Example Of The Macroeconomic Reforms In Turkey Following The Financial Crisis Of 2001 Term Paper

In the 1990s Turkey faced many economic crises and the last crisis was in 2001 (Chen et al, 2014). Wrong fiscal policies and failures of the banking industry were the key factors that led to the crisis (Banking Regulation and Supervision Agency, 2010). Turkey needed to implement many structural reforms in order to improve the situation in the economy (Togan, 2009).
The International Monetary Fund (IMF) began cooperation with Turkey in 1998. When the crisis started in February 2001, the IMF developed a special support program for Turkey. In 4 years the IMF offered $20.4 billion of loans (Yeldan, 2008).
The year of 2001 was especially difficult for Turkey’s economy. GNP fell by 5.7%, inflation rose to 54.9%, and the Turkish currency devalued by 51%. As the result, the unemployment rate rose to 10% and the real wages were cut by 20% (Yeldan, 2008).
A program that was called “Transition to a Stronger Turkish Economy” was introduced in Turkey in order to stop the crisis. Turkey wanted to improve the fiscal discipline, develop the banking system, change the business climate for better foreign direct investment (FDI), privatize the public enterprises, develop social security and tax reforms, control inflation, and introduce the floating exchange rate (Togan, 2009, Banking Regulation and Supervision Agency, 2010). The targets offered by the IMF became the official targets of all Turkish governments in the period of 2002-2007 (Togan, 2009).
In the following years, Turkey made its central bank more independent and limited the influence on the foreign exchange markets (Banking Regulation and Supervision Agency, 2010). Secondly, Turkey targeted inflation by balancing the budget expenses. Thirdly, the government increased the competition and restored the consumer confidence (Chen et al, 2014). But the problem of high unemployment rate was not solved (Yeldan, 2008).
Turkish government has controlled the deficits. The budget deficit declined from 11.9 percent of GDP in 2001 to 0.6 percent in 2006. As the result, the government’s debt-to-GDP ratio decreased from 69.2 percent in 2002 to 39.6 in 2007 (Togan, 2009).
Thanks to all structural reforms and new fiscal and monetary policies, Turkey’s economy grew for 27 quarters in a row until the world economic crisis began in 2008. As the result, GDP rose from $232.7 billion in 2002 to $655.9 billion in 2007. GDP per capita rose from $3,403 in 2002 to $8,984 in 2007 (Togan, 2009). In Figure 1, one can see that there was nearly zero growth in 2001-2003, but later GDP and GDP per capita started to grow and the growth rates were one of the highest in region. In 2008 the next economic crisis occurred, but the GDP and GDP per capita continued to grow, which is the outcome of structural reforms that were implemented in early 2000s.
Figure 1 GDP and GDP Per Capita Growth

Source: Turkey Data Monitor

Nevertheless, Table 1 shows that Turkish government was not able to follow some of the targets set up in cooperation with the IMF.

The IMF, Targets and Realizations

Source: Yeldan. Turkey and the Long Decade with IMF: 1998-2008
In general, the banking system of Turkey became much stronger than before and lending to the private sector replaced the financing of government. Foreign direct investment helped to develop the financial sector too. When the macroeconomic stabilization was achieved, both the government of Turkey and IMF were expecting that the economic growth would continue (International Monetary Fund, 2007).
Not only the IMF, but also the EU, the largest trading block in the world, helped Turkey on its way out of the economic crisis of 2001. Turkey and the EU have had close ties for many years. In 1995, the EU-Turkey Customs Union was created and Turkey had to follow most of the EU trade regulations (Togan, 2008). In 1999, Turkey became a candidate for EU accession. The Accession Partnership played an important role in integrating Turkey into the EU. A liberal foreign trade regime has been one of the main achievements of Turkey and the EU (European Commission, 2015). However, the future cooperation depends on the political decisions of Turkey and the EU.
The EU-Customs Union caused liberalization of the Turkish market and removal of the technical barriers to trade. Turkish government was able to create a stable economy that can attract the foreign and domestic investment. The foreign direct investment was $1.1 billion every year between 1993 and 2002 and rose to $22 billion in 2007 (Togan, 2009). At the same time, after 2001 the rapid growth did not cause the reduction of the unemployment rate. And the cheap imports made Turkey dependent on the foreign economies and limited the improvement of the local production in Turkey (Togan, 2009).
Figure 2 shows how foreign direct investment grew in 2000-20014. 2007 was the peak year, and the world economic crisis of 2008 stopped the rapid growth of foreign direct investment in Turkey.
Figure 2 Foreign Direct Investment

Source: Turkey Data Monitor

Figure 3 represents information how the external debt changed in 2001-2014. When the crisis occurred in 2001, the government of Turkey borrowed a lot of money from the external partners in order to recover from the crisis. In 2001-2005, Turkish government was able to reduce the budget expenses and the debt of the public sector decreased too. At the same time the debt of the private sector began to grow which means that Turkish companies have to borrow in order to repay their growing debts. As the result, in the past few years the external debt began to grow again and may have negative consequences for Turkish economy.
Figure 3 External Debt Stock

Source: Turkey Data Monitor

In Table 2, one can see that the trade with the EU countries grew from $37,369 million in 2001 to $138,169 in 2008. The trade with the EU accounts for approximately 50% of Turkey’s total trade. However, the balance of trade with the EU is negative and will not become positive in the nearest future (See Figure 4). At the moment the EU is Turkey’s main import and export partner. Turkey exports to the EU machinery, transport equipment and manufactured goods (European Commission, 2015).

Export and Import of Trade from the EU

Source: Zeytinli, E. The Effect of Trade Agreements: the case of Europe and Turkey
Figure 4

EU-Turkey Trade in 2001-2008 (millions $)

Source: Zeytinli, E. The Effect of Trade Agreements: the case of Europe and Turkey
In conclusion, Turkey recovered from the economic crisis of 2001 by means of the financial assistance of the IMF and cooperation with the EU. Turkey implemented the reforms that led to the economic stability. Turkish government switched from the fixed exchange rate to the floating exchange rate that helped to build a strong market economy. Consequently, Turkey was able to attract the foreign direct investment from the EU and improve the foreign trade. Despite the improved economic situation, there are many challenges for Turkey. Trade deficit and high unemployment rate signal about the inability of the Turkish companies to compete with EU companies. In the future, Turkey would like to have a much stronger economy. So it will need to think of the new reforms that will help the country to develop its financial markets and improve the export-oriented industries.

Works Cited

Banking Regulation and Supervision Agency. From Crisis to Financial Stability (Turkey
Experience). September 2010. Web. 31 December 2015
Chen, M., Chew, M., Goyal, S., Matar, M., Yavuz, Z. The Turkish Economy, Post-2001
Crisis: Why Timing, Faith, and Expectations Matter. Spring 2014. Web. 31 December
2015
European Commission. Turkey: Detailed Country Information. 2015. Web. 31 December
2015.
IMF. Turkey: Financial System Stability Assessment. 2007. Web. 31 December 2015
Togan, S. Turkey Country Report. Bertelsmann Stiftung (ed.), Managing the Crisis. A
Comparative Assessment of Economic Governance in 14 Economies. Gütersloh:
Bertelsmann Stiftung, 2010. Web. 31 December 2015
Yeldan, A. Turkey and the Long Decade with The IMF: 1998-2008. June 2008. Web.
December 2015
Zeytinli, E. The Effect of Trade Agreements: the case of Europe and Turkey. Economics and
Management. 17 (4). 2012. Web. 1 January 2016