Political Economy Perspectives on the 1994 Turkish Economic Crisis: A CGE Modeling Analysis

This paper investigates the role of the deterioration of the Turkish public sector balances in the latter half of the 1980's and the evolution of the economic crisis with the aid of a computable general equilibrium model. The theoretical basis of the model utilized in the paper rests upon the Walrasian and the Structuralist/Keynesian macro foundations. The model recognizes 15 production sectors, 3 socio-economic income groups and a central government; and simulates the production, income distribution, consumption, capital accumulation and foreign trade processes of the national economy within a simultaneous system of algebraic equations. The distinguishing feature of the model is that, it accommodates monopolistic mark-up pricing rules in the industrial sectors, and endogenously solves for capacity utilization and unemployment level through Keynesian mechanisms of effective final demand. The model investigates the evolution of the crisis under three main headings: (i) the role of the financial crisis and the unprecedented deficit in the public sector balances; (ii) the roles of the foreign borrowing strategy of the state and the short term foreign capital inflows on balance of payments and the foreign exchange rate; and (iii) the role of the political-economic relations of income distribution and inflationary processes emanating from real wage increases and non-competitive pricing behavior in the industrial sectors. The general equilibrium results of the model underscore the importance of intra-class relations of income distribution and conflict in the evolution of price movements in the Turkish economy; and suggest that the sources of the crisis lie in the historical role of the administrative interventions of the state towards protection of the capitalist and rural incomes, which would otherwise be squeezed out in favor of wage-labor in the late-1980's