ABSTRACT

Introduction Looking at the past two decades of Turkish economic performance, four events  emerge  as  being  of  primary  importance.  The  first  of  these  is  the  capital account liberalization in 1989. This decision has opened a new era of short- term  capital  inflows  into  Turkey  beyond  the  control  of  the  government  and have in a shallow foreign exchange market introduced a great deal of volatility in exchange rates and often meant high real rates of interest rates in the domestic economy. It has also introduced a strong surprise element in economic policy-making which became increasingly subject to the whims and speculative  behavior  of  international  investors.  The  deep  financial  crises  that  Turkey experienced in 1994 and 2000-2001 have rightly been attributed in part to such behavior taking advantage of the weakness of macroeconomic fundamentals  and  the  lax  regulatory  framework  in  financial  markets  in  the  face  of  the weaknesses of the banking sector. This decision has also made Turkey increasingly  vulnerable  to financial  difficulties  elsewhere,  as  evidenced  by  the  volatility in financial markets in Turkey following the crises in Mexico, Argentina, Brazil and Russia, as well as wider crises such as the Asian crises of 1997  and the current global financial crisis that is simmering since the third quarter of  2008. The second of these important events is the Customs Union with the European Union which came into force in January 1996 which generated profound effects on Turkey’s foreign trade as well as its level of industrial competitiveness. On a somewhat different plane, Turkey’s membership to the World Trade Organization in 1995 was another major event reinforcing the liberalization trends in the Turkish economy while at the same time narrowing the policy space of Turkish governments.   The  third  of  these  events  is  the  economic  crisis  which  erupted  in  the  first  quarter of 2001. Apart from its devastating socioeconomic impact,1 it opened the way for extensive institutional changes, the most notable of which were the legislative changes to increase central bank independence and the setting up of independent institutions in a variety of spheres.