Growth, traded goods and external debt before and after capital account liberalization: Case of Turkey

Abstract

Most of the past empirical work has failed to detect any kind of strong positive relationship between capital account liberalization and economic growth, in contrast to what standard theory had predicted. Some researchers have argued that the increased frequency of financial crisis and the resulting macroeconomic instability is the main cost of capital account liberalization which may partly (or more than partly) offset its beneficial growth enhancing effects. In this paper, based on Turkish experience, we offer two additional mechanisms through which increased net capital inflows might exert negative impact on economic growth even when the years of deep financial crisis caused by capital reversals are not taken into account: The changing sectoral composition of output and employment against traded goods, and higher inflation.