ABSTRACT
The opening up of the Turkish economy is not a new process. The process effectively started in January 1980, following the major crisis of the previous model of import-substituting industrialization in the late 1970s. The first phase of Turkish neo-liberalism, the “de-regulation phase,” in which key multilateral actors such as the IMF, the World Bank and the OECD were heavily involved was, on the whole, more successful than the second phase of Turkish neoliberalism during the 1990s (Öniş and Şenses, 2007). The critical turning point in Turkish neo-liberalism was the decision in August 1989 to open up the capital account completely. The decision to move to full convertibility meant that the Turkish economy was fully exposed to the forces of financial globalization. What became obvious during the context of the 1990s, however, was that the Turkish economy was ill-equipped to deal with the forces of financial globalization for two basic reasons. First, the macro-economy was chronically unstable. It was characterized by a combination of large fiscal deficits and chronically high rates of inflation. Second, the financial system was not properly regulated. As many commentators agree the decision to liberalize the capital account fully in the summer of 1989 was a premature decision (Rodrik, 1991). The consequence of this decision in the midst of high degree of domestic economic and political instability was that the Turkish economy’s performance became heavily dependent on highly volatile short-term capital flows with costly ramifications. Given its domestic weaknesses, the economy has failed to capitalize on the growing volume of foreign direct investment directed toward emerging markets during this period. The 1990s as a decade also illustrate how the interplay of politics and economics had a crucial influence on the performance of the economy. The political system during the 1990s has been characterized by successive weak coalition governments which lacked the political will and the capacity to impose fiscal discipline and create an environment conducive to sustained economic growth. The fact that the country was going through a costly war against a separatist organization in the southeast also exercised a negative impact on investment as well as constituting a drain on fiscal resources. Turkey’s “democratic deficits” during this period had a significant spillover on the economy resulting in an economic structure characterized by pervasive rentseeking and corruption (Cizre-Sakallıoğlu and Yeldan, 2000).
