The Political Economy of AK Party Rule in Turkey: From a Regulatory to a Developmental State?

 






Insight Turkey Volume 19 No. 2, 2017

The Turkish economy started to integrate into the international economic and financial system in the early 1980s. Following the full capital account liberalization and currency convertibility decision in 1989, several premature and rapid financial liberalization decisions were reflected in a Turkish economy dependent on foreign capital flows, with unsustainable budget deficits, and very high public sector borrowing requirements. Combined with extraordinarily high inflation and interest rates, lack of proper regulation in the financial sector, and instability in the political system, the 1990s and early 2000s were characterized by economic and financial crises in Turkey. Assuming office in late 2002, the AK Party governments have prioritized macroeconomic and financial stability with fiscal discipline by assuming a largely regulatory function in the financial system, especially the banking sector. Nevertheless, regulatory practices in the financial system do not rule out deregulatory practices in different respects. While the IMF program, after the twin economic and financial crises in 2000 and 2001, built the foundations of the transformation of the Turkish economy, it would be an exaggeration to argue that the AK Party simply followed the IMF program after 2002. Successive AK Party governments have transformed the Turkish economy so that Turkey is not a crisis-prone country anymore, despite significant internal and external shocks to the economy. On the other hand, several challenges remain to achieve higher income levels for Turkish citizens, and to accomplish sustainable economic and social development in Turkey.

This paper provides a political economy examination of the AK Party governments, with a focus on the macroeconomic policy framework between 2002 and late 2016. It outlines how the priorities of the AK Party governments have changed from those of a regulatory to a more developmental state during this period. The paper is organized as follows: the first section outlines key developments in the emergence of a regulatory state with fiscal discipline in Turkey. The second section underlines the main challenges ahead for the Turkish economy, and the third section discusses whether Turkey is on the verge of becoming a developmental state. The fourth section concludes with a discussion.


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