Turkish Economy in the 1990s: An Assessment of Fiscal Policies, Labor Markets and Foreign Trade

Abstract

Turkey entered the 1990s under conditions of a truly “open economy”–a macroeconomic environment where its capital account was completely liberalized and the process of financial de-regulation was completed. In this setting, many of the instruments of macro and fiscal control have changed in nature, as the constraints of macro equilibrium have undergone major structural change. In the early 1990s, the domestic economy witnessed a massive inflow of (mostly short-term) foreign capital. Furthermore, the so-called foreign exchange gap which had constrained the growth potential of Turkey for more than three decades seemed to have been alleviated. The ready availability of foreign exchange enabled the Turkish Lira to appreciate against the major currencies in real terms and led to a rapid expansion of import demand. Moreover, it made possible the financing of both the rapidly growing fiscal deficit of the public sector and the sudden rise of wage costs in the labor market.

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