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

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.