Uneven governance and fiscal failure: the adjustment experience in Turkey

Abstract

Starting in 1980, Turkey embarked on an ambitious program of stabilization and structural adjustment. The speed with which macroeconomic stability was established and the rapid response of the private sector to the new regime made Turkey a success story among adjusting countries. Turkey has succeeded in liberalizing foreign trade, the financial sector, and the capital account, and in transforming a protected, inward-oriented economy into an export-oriented and private-sector-driven economy with a number of sectors that can compete internationally. In early 1994, however, the country was once again faced with a major macroeconomic crisis, which was driven by unsustainable fiscal deficits. The purpose of this paper is to examine the economic reform experience in Turkey and attempt to explain the factors that led to the failure in fiscal policy. The main argument of the paper is that the failure in fiscal policy originates in a failure of governance capacity. The aspect of governance that is most salient in explaining the Turkish experience is the inability of the state to resolve problems of cooperation between political actors. In Turkey, fifteen years of reform have created a vibrant private sector, and a state that is lagging behind in attending to important regulatory and social functions. Having reformed the aspects of the economy that relate to the economic activities of the private sector, the author believes that the majority of the remaining tasks have to do with reforming the state. The paper is organized as follows: 1) introduction; 2) brief historical background; 3) stabilization, adjustment program, and fiscal deterioration; 4) governance aspects of the stabilization and adjustment period; and 5) conclusion.