The political economy of productivity and growth cycles: The Turkish experience, 1950-2010

A number of recent studies have challenged the widely held belief that output fluctuates around a stable and rising level of trend output. For example, Cerra and Saxena (2008) [AER, 98(1)] have shown that output drops tend to be persistent in the aftermath of particular crises. By utilizing a standard real business cycle model augmented with transitory and trend shocks to productivity, Aguiar and  Gopinath (2007) [JPE, 115(1)] went further and argued that “the cycle is the trend” for emerging market economies. They claimed –without providing a theoretical explanation in their model– that the frequent policy regime shifts, such as dramatic changes in fiscal and monetary policies, are responsible for the substantial volatility in output trend in emerging market economies.

Fortunately, the new political macroeconomy literature provides a number of channels through which emerging market economies or developing countries may experience such a policy environment which results in persistent productivity and output drops.  For instance, chronic instability episodes, populist cycles, recurrent crises and associated low and volatile growth rates have been the dominant macroeconomic themes in the recent history of the Turkish economy, since its transition to the multi-party democracy in the 1950s. Most of the governments in Turkey –like in many other developing countries, such as those in Latin America– behaved “fiscally irresponsible” by implementing myopic and populist macroeconomic policies over extended periods of time, with the aim of alleviating distributional pressures and hence preserving or increasing electoral support. In turn, the resultant fiscal imbalances and high inflation have been followed by major economic and/or political crises. Several stabilization programs were implemented (usually after crises) to restore stability in the economy but, mainly due to political reasons, the elected governments after seeing a temporary relief in the economy generally delayed or completely abandoned the stabilization policies. Furthermore, these governments as well as their successors usually chose to continue the popular and myopic economic policies with the similar aims. Consequently, the insistence on unsound and unsustainable policies for long periods of time lead to persistently low and occasionally falling total factor productivity and hence low and volatile economic growth rates during the chronic instability periods. Nevertheless, productivity usually rebounds quickly, particularly during the committed stabilization periods such as the one experienced after the 2001 crisis in Turkey –of which fiscal adjustment was the central part.

Motivated by these issues, this paper has two main objectives. The first objective is to develop a macroeconomic policy framework with explicit consideration of both monetary and fiscal policy to analyze the role of a set of political-economy factors on public spending and borrowing decisions and macroeconomic performance, with a particular emphasis on productivity and growth. The second objective is to investigate the effects of macroeconomic instability on total factor productivity and economic growth in the Turkish economy over the 1950-2010 period, by utilizing time series econometric techniques. Empirical results confirm that the Turkish economy has experienced a recurrent productivity and growth cycles along with the populist cycles and associated instability episodes since the 1950s.