Turkey: Economic Reform and Accession to the European Union

Turkey: Economic Reform and Accession to the European Union

Turkey: Economic Reform and Accession to the European Union

Turkey: Economic Reform and Accession to the European Union


What requirements must Turkey- the largest country among the candidate and accession countries- meet to join the European Union? What progress has been made toward meeting them? This timely volume analyzes the economic challenges confronting Turkey in its quest to accede to the European Union (EU). It focuses on the extent to which Turkey is ready to join the Single Market, comply with the EUOCOs body of economic regulations and directives, the Acquis Communautaire, and meet the Maastricht criteria for fiscal, monetary, and exchange rate policies. This book also provides an assessment of Turkey's national program to meet the accession requirements. It describes briefly what Turkey needs to achieve on the economic policy front to satisfy the conditions for accession, the progress to date, and the likely consequences of implementing the full body of EU requirements. The book is divided into four parts: An analysis of the macroeconomic policies for EU accession; An analysis of the effects of integration on key sectors: agriculture; manufacturing; services industries, including banking, telecommunications, transportation, and natural gas; and network industries; An exploration of key economic policy challenges, including labor market regulation, foreign direct investment challenges, and the costs and benefits of meeting the EU environmental Acquis; The quantification of the impact of EU accession and consideration of the welfare effects of integration; While the focus is on the specific situation of Turkey, the subject will be of value to all researchers with an interest in the challenges of deeper integration through regional agreements."


This chapter investigates the macroeconomic policies appropriate for Turkey both before and after its accession to the European Union (EU). the first section of the chapter considers the recent macroeconomic developments in Turkey, and the second examines the macroeconomic policy framework for eu membership. the third section analyzes the macroeconomic challenges faced by Turkey, emphasizing the issues related to inflation, fiscal policy, public debt, sustainability of current account, and exchange rate regimes. the final section offers conclusions.

Macroeconomic Developments
in Turkey

Over the past decade, economic crises began to affect the Turkish economy with increasing frequency. Periods of economic expansion alternated with periods of equally rapid decline. Although inflation during the period 1990–2000 fluctuated between 54.9 percent and 106.3 percent, the average inflation rate amounted to 75.2 percent. Currently, Turkey is in the midst of a determined campaign to turn around decades of weak performance stemming from pervasive structural rigidities and weak public finances. the past few years have witnessed three major attempts at addressing underlying weaknesses. the first was during 2000 under the three-year standby agreement initiated in December 1999 after a significant drop in output caused by mostly external factors, including the earthquake. Despite some notable achievements, a worsening current account and a fragile banking system led in late 2000 to a liquidity crisis that turned into a fullblown banking crisis in February 2001. in response, the government decided to abandon the crawling peg regime and floated the currency. in May 2001, the International Monetary Fund (IMF) increased its assistance to Turkey under a new standby arrangement. But just as the revised program was beginning to show results, the terrorist events of September 11, 2001, in the United States triggered the reemergence of serious financing problems. in February 2002, the imf approved a new three-year standby credit for Turkey to support the government's economic program. With the implementation of the stabilization program, Turkey envisages a gradual but steady improvement in its economic conditions. in August 2004 Turkey approached the imf for a final three-year standby agreement—an exit program from instability and excessive debt.

Monetary Developments and Inflation

During the past two decades, Turkey has experienced high and variable inflation. There is strong evidence that, in the medium and long term, a close correlation exists between the rate of growth of monetary aggregates and inflation. This correlation appears in figure 1.1 between the monthly series of annual consumer price index (CPI) inflation and the monthly series of the annual growth rate of base money over the period January 1987–September 2004.

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