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

This paper investigates the role of the deterioration of the Turkish publicsector balances in the latter half of the 1980's and the evolution of theeconomic crisis with the aid of a computable general equilibrium model. Thetheoretical basis of the model utilized in the paper rests upon the Walrasianand the Structuralist/Keynesian macro foundations. The model recognizes 15production sectors, 3 socio-economic income groups and a central government;and simulates the production, income distribution, consumption, capitalaccumulation and foreign trade processes of the national economy within asimultaneous system of algebraic equations. The distinguishing feature of themodel is that, it accommodates monopolistic mark-up pricing rules in theindustrial sectors, and endogenously solves for capacity utilization andunemployment 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 thepublic sector balances; (ii) the roles of the foreign borrowing strategy ofthe state and the short term foreign capital inflows on balance of paymentsand the foreign exchange rate; and (iii) the role of the political-economicrelations of income distribution and inflationary processes emanating fromreal wage increases and non-competitive pricing behavior in the industrialsectors.The general equilibrium results of the model underscore the importance ofintra-class relations of income distribution and conflict in the evolution ofprice movements in the Turkish economy; and suggest that the sources of thecrisis lie in the historical role of the administrative interventions of thestate towards protection of the capitalist and rural incomes, which wouldotherwise be squeezed out in favor of wage-labor in the late-1980's.