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The Political Anatomy of Economic Crises -the case of Turkey: 1945-2018

Year 2021, Volume: 7 Issue: 2, 110 - 122, 30.11.2021
https://doi.org/10.51803/yssr.908331

Abstract

The foundations of economic and financial crises are conventionally attributed to the technicalities of macroeconomic fragilities. Yet political instability (caused by the deficiency of democracy and/or unfunctional political institutions) can also be considered as a major determinant of economic instability by deteriorating the debt dynamics through depreciation of the national currency or the ascent of interest rates. Analogously, political instability, for instance, disruption of cabinet durability, to a large extent depends on the economic performance of governments. Hence, though most economists conceive macroeconomic fragilities as the mother of all crises, the issue is rather complex and there is an intermingled relationship between political and economic crises.

Besides, as macroeconomic fragilities or structural imbalances are results of inappropriate policies, the political rationale and the social motives behind such misleading policies should also be well comprehended. For that purpose, an elaboration will enable the negation of the dominant argument that it is only economic factors that instigate crises.

This study investigates the political background eight economic crises in Turkey, since 1946. It is observed that in all of them, significant levels of devaluation and retraction of growth are experienced. All of the devaluations were indispensable, except the first one in 1946 which was discretionary and precautionary. The crises of 1978/9, 1994 and 2001 ended with drastic austerity programmes, albeit the others, where governments refrained with macroeconomic adjustment through fiscal and monetary measures. The 2001 twin-crisis was so peculiar, as it was to a large extent caused by the design-defection of the programme recommended by the IMF. Yet, since the attempt of financial liberalization, all of the other economic crises were prompted by capital flights. The 2008/9 crisis was due to global contagion and the 2018 crisis was caused by the tensions in the bilateral relations with the US, amid high private sector foreign debt. In all economic crises, the profligate fiscal stance of governments has played a prominent role, as well as the maintenance of appreciated exchange rates, but such choices had a political rationale. Finally, in the background of all the economic crisis in Turkey, we observe stern political instability.

Political instability not only restricts the rational decision-making capacity of the policy-maker, especially if it converges into a political crisis, but also exacerbates economic sentiment, either by consumer confidence or by investor appetite, which subsequently results in economic decline. It also intensifies risks and causes exchange rate depreciation as well as interest rate hikes, both of which degenerates debt dynamics. Since the financial liberalization attempt, as portfolio investments have boosted, political stability has become imperative to sustain the stability of risk-sensitive financial markets. Both the experience of the 2008/9 and especially the 2018 financial crisis, have verified the importance of political instability as a determinant of economic crises. In short, economic crises cannot be analysed disregarding their political anatomy.

