Istanbul Journal of Economics
External Debt Cycles of the Turkish Economy: Is it Possible to Escape the Crisis?Parla Onuk
The prevailing view on the debt crises experienced by peripheral countries is that their economies are primarily exposed to shocks arising from existing internal dynamics and defaults follow a unique process. However, parallel to the development of financial capital, most debt crises in the peripheral countries have a systemic structure shaped by the dynamics of the core countries. The aim of this study is to investigate the structure in question through debt cycles and to shed light on the political economy dynamics of these cycles. Hence, foreign borrowing in Turkey is examined from a historical perspective. In the present analysis, interest rates in core countries are identified as the main determinant of boom periods and consequent debt crises. The presence of a hegemonic power in the world economy is a major political dynamic behind the debt cycles. At the same time, the determinants of the debt crisis were empirically tested by considering 21 developing countries between 1970 and 2017. Interest rates, high inflation, GDP growth, the ratio of foreign direct investment to GDP, and the ratio of short-term debt to reserves are determined to be the main dynamics. In this context, we discuss contrasting views on the sustainability of external debt and whether it is possible for a heavily indebted economy like Turkey to escape recurring debt crises.
Türkiye Ekonomisinin Dış Borç Döngüleri: Krizden Kaçış Mümkün Mü?Parla Onuk
Çevre ülkelerin borç krizleri üzerine hâkim görüş, bu ekonomilerin ağırlıklı olarak iç dinamiklerinden kaynaklı şoklara maruz kaldığı ve temerrütlerin kendine özgü bir yapıya sahip olduğu şeklindedir. Ne var ki, finans sermayesinin gelişimine paralel olarak çevre ülkelerdeki borç krizlerinin çoğu; merkez ülkelerdeki dinamikler tarafından şekillenen sistematik bir yapıya sahiptir. Bu çalışmanın amacı, söz konusu yapıyı borç dalgaları üzerinden araştırmak ve bu dalgaların ekonomi politik dinamiklerine ışık tutmaktır. Bunun için Türkiye’deki borçlanma süreçleri tarihsel bir perspektiften masaya yatırılmıştır. Bu analizde merkez ülkelerdeki faiz oranları, Türkiye’deki borç krizlerinin ana belirleyeni olarak tespit edilmiştir. Dünya sahnesinde hegemonik bir gücün varlığı ise borç dalgalarının seyrini belirleyen temel politik etken olarak karşımıza çıkmaktadır. Aynı zamanda borç krizinin belirleyenlerinin araştırıldığı ampirik analizde; faiz oranları, yüksek enflasyon, GSYH büyümesi, doğrudan yabancı yatırımların GSYH’ye oranı ve kısa vadeli borçların rezervlere oranı temel dinamikler olarak belirlenmiştir. Bu bağlamda, dış borcun sürdürülebilirliği ve Türkiye gibi ağır borçlu bir ekonominin tekrarlayan borç krizlerinden kaçınmasının mümkün olup olmadığı konusunda değişen görüşler tartışılmaktadır.
From the 1820s, the development of finance capital has paved the way for large capital movements from the core to the periphery of the world economy. While these capital inflows are an important source of funding for economic growth in peripheral countries, reversal of capital flows often leads to crises in heavily indebted economies, and in some cases, it generates economic and social devastation. Sanction mechanisms, which are enforced following these crises, have played a significant role in the establishment of the core’s hegemony over the periphery and restructuring the global economy to align with core interests.
Peripheral countries’ fall into debt crises, one after the other, like dominoes, in the 1980s had widespread repercussions worldwide. In the economics literature, scholars have turned to researching and understanding the effects of foreign debt generating international crises. The first groundbreaking article was presented by Eaton and Gersovitz (1981) to determine why countries pay their debts asserting that countries pay foreign debts out of concern for long-term reputations. In the event of a possible default, creditors evaluate debtors’ repayment records, and countries with good reputations are able to access foreign funds with lower risk premiums. Conversely, those with bad records are unable to secure funds, resulting in devastating defaults. In short, indebted countries would be able to determine their own future.
Although the study received considerable attention, interest in the debt literature in the international arena declined until the late 1980s and early 1990s; however, the Mexican (Tequila) Crisis of 1994, the Asian Debt Crisis of 1997, the Russian default soon after, and even the European Debt Crisis of 2010 rekindled interest in the subject. The world was now witnessing the external debt crises of the peripheral countries in a systematic and cumulative manner; therefore, the sterile theoretical infrastructure that focused only on countries’ internal dynamics was extremely insufficient for explaining the functioning and effects of international credit mechanisms.
This study aims to fill this gap in the literature and explores the economic and political dynamics behind peripheral countries’ external borrowing. To determine these dynamics, in the first section, the definition of debt waves is presented within the framework of theoretical arguments. In order to analyze the global development of borrowing and identify economic policy determinants. The second section examines the phases of these waves using an historical perspective, determining the main years wherein borrowing began to rise. Additionally, Turkiye’s indebtedness in these periods is discussed. In the third section, the determinants of falling the debt crisis were empirically tested by considering 21 developing countries between 1970 and 2017. While the findings confirm the significance of interest rates, they also indicate that other macroeconomic variables, such as GDP growth, short term debt to total reserves, and high inflation, which are among the other factors that trigger debt crises. Besides economic dynamics, the presence of a hegemonic power in the world economy is a major political dynamic behind debt cycles. In the presence of a great political power, creditors are better organized and able to impose heavy sanctions on indebted nations. Accordingly, the period of restructuring, which is the third and last phase of the cycle, lasts a very short time under these circumstances. In this context, we discuss contrasting views on the sustainability of external debt and whether it is possible for a heavily indebted economy like Turkey to escape recurring debt crises.