Financial Globalization, the Democratic Deficit and Recurrent Crises in Emerging Markets: the Turkish Experience in the Aftermath of Capital Account Liberalization

Abstract

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.

Financialization and Government Borrowing Capacity in Emerging Markets

“…The example occurred during the 2001 financial crisis in Turkey, when political uncertainty after a dispute between President and Prime Minister, and various problems in the banking system, 84 led to the collapse of a large number of banks. This necessitated direct state intervention, and resulted in severe weakness in the currency and bond markets in Turkey (Akyüz and Boratav 2005;Alper and Onis 2001;Altunιşιk and Tür 2005;Ertürk 2003). As discussed above, a number of banks decided to cease lending bonds, so making it harder for others to bet on further falls in the market.…”

Corporate Governance, Opaque Bank Activities, and Risk/Return Efficiency: Pre- and Post-Crisis Evidence from Turkey

“…For the Turkish banking sector, the period after the 1989 financial liberalization can be characterized as follows: in the period before the 2000-2001 crisis, banks operated in a very volatile environment characterized by severe boom and bust cycles that resulted in a major banking crisis at the end of 2000 and early 2001 (see e.g. Alper and Öniş (2003) and Tanyeri (2010) for a detailed discussion). However, in the period after this crisis, the sector has improved its performance as a result of solid restructuring, recapitalization, and supervision and remained largely unfazed in the face of the recent global economic downturn.…”

Reforming Sticky Institutions: Persistence and Change in Turkish Agriculture

“…ANAP eventually lost the 1991 elections to parties that brought together old school politicians and traditional elites. In turn, the weak ruling coalitions of the 1990s were to take full advantage of the fiscal opportunities presented by financial internationalization in their conciliatory bids toward popular interests (CizreSakallıoğlu and Yeldan 2000;Alper and Öniş 2003).…”