References

  • Akyüz, Y. & Boratav, K. (2003) The Making of the Turkish Financial Crisis World Development, 2003
  • Alper, C. E. (2001) The Turkish Liquidity Crisis of 2000 -what went wrong Russian and East European Finance and Trade, Vol.37, No. 6
  • Alper, E., & Öniş, Z. (2003). Financial globalization, the democratic deficit, and recurrent crises in emerging markets : the Turkish experience in the aftermath of capital account liberalization. Emerging Markets, Finance and Trade, 39, 5-26.
  • Acemoglu, D., Johnson, S., Robinson, R., & Thaicharoen, Y. (2003). Institutional causes, macroeconomic symptoms; volatility, crisis and growth. Journal of Monetary Economics, 50, 49-123.
  • Acemoglu, D., & Robinson, J. A. (2008). Economic origins of dictatorship and democracy. Palgrave.
  • Boratav, K. (2018) March-August 2018: capital movements that triggered the crisis (neo-liberalism creates crisis in the South) (in Turkish) 19 October 2018, SOL
  • Bussière, M. & Mulder, C. (2000) Political Instability and Economic vulnerability International Journal of Finance and Economics, Nov. Vol.5
  • Celasun, M. (2002) Before and After the 2001 Crisis: a macroeconomic and financial evaluation (in Turkish, unpublished)
  • Celasun, O. (1999) The 1994 Crisis in Turkey Policy Research Working Papers, No: 1913.
  • Chang, R. (2005) Financial Crises and Political Crises NBER
  • Cömert, H. & Yeldan E. (2018) A Tale of Three Crises in Turkey: 1994, 2002 ,2008-2009 ERC Working Papers in Economics, 18/09, June
  • De Castro, R.C. (2007) The 1997 Asian Financial Crisis and the revival of populism/neopopulism in the 21st century Philippines politics Asian Survey, 2007
  • Dornbusch, R., & Edwards S. (1991). The macroeconomics of populism. in: Dornbusch, R., & Edwards S. (Eds.). The macroeconomics of populism in Latin America. University of Chicago Press, Chicago, IL.
  • Ertuğrul, A. & Selçuk, F. (2001) A Brief Account of the Turkish Economy -1980-2000 East European Finance and Trade, November, 2001
  • Feng, Y. (2003). Democracy, governance and economic performance: theory and evidence. MIT Press, Cambridge, MA.
  • Fischer, S. (2001). Exchange rate regimes: is the bipolar view correct? Journal of Economic Perspectives, 15, 3-24.
  • Gasiorowski, M. J. (1995). Economic crisis and political regime change: an event history analysis. American Political Science Review, 89, 882-97.
  • Gasiorowski, M.J. (2000) Democracy and macroeconomic performance in underdeveloped countries: an empirical analysis. Comparative Political Studies, 33, 319-49.
  • Goldfajn, I., & Olivares, G. (2001). Can flexible exchange rates still “work” in financially open economies? G-24 Discussion Paper, No. 8.
  • Haggard, S. (2000). The Politics of Asian financial crisis. Journal of Democracy, 11, 130-44.
  • Haggard, S. & McIntyre A. (2000) The Political Economy of the Asian Financial crisis: Korea and Thailand compared in Noble G.W. & Ravenhill J. (Eds.) The Asian Financial Crisis of Global Finance Cambridge Univesity Press, 2000
  • Kaminsky, G. L. and Reinhart, C. M. (1999). The Twin Crises: The Causes of Banking and Balance of Payments Problems. American Economic Review, Vol. 89 No. 3, 473–500.
  • Leblang D. & Satyanath S. (2008) Politically generated uncertainty and currecy crises: theory, test and forecasts Journal of International Money and Finance, Vol.27, No. 3, pp.480-497
  • Lijphart, A. (1984) Measures of cabinet durability: a conceptual and empirical evaluation Comparative Political Studies, Vo.17, No.2 Macpherson, C. B. (1973). Democratic Theory, Clarendon Press.
  • McIntyre A. Political Institutions and the economic crisis in Thiland and Indonesia in Pempel T.J. (Ed.) The Politics of Asian Financial Crisis. Cornell University press. Pp.143-162
  • McKinnon, R., & Schnabl G. (2004). The Asian dollar, standard, fear of floating and original sin. Review of Development Economics, 8, 331-60.
  • Mei, Jianping (1999) Political risk, financial crisis and market volatility NYU Working Paper.
  • Nelson, J. M. (Ed.) (1990). Economic crisis and policy choice: the politics of adjustment in the Third world, Princeton University Press, Princeton, NJ.
  • Öniş, Z (2003) Domestic Politics versus Global Dynamics: Towards a Political Economy of the 2000 and 2001 Financial Crises in Turkey in Öniş, Z & Rubin B (Eds.) The Turkish Economy in Crisis. Cass. London
  • Öniş, Z (2010) Crisis and Transformation in Turkish Political Economy Turkish Political Quarterly, Vol.5, No:3
  • Özatay, F. (2007) The 1994 Currency Crisis in Turkey The Journal of Policy Reform
  • Özatay, F. (2020) Paving the way for an economic crisis with high leverage and currency mismatches:2018-2019 crisis in Turkey Working Paper Series, TEPAV
  • Pamper, T. J. (1999) The Politics of Asian Economic Crisis Cornell University Press
  • Persson T. & Tabellini G. (2000) Political Economics: explaining economic policy Cambridge, MIT Press
  • Porhal, N. (2008) The economic consequences of political crises The East African Review, No.38
  • Powell, A. (2002) Argentina’s avoidable crisis: bad luck, bad economics, bad politics, bad advice Brookings Trade Conference, Washington
  • Randanowitz, L. (2010) 2008-2009 Crisis in Turkey: performance, policy responses and challenges for sustaining recovery OECD Economics Department Working Paper
  • Remmer, K. L. (1990). Democracy and economic crisis: the Latin American experience World Politics, 42, 315-35.
  • Remmer, K.L. (1991) The Political Impact of Economic Crises in Latin America in the 1980s American Political Science Review. Vol.85, No:3
  • Rodrik, D. (1990) Premature Liberalization, Incomplete Stabilization: The Özal decade NBER Working Paper, No: 3300; Massachusetts
  • Roubini N. & Sachs J.D. (1989) Political and Economic determinants budget deficit in industrial democracies European Economic Review, Vol.33, pp.903-933 Svensson, L. (1994). Fixed exchange rates as a means to price stability: what have we learned? European Economic Review, 38, 447-68.
  • Uygur, E. (2010) The Global Crisis and the Turkish Economy Turkish Economic Association. Discussion Paper
  • Van Rijckegem & Weder B. (2008) Political Institutions and debt crises Public Choice, Vol.138
  • Weyland, K. (1996). Neo-populism and liberalism in Latin America: unexpected affinities. Studies in Comparative International Development, 31, 3-31.
  • Williamson, J. (2000). Exchange-rate regimes for emerging markets: reviving the intermediate option. Institute for International Economics, Washington D.C.

