Financial liberalization and the real economy: the Turkish experience

Abstract

In this dissertation, the effects o f financial liberalization in Turkey are investigated on three aspects. Firstly, the effects o f liberalization on the macroeconomic variables o f aggregate saving, investment, growth, bank deposits, bank credits and securities issues and portfolios are discussed. It was found that after the liberalization the difference between private saving and investment increased. On the other hand the same difference for the public sector became highly negative. In other words the public sector increasingly resorted to the private sector to cover its deficit. The share o f non-service sector investments (manufacturing, agriculture and mining) in total private investments decreased considerably after liberalization. The growth performance o f the economy after liberalization compares negatively with that before the liberalization. Financial deepening increased after liberalization. Bank deposits increased rapidly but the increase in credits were limited. The main reason was a rapid increase in bank and non-bank holdings o f government securities. We focus next on the probable efficiency effects o f liberalization. Employing a fixedeffect model we compared the efficiency o f manufacturing firms in eight industries before and after the liberalization. We use these findings to see whether efficiency became a more important factor in the access to bank credit after the liberalization. The results indicate that there has been an increase in the mean efficiency and the importance o f efficiency as a determinant o f access to bank credit after liberalization. However, factors like size and location continued to play a major role in access to bank credit well after the liberalization. Finally, we present evidence through a second fixed effect model and a sample selection model that after the liberalization efficiency led to increased access to bank credit but the opposite link was much less strong. Finally, we investigate the financial behavior o f manufacturing firms quoted at the Istanbul Stock Exchange during “normal” times and during crisis. We present evidence that firms are financially constrained. Using interactive variables in ordinary least square estimations we argue that financial constraints on firms that are informationally closer to banks are less stringent. On the other hand, we found that during 1994 financial crisis the constraints became more stringent. However, again, this phenomenon was not homogenous across different firm categories. Finally, the findings point out to a substantial restructuring during the crisis. The terms o f restructuring varied across firm categories. We present evidence that firms with closer informational ties to banks had better conditions o f restructuring.