This paper of mine on the Turkish economy was completed more than a year ago but has just been published in the new journal of the Turkish Economic Association. Re-reading it, I feel it captures well the missed opportunities of the last few years.
Unwillingness to use fiscal policy in a countercyclical manner (tighten when times are good), discourage capital inflows, and prevent real exchange rate appreciation until it becomes too late have once again placed the Turkish economy on an unsustainable course. Worse, with an external deficit reaching close to double-digit levels, the economy is poised for a painful hard landing as soon as confidence turns south – triggered, for example, by bad news in the Eurozone.
As recent experience shows, the countries that are worst hit by sudden flight to safety in financial markets tend to be those caught with large external deficits:
Governments that engineer growth accelerations on the back of unsustainable foreign borrowing booms like to repeat the mantra “this time it is different.” Unfortunately, few current account deficits as large as Turkey’s end well.