The Political Anatomy of Economic Crises -the case of Turkey: 1945-2018

Year 2021, Volume: 7 Issue: 2, 110 - 122, 30.11.2021
https://doi.org/10.51803/yssr.908331

Abstract

The foundations of economic and financial crises are conventionally attributed to the technicalities of macroeconomic fragilities. Yet political instability (caused by the deficiency of democracy and/or unfunctional political institutions) can also be considered as a major determinant of economic instability by deteriorating the debt dynamics through depreciation of the national currency or the ascent of interest rates. Analogously, political instability, for instance, disruption of cabinet durability, to a large extent depends on the economic performance of governments. Hence, though most economists conceive macroeconomic fragilities as the mother of all crises, the issue is rather complex and there is an intermingled relationship between political and economic crises.

Besides, as macroeconomic fragilities or structural imbalances are results of inappropriate policies, the political rationale and the social motives behind such misleading policies should also be well comprehended. For that purpose, an elaboration will enable the negation of the dominant argument that it is only economic factors that instigate crises.

This study investigates the political background of eight economic crises in Turkey, since 1946. It is observed that in all of them, significant levels of devaluation and retraction of growth are experienced. All of the devaluations were indispensable, except the first one in 1946 which was discretionary and precautionary. The crises of 1978/9, 1994, and 2001 ended with drastic austerity programmes, albeit the others, where governments refrained with macroeconomic adjustment through fiscal and monetary measures. The 2001 twin-crisis was so peculiar, as it was to a large extent caused by the design-defection of the programme recommended by the IMF. Yet, since the attempt of financial liberalization, all of the other economic crises were prompted by capital flights. The 2008/9 crisis was due to global contagion and the 2018 crisis was caused by the tensions in the bilateral relations with the US, amid high private sector foreign debt. In all economic crises, the profligate fiscal stance of governments has played a prominent role, as well as the maintenance of appreciated exchange rates, but such choices had a political rationale. Finally, in the background of all the economic crises in Turkey, we observe stern political instability.

