Turkey and Neighbourhood

Introduction

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This paper argues that Turkey’s experience with economic crisis in 2001 demonstrates the effects of the investment model of economic development interacting simultaneously with the liquidity model. Investment model focuses on pull factors. “Rich country investors continuously evaluate profit opportunities at home and abroad, and when growth prospects in less developed countries (LDCs) seem favorable, they make the decision to invest” says Michael Pettis, as he explains the cycles of hot money inflow to LDCs according to this model.1 Liquidity model, however, puts emphasis on the changes in the liquidity of rich country markets as determining forces to invest abroad. Therefore, ‘capital investments precede and cause growth.’ These two theories in concert help explain Turkey’s economic crisis in 2001, its resurgence following the crisis, and Turkey’s recent economic distress during the current global financial crisis.

 

This paper argues three main points. First, capital flows in and out of Turkey can largely be explained by the liquidity model of development. Secondly, Turkey’s reforms helped attract those capital flows and effectively “put Turkey on the map” in the eyes of global financial markets, thus rendering Turkey an attractive target for global liquidity. Finally, Turkey’s reforms, although helpful, did not promote long-term sustainability, thus leaving Turkey vulnerable to fluctuations in global liquidity.

 

 

 

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* Published in the First Issue of Journal of Global Analysis (JGA).

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