Effects of the global crisis on the Turkish economy

Introduction 

There has been several crises that had hit the economic world hardly bringing some of the negative effects on the economic growth in some countries, mainly the developing countries which cannot respond to such crises appropriately. Turkey as a developing country is not exceptional. This paper majors on the impact global crisis have on the economy of Turkey and it responds by giving out the measures that should be taken to tackle this effect. The topic is chosen in order to have a clear indication on how crises affect the economy of a country and to find some counter measure to curb the situation before it get worst. The research should be able to satisfactorily answer the following questions:

Research questions

1. What are the effects of the global crisis on the Turkish economy?
2. What were these major crises that effected the economy of Turkey?
3. To what extend was the economy affected?
4. What are the measures to be taken to respond to this adverse effect on economy?

Importance and purpose

The purpose of this research is to analyze on the effects that can be brought about by various kinds of crisis in an economy of a developing nation. It also analyses on the measure that can be taken to remedy this effect on the economy for a continuous economic growth in a nation.

Stuck on a paper?

Order an original, fully referenced and formatted paper.

Write my paper

Literature Review

In 1980s, balancing of payment transaction and liberalization of domestic economy was begun in Turkey. There has been many fluctuations in the economy of Turkish which go in parallel to the attempt to liberalize it since then. The extent to which this fluctuation occur has been rising since 1980s as compared to the previous years. The operation of the economy of Turkey has been more dependent on the move taken by the international finance as done in developing countries (Benlialper & Cömert, 2013). Those periods that were recorded a higher financial inflows have been coinciding with a higher credit and a high economic growth in general. In the event of reversal in the economy of Turkey in its financial account, there has been a boom in the credit and as a result, economic growth fades away. Immediately after 1990s, there was an emergence of four major crises which resulted in total financial reversal flows (Ammer et al. 2011). These crises came in three channel, that is, the expectation channel, trade channel and financial channel. These crises were characterized by a severe shock in export which brought the base for the decline in the level of production in Turkey (Berkmen & diğerleri, 2011). 

The last crisis that hit the economy of Turkey has its beginning in September of 2008 and it inflict a heavy downfall on the economy until the end of 2009. This crisis branched from the shock waves of the global crisis which had its origin in the United States.  Despite the government of Turkey trying to employ microeconomic skill to recover the downfallen economy due to crisis, the crisis of 2001 was still in place and the level of unemployment remain to be high (Bilgin and Şahbaz, 2009). 

Economic crisis can be categorized into two; the real sectors crises and the financial sector crises. The real sector crises emerges from the reduction in the level of production and the rate of employment. Financial crises arises as a result of the payment sector being disrupted which is brought about by the problems that arises from the financial markets and the problem have a potential of spreading to the entire market (Cömert & Çolak, 2014). 

Boost your grades with a new guide on A+ writing

Learn everything you need about academic writing for free!

Incorrect email. Please check it and try again.

Get it

By continuing, you agree to the Terms & conditions & Privacy policy

Time to excel in writing! The download will start within seconds.

Download

The crises faced in Turkey in 1994 was within the limit of microeconomic instability which had its roots from the First Generation Currency Crisis. The crisis of 2001 hade its limits explained from the Third Generation Crisis Models which resulted from the interaction among the First Generation Currency Crises, banking and finance sectors and the ethical issues (Krugman, 1997). The 2008 global crisis has its explanation derived from the scope of the Third Generation Crisis Models. These crises had an impact in the economy of Turkey as it contracted goods and services markets as a result of a reduction I the short term volatility (Krugman, 1979).  

Hypothesis 

The economy of Turkey had its rough end in growing when the four major crises occurred. It was a great challenge raising the economy of the country during the crises and that the indicators of economic growth showed total reversal showing that the economy is declining tremendously. As expected from the crises that faced the country, there is a drop in the level of economic growth and that the government tried the best to recover economy after the crises. There have been a slight rise in economy after the crises as a result of the effort impacted by the government to recover it. Also, measures that were taken to recover the economy after fall was not strong enough to bounce back the economy to the initial level. 

Data 

The data used in this research was obtained from various sources that have conducted a research in the sector and have collected a lot of data. The data showing the progressive economic growth in GDP and its components were obtained from the Central Bank of the Republic of Turkey database. The data used to summarize the general effect of crisis in the developing countries were obtained from the IMF WEO databases from their research work. The data use to analyze economic growth in Turkey as from 1990 to 2011 was obtained from the IMF, World Economic Outlook Database. 

Data Analysis

The data shown below shows a progressive growth in Gross Domestic Product (GDP) and its components along the years, where Q1 to Q4 represents the quarters of a year sourced from CBRT. The values are in percentage (CBRT, 2014). 

Table 1: Table showing the growth in GDP and its components in percentage

The data below also summarizes the general effect of a crisis in economic growth of seven developing countries, Turkey inclusive sourced from IMF and WEO (World Economic Outlook). The data shows how these developing countries were hardly hit by the crises (IMF, 2009). 

