The Turkish Economy at the Crossroads: The Political Economy of the 2018 Financial Turbulence

Abstract

In 2018, the Turkish economy suffered one of the most severe financial speculations in its 38-year open economy era. Some have tried to explain the causes of the financial turbulence solely by linking it to the deterioration in the macroeconomic indicators, such as the inflation rate and current account deficit. However, this approach cannot help us to understand the fundamental causes of the financial turbulence. This paper argues that internal and external shocks ranging from the coup attempt in 2016 to geopolitical risks hindered the designing and implementation process of the second-generation reforms Turkey needed to escape from its middle-income trap. As the reform process slowed down and the severity of shocks increased; uncertainties over economic performance and policies mounted. This uncertain environment paved the way for financial turbulence by providing opportunities for speculators to mislead the markets in line with their own interests.