Working Paper: NBER ID: w3300
Authors: Dani Rodrik
Abstract: In late 1979, Turkey stood in the throes of a foreign exchange crisis, with widespread shortages, negative growth, and inflation into triple digits. A decade later, Turkey has a comfortable balance-of-payments situation, and sits atop considerable foreign exchange reserves. The economy has achieved a remarkable transformation from an inward-oriented outlook to an outwardoriented one. Yet, after some success in the early 1980s, inflation remains unconquered and the public sector budget is out of control. This paper provides an interpretation of the Turkish experience in the 1980s. It is argued that foreign capital inflows in the early 1980s cushioned the fiscal squeeze, and allowed a relatively painless reduction in inflation alongside a process of export-oriented growth. In the best of all possible worlds, the outward-oriented reforms would have taken sufficient root 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 followed a mix of liberalization with patronage politics detrimental to monetary discipline. Financial liberalization reduced demand for base money at the same time that 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.
Keywords: Turkey; economic stabilization; liberalization; inflation
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign capital inflows (F21) | reduced fiscal strain (H69) |
| reduced fiscal strain (H69) | inflation reduction (E31) |
| foreign capital inflows (F21) | inflation reduction (E31) |
| financial liberalization (F30) | inflationary pressures (E31) |
| fiscal deficits (H68) | inflation dynamics (E31) |
| political stability (P26) | economic policy effectiveness (E65) |
| aggregate demand restraint (E00) | inflation reduction (E31) |