Financial account liberalizations since the second half of the 1980s paved the way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets (EMs) via testing for the uncovered interest parity (UIP) condition. This paper is the first to provide a broad and critical survey on this recent literature. Specifically, we attempt to answer the following questions. First, are the EMs different from the developed economies in the context of the UIP condition? Second, to what extent can these differences contribute to the debate on the UIP literature? Third, what are the empirical challenges specific to the EMs in testing for the UIP condition?

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Financial globalization offers both risks and benefits for countries of the semi-periphery or the so-called "emerging markets". Politics within the national space matters, yet acquires a new meaning, in the age of financial globalization. "Weak democracies" are characterized by limited accountability and transparency of the state and other key political institutions. Such democracies tend to suffer from populist cycles, which result in low capacity to carry out economic reform. Financial globalization, in turn, magnifies populist cycles and renders their consequences more severe. Hence "weak democracies" are confronted with the predominantly negative side of financial globalization which includes over-dependence on short-term capital flows, speculative attacks and recurrent financial crises leading to slow growth and a more regressive income distributional profile. The relevance of these set of propositions are illustrated with reference to the case of Turkey which, indeed, experienced recurrent financial crises in the post-capital account liberalization era with costly consequences for the real economy. Two general conclusions follow. Firstly, there is a need to strengthen democracy in the developing world. Secondly, since this is hard to accomplish over a short space of time serious question marks are raised concerning the desirability of early exposure to financial globalization given the current state of the world.

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Recent episodes of financial crises in emerging markets progressively highlighted the importance of a sound and well-functioning banking sector for macroeconomic stability and sustainable economic growth. The Asian crisis of 1997, in particular, drew attention to the fundamental role that a deficient banking system could play in terms of generating major financial crises with devastating repercussions on the real economy and with significant possibilities of contagion in an emerging market context. The recent twin economic crises experienced by Turkey in 2000 and 2001 illustrated in a rather dramatic fashion the strong correspondence between a poorly functioning and under-regulated banking system, on the one hand, and the sudden outbreak of macroeconomic crises on the other. Indeed, the Turkish experience shows that both public and private banks can contribute significantly to the outbreak of economic crises. In retrospect, it may be argued that private commercial banks played an instrumental role in the first of the twin crises experienced in November 2000, whilst, public banks emerged as the central actors in the context of the subsequent crisis of February 2001.

A sudden capital outflow may lead to liquidity problems and hence cause output losses in emerging market economies. The existence of real effects of such capital outflows are questioned initially, using the narrative approach during the past four financial crises in Turkey during the 1989-1999 period. The paper also investigates the transmission channels of sudden capital outflows during 1990's. In particular, the transmission of the financial crises through the interest rate, the other asset prices and credit channels are ventured to identify by a VAR methodology. The results indicate that the financial crisis of January 1994 and Russian crisis had real output effects. The three transmission channels that we examine, namely the interest rate, credit and other asset prices channels, are all found to be effective.

Financial globalization offers both risks and benefits for countries of the semiperiphery or "emerging markets." Politics within the national space matters, yet acquires a new meaning, in the age of financial globalization. "Weak democracies" are characterized by limited accountability and transparency of the state and other key political institutions. Such democracies tend to suffer from populist cycles, which result in a low capacity to carry out economic reform. Financial globalization, in turn, magnifies populist cycles and renders their consequences more severe. Hence, "weak democracies" are confronted with the predominantly negative side of financial globalization, which includes overdependence on short-term capital flows, speculative attacks, and recurrent financial crises leading to slow growth and a more regressive income distributional profile. The relevance of these sets of propositions are illustrated with reference to the case of Turkey, which, indeed, experienced recurrent financial crises in the post-capital account liberalization era, with costly consequences for the real economy. Two general conclusions follow. First, there is a need to strengthen democracy in the developing world. Second, since this is hard to accomplish over a short period of time, serious questions are raised concerning the desirability of early exposure to financial globalization given the current state of the world.

A weakly regulated banking sector is costly notably in the context of emerging-market economies characterized by transitional financial systems. Political and institutional forces play an important role in explaining the inability to implement proper banking sector regulations over significantly time periods. The Turkish experience in the aftermath of capital account liberalization leading to the liquidity crisis of 2000 and 2001 have been utilized as a case study for highlighting the relevance of political and institutional variables in the process of bank regulation. In specific terms, the role that the banking system has played as an avenue for politically generated rent distribution has received primary emphasis. Three major dimensions of the Turkish banking sector in the 1990s have been underlined including the importance of the public banks' duty losses, politicization of new bank entry and the negligible presence of foreign banks. These characteristics are explained by a) the direct involvement of the political authority in the regulatory process; b) the absence of incentives for banks under surveillance to restructure themselves; and c) low priority attached to bank regulation on the part of the regulatory authority in the presence of multiple and conflicting objectives. Finally, attention is drawn to the key role that the external anchors play in facilitating significant regulatory reform.