The political economy of cyclical crises in Turkey: The role of the banking sector

Turkey has been experiencing severe economic crises in almost every decade since the end of WWII. These crises became more severe and frequent after Turkey instituted market-oriented reform in the 1980s. The persistence of crises in the Turkish political economy is puzzling given various economic reform programs implemented over an extended period of time by governments of both the right and the left of the political center. This dissertation addresses the question of why Turkey has experienced this crisis-ridden development course, even after undergoing liberalizing reform.The extant literature on this question emphasizes particular institutional factors (the prevalence of rent-seeking behavior, clientelism, and authoritarian state structures) and structural factors (e.g. global capital movement, forms of capital accumulation) to explain Turkey's record. This dissertation develops a different explanation that centers on the role of the financial sector in Turkish political development. It argues that Turkey's propensity to crisis can be explained by the way in which financial institutions were linked to economic development policies starting with the creation of state banks as a tool of state-led industrialization strategy in the 1920s. Crises in the Turkish political economy always involved the dynamics of credit growth generated in the banking sector. The ensuing moral hazard on the part of both public and private sector rendered effective monetary policies both politically and economically infeasible. Turkey's early financial reforms did not resolve this dynamic because they were primarily guided by domestic political elites whose macroeconomic and distributional concerns continued to guide the way the financial sector was regulated. Evidence for this argument is offered through an analysis of financial sector regulation both in the pre-and post liberalization period.This dissertation contributes to the literature in two ways. As spelled out, it offers an alternative explanation for the persistence of crises and the pattern of liberalizing reform in the Turkish political economy. Secondly, it contributes to our understanding of institutional change by challenging the assumption that international market forces are the main forces guiding economic reforms in developing countries.