Explaining Turkey’s Current Economic Crisis

The Turkish economy fell into crisis at the end of 2018. Özgür Orhangazi and Erinç Yeldan document how this crisis is characterized by a prolonged recession with persistent low-to-negative growth rates, dwindling investment performance, debt repayment problems, secularly rising open unemployment, a spiraling currency depreciation and high inflation. They show that the crisis can be traced to the post-2001 neoliberal speculative-led growth model. That model relied on excessive hot money flows and foreign debt accumulation as its primary growth engine. This caused a long buildup of financial imbalances and a corresponding rise of financial fragility.

Abstract

Turkey entered a new phase of recession-cum-real economy crisis starting in the last quarter of 2018. In contrast to the previous crisis episodes of 1994, 2001 or 2009, when the economy had abruptly shrunk with a spectacular collapse of asset values and a severe contraction of output, the 2018- crisis is characterized by a prolonged recession with persistent low (negative) rates of growth, dwindling investment performance, debt repayment problems, secularly rising open unemployment, a spiraling currency depreciation and high inflation. Popular explanations from the mainstream tradition attribute this dismal performance to a lack of “structural reforms” and/or exogenous factors. Per contra, our analysis shows that the underlying sources of the crisis are to be found not in the conjunctural cycles of reform fatigue, but rather in the post-2001 neoliberal speculative-led growth model with excessive reliance on hot money flows and foreign debt accumulation. We argue that following the post-2001 orthodox reforms, a foreign-capital-inflow-dependent, debt-led, and construction-centered economic growth model dominated the economy and caused a long buildup of imbalances and increased fragilities.

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