: Politics and Financial Liberalization in Turkey, Revisiting the Revolving Door Hypothesis," World Development, Elsevier, vol. 32(5), pages 851-869, May.
  9. Onur Koska, 2005. "Financial Liberalization Era in Turkey: Critique on Decree No.32," Macroeconomics 0506016, EconWPA.
  10. Unal Zenginobuz & Sumru Altug, 2009. "What has been the Role of Investment in Turkey's Growth Performance?," Working Papers 2009/02, Bogazici University, Department of Economics.
  11. Hasan Ersel, 1991. "The Structural Adjustment : Turkey 1980-1990," Discussion Papers 9107, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  12. Ari, Ali, 2008. "An Early Warning Signals Approach for Currency Crises: The Turkish Case," MPRA Paper 25858, University Library of Munich, Germany, revised 2009.
  13. Turhan, Ibrahim M., 2008. "Why did it work this time: a comparative analysis of transformation of Turkish economy after 2002," MPRA Paper 31158, University Library of Munich, Germany.

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