Table 2: Table showing economic growth in Seven developing countries

The data below shows economic growth in Turkey as from 1990 to 2011, sourced from IMF, World Economic Outlook Database (IMF,2011).

The fall in consumption and investment expenditure was the first pint where the effect of crisis was felt. This was as a result of the worsen expectations of the investors and consumers. This is evident from the data obtained and the plotted graph as seen. From the data shown above, the level of consumption dropped as from the third quarter of the year 2008 to the second quarter of the year 2009. At this point, Turkey was facing the crisis of 2008 and this had a great implication in the drop consumption and investment levels at this period. This is displayed in the graph shown below. The level then rises soon after some time. This is because the crisis is over and the government has taken the necessary steps to recover the economy (Uygur & Ercan, 2010).

The channel of export was hit hardly by the crisis which affected the economy of Turkey. Despite this hard hit by the 2008-2009 crisis, there was an increase in export in in earlier crisis of between 1991 and 1994. This was as a result of the large depreciation in TRY when this global crisis occurred. However, in the crisis of 2008-2009, there as a large drop in the level of export in Turkey. The reason for this shock is because her main export partner that is the EU was in a serious crisis and hence the demand for goods halted (Kara, 2012). A reduction in export has a great impact in the growth of GDP because of a multiplier effect. This can be summarized in the graph below.

As seen from table 2, it is evident that there is a drop in the economic growth in Turkey as from 2008 to 2009. This was the season in which the country was experiencing global crisis (IMF, 2010). This can be well displayed in a graph shown below. Despite the drop in economic growth in these developing countries, the magnitude in which this drop occurs varies. This is because of different measures a country takes in response to such a threat in order to recover her economy. 

Any topic. Any deadline.

Our certified writers can do
an A-level paper for you.

Write my paper

These developing countries are mainly affected by the global crisis hardly because of the following reasons,. First, their financial markets do not have ability to serve to their standard the role they should play in case of a crisis emerging in markets as opposed to those that used to occur in earlier times as 1980s (Yılmaz & Durmuş, 2009). Secondly, the introduction of massive quantitative easing which is accompanied by very low interest rates in these developing countries resulted in rejuvenated financial flow into these developing countries in the near future. And thirdly, as seen from the crisis that had occurred in US and the long lasting instability in Euro Area, developing countries used to enjoy a great legitimacy and independence in doing expansive monetary and fiscal ideas which partly offset insufficient aggregate demand challenge in these developing countries for some time (World Bank, 2013).

Policies set to respond to the crises

The government of Turkey took some measures which intended to respond to the financial crisis in the country, despite the respond was too late. These responses include the fiscal policy measures, monetary responses and the financial sector measures. Monetary measures was the first to be adopted in the early of 2008, and later on in 2009, the first fiscal package was adopted (Uygur & Ercan, 2010). Also, Banking Regulation and Supervision Agency (BRSA) assisted by the Central Bank came up with other monetary measures that aid in curbing any risk that might have affected the banking sector during the crisis period (Cömert & Çolak, 2013). The measures taken have got their impacts reflected in the growth of economy in the country, as seen in the tables above. For instance, fiscal response first came in to place in the first quarter of 2009 in form of announcing the first comprehensive fiscal policy package. After this, several other fiscal packages followed over time (Karahasan, 2009). 

The first monetary response was taken in the early 2008. This step was taken primarily to make inflation stable, to demand of FX (Trade Forex) by easing pressure on exchange rates and the (Think Liquidity) TL liquidity as required by private sectors and adjustment of interest rate was taken into consideration. 

Besides these fiscal measures, the Central Bank of Turkey took monetary actions as in the case of majority of crisis-countries. The monetary responses to the crisis preceded the fiscal actions and started to take place in the first half of 2008. The primary objectives of monetary policy during the crisis were to stabilize inflation, meet the FX demand (to ease the pressure on the exchange rates) and TL liquidity needs of private sector (Öniş & Güven, 2011). 

Results and conclusion 

The research found out that developing countries have a problem in maintaining their economy in the event of a global crisis happening. As from the data collected, it is found out that Turkey experienced rough time during the global crisis, but with different magnitudes, depending on how the country responded to the crisis. The general effect of the crisis can be summarized in the table below which shows various events before and after the crisis. It shows the bank situation before and after the crisis (OECD, 2010). 

As was expected, general economy of Turkey was adversely affected by the crises as seen in the economic indicators such as there was a fall in export and any other exchange with other countries, the rate of unemployment was high and the level of production went down. These are some of the indicators that showed that the economy was negatively affected by the crises. Also there were some responses taken to handle the worsening economic situation. As was expected, the response was too slow to handle the situation on time and this slow down recovery of economic status in the country. There was a combined effort in recovery of the economy among different agencies (Rawdanowicz, 2010).