Economic analysis of financial reform in the Turkish economy

Turkey planned to transform its repressed financial structure into a market-based system by implementing the structural adjustment and liberalization program starting at the beginning of 1980. Prior to 1980 structural adjustment and liberalization program, direct control methods were used in macroeconomic management and resulted in relatively large fluctuations in the economy, the state-owned enterprises became loss-making and relied on subsidized bank loans to keep operating, the state-owned bank credits were allocated according to the state policies rather than market principles. To be able to solve these problems, Turkey took some steps in the sense of economic and financial liberalization. In this study, we perform counterfactual simulations with a financial CGE model to explore the question of how the projected market-based financial system in the Turkish economy affects, in the welfare economics sense, the stakeholders in that economy. We simulate the effects of interest rate liberalization, removing the loan subsidies, and government deficit financing options on households, government, enterprises, and banking sectors. The simulations for removing the loan subsidies, and government deficit financing options are performed under fixed and flexible interest rate regimes. Our results show that interest rate liberalization makes the government and the enterprises suffer a revenue loss, but households slightly and commercial banks substantially revenue increase. Removing the subsidized loan rates under both interest rate regimes makes all economic agents suffer except commercial banks. The effect is getting bigger in the case of flexible interest rate regime. Increasing the bond finance of government deficit simulation makes commercial banks relatively better. However, the effect is small in respect to other two simulation results. The real GNP decreases in the short run and increases in the long run with exception in the case of fixed interest rate regime with removing the loan rate subsidies. Interest rate liberalization has a relatively strong effect in the long run on increasing the real GNP. Interest rate liberalization plus removing the loan rate subsidies produces the highest increase in real GNP in the long run, but it also causes the largest decrease in real GNP in the short run.