A failure story: Politics and financial liberalization in Turkey, revisiting the revolving door hypothesis

The risks and benefits of financial liberalization is a highly contentious issue in the current economic debate. This article focuses on Turkey's "lost decades" and tries to reveal the underlying factors behind the economic collapse in the country. Two elements will be analyzed: (a) the role of public sector together with the domestic banking sector in setting the stage for alternating financial crisis, and (b) the effect of close correlation between external debt and capital flight on the economy. This paper argues that there exists a contemporaneous bi-directional causality between external debt and capital flight in the Turkish economy. Exploration of this fact may have some important implications for economic policy modeling in Turkey's crisis-ridden economy. (C) 2004 Elsevier Ltd. All rights reserved.