Working Paper/Hasan Ersel Vulnerability to External Financial Shocks: The Case of Turkey

05/05/2010 - Viewed 1949 times For many observers, Turkey's performance during the "2007+ global financial crisis" was puzzling. In the first half of the 2009, Turkey was one of the worst affected countries in the world. In addition, the Turkish government was too slow to react, and the measures taken seemed inadequate. The purpose of this paper is to answer the following two questions: First, why was Turkey affected so much by the crisis? And second, why was the government's reaction late and "less than adequate"? The paper is organized as follows: In the following section the concept of vulnerability is briefly discussed. The second section is devoted to another methodological issue. Here a simple framework is introduced to analyze the channels and the manner in which a shock such as the 2007+ crisis affects an economy. In the third section, Turkey's experience with the 2001 crisis is discussed. The purpose of this section is to give some historical insight to explain why the government was confident (even over-confident) of Turkey's resiliency. The fourth section briefly surveys the developments in the Turkish economy after it was hit by the global crisis in the last quarter of 2008. In the fifth section, in the light of these discussions, the government's reaction is analyzed. In this section the emphasis is on the uncertainty that the 2007+ crisis had created. Therefore it is assumed that the government was taking decisions under complete uncertainty. A simple framework is introduced to show that a rationale can be attributed to the government's behavior. The paper concludes with the evaluation of the government's decisions.

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