Premature Liberalization, Incomplete Stabilization: the Ozal Decade in Turkey
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.
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