Political instability not only restricts the rational decision-making capacity of the policy-maker, especially if it converges into a political crisis, but also exacerbates economic sentiment, either by consumer confidence or by investor appetite, which subsequently results in economic decline. It also intensifies risks and causes exchange rate depreciation as well as interest rate hikes, both of which degenerates debt dynamics. Since the financial liberalization attempt, as portfolio investments have boosted, political stability has become imperative to sustain the stability of risk-sensitive financial markets. Both the experience of the 2008/9 and especially the 2018 financial crisis, have verified the importance of political instability as a determinant of economic crises. In short, economic crises cannot be analysed disregarding their political anatomy.

References

  • Akyüz, Y. & Boratav, K. (2003) The Making of the Turkish Financial Crisis World Development, 2003
  • Alper, C. E. (2001) The Turkish Liquidity Crisis of 2000 -what went wrong Russian and East European Finance and Trade, Vol.37, No. 6
  • Alper, E., & Öniş, Z. (2003). Financial globalization, the democratic deficit, and recurrent crises in emerging markets : the Turkish experience in the aftermath of capital account liberalization. Emerging Markets, Finance and Trade, 39, 5-26.
  • Acemoglu, D., Johnson, S., Robinson, R., & Thaicharoen, Y. (2003). Institutional causes, macroeconomic symptoms; volatility, crisis and growth. Journal of Monetary Economics, 50, 49-123.
  • Acemoglu, D., & Robinson, J. A. (2008). Economic origins of dictatorship and democracy. Palgrave.
  • Boratav, K. (2018) March-August 2018: capital movements that triggered the crisis (neo-liberalism creates crisis in the South) (in Turkish) 19 October 2018, SOL
  • Bussière, M. & Mulder, C. (2000) Political Instability and Economic vulnerability International Journal of Finance and Economics, Nov. Vol.5
  • Celasun, M. (2002) Before and After the 2001 Crisis: a macroeconomic and financial evaluation (in Turkish, unpublished)
  • Celasun, O. (1999) The 1994 Crisis in Turkey Policy Research Working Papers, No: 1913.
  • Chang, R. (2005) Financial Crises and Political Crises NBER
  • Cömert, H. & Yeldan E. (2018) A Tale of Three Crises in Turkey: 1994, 2002 ,2008-2009 ERC Working Papers in Economics, 18/09, June
  • De Castro, R.C. (2007) The 1997 Asian Financial Crisis and the revival of populism/neopopulism in the 21st century Philippines politics Asian Survey, 2007
  • Dornbusch, R., & Edwards S. (1991). The macroeconomics of populism. in: Dornbusch, R., & Edwards S. (Eds.). The macroeconomics of populism in Latin America. University of Chicago Press, Chicago, IL.
  • Ertuğrul, A. & Selçuk, F. (2001) A Brief Account of the Turkish Economy -1980-2000 East European Finance and Trade, November, 2001
  • Feng, Y. (2003). Democracy, governance and economic performance: theory and evidence. MIT Press, Cambridge, MA.
  • Fischer, S. (2001). Exchange rate regimes: is the bipolar view correct? Journal of Economic Perspectives, 15, 3-24.
  • Gasiorowski, M. J. (1995). Economic crisis and political regime change: an event history analysis. American Political Science Review, 89, 882-97.
  • Gasiorowski, M.J. (2000) Democracy and macroeconomic performance in underdeveloped countries: an empirical analysis. Comparative Political Studies, 33, 319-49.
  • Goldfajn, I., & Olivares, G. (2001). Can flexible exchange rates still “work” in financially open economies? G-24 Discussion Paper, No. 8.
  • Haggard, S. (2000). The Politics of Asian financial crisis. Journal of Democracy, 11, 130-44.
  • Haggard, S. & McIntyre A. (2000) The Political Economy of the Asian Financial crisis: Korea and Thailand compared in Noble G.W. & Ravenhill J. (Eds.) The Asian Financial Crisis of Global Finance Cambridge Univesity Press, 2000
