Financial globalization, the democratic deficit, and recurrent crises in emerging markets: the Turkish experience in the aftermath of capital account liberalization

Abstract

Financial globalization offers both risks and benefits for countries of the semi-periphery or "emerging markets." Politics within the national space matters, yet acquires a new meaning, in the age of financial globalization. "Weak democracies" are characterized by limited accountability and transparency of the state and other key political institutions. Such democracies tend to suffer from populist cycles, which result in a low capacity to carry out economic reform. Financial globalization, in turn, magnifies populist cycles and renders their consequences more severe. Hence, "weak democracies" are confronted with the predominantly negative side of financial globalization, which includes overdependence on short-term capital flows, speculative attacks, and recurrent financial crises leading to slow growth and a more regressive income distributional profile. The relevance of these sets of propositions are illustrated with reference to the case of Turkey, which, indeed, experienced recurrent financial crises in the post-capital account liberalization era, with costly consequences for the real economy. Two general conclusions follow. First, there is a need to strengthen democracy in the developing world. Second, since this is hard to accomplish over a short period of time, serious questions are raised concerning the desirability of early exposure to financial globalization given the current state of the world.