Turkey has suffered chronic macroeconomic instability over the last twenty five years. Has this affected economic growth? This study investigates the growth experience of Turkey from 1963 to 1999 and using econometric techniques, analyses the empirical relationships between macro-economic instability, public investment, private investment and growth in Turkey during this period. The paper extends its empirical analysis by also looking at the infrastructural component of public investment.
The paper argues that political instability and polarisation, and the strategic behavior of policy makers or the interactions among them, may have harmful effects on macroeconomic stability, public investment and economic growth for long periods of time.
The main conclusion of the paper is that the chronic and increasing macroeconomic instability of the Turkish economy has seriously affected the capital formation and hence growth. The paper also finds that:
.there was no significant effect of public infrastructural investment on private investment in the long run.
.there is some evidence of complementarities between private and public investment over the short and medium run.
In light of these results, the paper suggests that chronic macro-economic instability seems to have become a serious impediment to public investment in Turkey.
Following this econometric study, the paper makes the following policy recommendations:
the government of Turkey should continue the current stabilisation program to restore macroeconomic stability, as soon as possible
the composition of fiscal adjustment matters, therefore policy makers have to be careful in their decisions concerning the components of public spending that would bear the burden of fiscal adjustment. For example, if governments reduced public capital spending (especially infrastructural spending) instead of current spending, this would harm capital accumulation and economic growth.