  • Kaminsky, G. L. and Reinhart, C. M. (1999). The Twin Crises: The Causes of Banking and Balance of Payments Problems. American Economic Review, Vol. 89 No. 3, 473–500.
  • Leblang D. & Satyanath S. (2008) Politically generated uncertainty and currecy crises: theory, test and forecasts Journal of International Money and Finance, Vol.27, No. 3, pp.480-497
  • Lijphart, A. (1984) Measures of cabinet durability: a conceptual and empirical evaluation Comparative Political Studies, Vo.17, No.2 Macpherson, C. B. (1973). Democratic Theory, Clarendon Press.
  • McIntyre A. Political Institutions and the economic crisis in Thiland and Indonesia in Pempel T.J. (Ed.) The Politics of Asian Financial Crisis. Cornell University press. Pp.143-162
  • McKinnon, R., & Schnabl G. (2004). The Asian dollar, standard, fear of floating and original sin. Review of Development Economics, 8, 331-60.
  • Mei, Jianping (1999) Political risk, financial crisis and market volatility NYU Working Paper.
  • Nelson, J. M. (Ed.) (1990). Economic crisis and policy choice: the politics of adjustment in the Third world, Princeton University Press, Princeton, NJ.
  • Öniş, Z (2003) Domestic Politics versus Global Dynamics: Towards a Political Economy of the 2000 and 2001 Financial Crises in Turkey in Öniş, Z & Rubin B (Eds.) The Turkish Economy in Crisis. Cass. London
  • Öniş, Z (2010) Crisis and Transformation in Turkish Political Economy Turkish Political Quarterly, Vol.5, No:3
  • Özatay, F. (2007) The 1994 Currency Crisis in Turkey The Journal of Policy Reform
  • Özatay, F. (2020) Paving the way for an economic crisis with high leverage and currency mismatches:2018-2019 crisis in Turkey Working Paper Series, TEPAV
  • Pamper, T. J. (1999) The Politics of Asian Economic Crisis Cornell University Press
  • Persson T. & Tabellini G. (2000) Political Economics: explaining economic policy Cambridge, MIT Press
  • Porhal, N. (2008) The economic consequences of political crises The East African Review, No.38
  • Powell, A. (2002) Argentina’s avoidable crisis: bad luck, bad economics, bad politics, bad advice Brookings Trade Conference, Washington
  • Randanowitz, L. (2010) 2008-2009 Crisis in Turkey: performance, policy responses and challenges for sustaining recovery OECD Economics Department Working Paper
  • Remmer, K. L. (1990). Democracy and economic crisis: the Latin American experience World Politics, 42, 315-35.
  • Remmer, K.L. (1991) The Political Impact of Economic Crises in Latin America in the 1980s American Political Science Review. Vol.85, No:3
  • Rodrik, D. (1990) Premature Liberalization, Incomplete Stabilization: The Özal decade NBER Working Paper, No: 3300; Massachusetts
  • Roubini N. & Sachs J.D. (1989) Political and Economic determinants budget deficit in industrial democracies European Economic Review, Vol.33, pp.903-933 Svensson, L. (1994). Fixed exchange rates as a means to price stability: what have we learned? European Economic Review, 38, 447-68.
  • Uygur, E. (2010) The Global Crisis and the Turkish Economy Turkish Economic Association. Discussion Paper
  • Van Rijckegem & Weder B. (2008) Political Institutions and debt crises Public Choice, Vol.138
  • Weyland, K. (1996). Neo-populism and liberalism in Latin America: unexpected affinities. Studies in Comparative International Development, 31, 3-31.
  • Williamson, J. (2000). Exchange-rate regimes for emerging markets: reviving the intermediate option. Institute for International Economics, Washington D.C.
There are 45 citations in total.

Details

Primary Language English
Journal Section Makaleler
Authors

Hursit Gunes

Publication Date November 30, 2021
Published in Issue Year 2021 Volume: 7 Issue: 2

Cite

APA Gunes, H. (2021). The Political Anatomy of Economic Crises -the case of Turkey: 1945-2018. Yildiz Social Science Review, 7(2), 110-122. https://doi.org/10.51803/yssr.908331