Financialized Growth and the Structural Power of Finance: Turkey's Debt-Led Growth Regime and Policy Response after the Crisis*

• Author: Ayca Zayim
• DOI: http://doi.org/10.1177/00323292221125566
• Published date: 01 December 2022
• Date: 01 December 2022
• Subject Matter: Articles

Financialized Growth and the

Structural Power of Finance:

Turkey’s Debt-Led Growth

Regime and Policy Response

after the Crisis*

Ayca Zayim

Mount Holyoke College

Abstract

This article analyzes the Turkish central bank’s“managed uncertainty”policy after the

global f‌inancial crisis. During 2010–14, the central bank intentionally generated uncer-

tainty around short-term interest rates, using the level of predictability faced by f‌inan-

ciers as a tool to buffer the domestic economy from volatile capital f‌lows. How did

the central bank implement this unconventional policy? Building on interview data

and public texts, the article argues that the surge in capital inf‌lows after the crisis

sourced a debt-led, f‌inancialized economic growth model and deepened Turkey’s reli-

ance on external f‌inancing. The central bank could diverge from the f‌inancial sector’s

policy preferences despite Turkey’s increased foreign capital dependence because the

availability of low-cost, ample, private funding opportunities temporarily expanded

policymakers’room to maneuver. However, operating vis-à-vis an unsustainable

growth regime, the central bank had to revert to orthodoxy in 2014 due to declining

investor conf‌idence and capital f‌light. This article contributes to the literature on the

structural power of f‌inance by demonstrating how f‌inance derives its structural

power from funding f‌inancialized growth, not productive investments. It also shows

Corresponding Author:

Ayca Zayim, Department of Sociology and Anthropology, Mount Holyoke College, 50 College Street, South

Hadley, MA 01075, USA.

Email: azayim@mtholyoke.edu

*This special issue of Politics & Society titled “The Structural Power of Finance Meets Financialization”fea-

tures an introduction by Florence Dafe, Sandy Brian Hager, Natalya Naqvi, and Leon Wansleben and f‌ive

articles that were presented as part of the workshop series held at and funded by the Department of

International Relations, London School of Economics, November 2019, organized by Natalya Naqvi and

Florence Dafe, and at the Max Planck Institute, Cologne, June 2021, organized by Florence Dafe, Sandy Brian

Hager, Natalya Naqvi, and Leon Wansleben.

Article

Politics & Society

2022, Vol. 50(4) 543–570

© The Author(s) 2022

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/00323292221125566

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that f‌inancial structural power varies based on the source and cost of external f‌inanc-

ing beyond the degree of foreign capital dependence.

Keywords

structural power, f‌inance, central bank, debt, Turkey

In the aftermath of the 2008 f‌inancial crisis, several emerging market (EM) economies

witnessed a surge in capital inf‌lows. The easing of monetary policy in advanced econ-

omies expanded liquidity in the global f‌inancial system, and private investors increas-

ingly took advantage of higher interest rates in EMs by moving their capital to

high-yielding EM assets. Mostly short-term and volatile, these private “hot money”

f‌lows heightened f‌inancial vulnerability and macroeconomic imbalances. Several

EMs experienced currency appreciation, asset bubbles, and widening external def‌icits.

In 2010, Brazilian Finance Minister Mantega referred to the appreciation of EM cur-

rencies as a result of QE as a “currency war.”

1

In 2014 Raghuram Rajan, former gov-

ernor of the Reserve Bank of India, similarly criticized the United States, saying, “The

US should worry about the effects of its policies on the rest of the world …and do what

is right, broadly, rather than what is just right given the circumstances of that country.”

2

Even the IMF, long known for its neoliberal view on capital market liberalization,

highlighted emergent f‌inancial and macroeconomic stability risks and acknowledged

capital controls as an “appropriate policy response.”

3

Several EMs, including Brazil,

South Korea, Taiwan, and Indonesia, imposed controls on capital inf‌lows, while

others such as South Africa relaxed capital outf‌low restrictions.

Turkey pursued a different strategy. The surge in capital inf‌lows powered a vicious

cycle in the Turkish economy whereby currency appreciation and domestic credit

growth accompanied burgeoning external debt of f‌inancial and nonf‌inancial sectors

and contributed to Turkey’s current account def‌icit. The def‌icit jumped to a historically

high level of 8.9 percent of GDP in 2011 and was increasingly funded through short-

term capital inf‌lows.

4

Starting in late 2010, Turkey’s central bank—the Central Bank

of the Republic of Turkey (CBRT)—alerted the government and public to mounting

domestic f‌inancial stability risks. Capitalizing on the postcrisis “ideational shift”in

central banking, it increasingly took on a leading role in the pursuit of f‌inancial stabil-

ity.

5

In late 2010, it introduced an unconventional monetary policy framework whereby

it intentionally generated uncertainty around the movement of future short-term (over-

night) interest rates, thereby decreasing interest rate predictability and threatening the

prof‌itability of short-term f‌inancial investments. As the CBRT’s former chief econo-

mist Kara expressed at the OECD Economic Policy Committee meeting in 2012,

“The prescription is quite simple: lean against the wind; counterbalance the f‌low of

capital by changing the degree of predictability of short-term policy rates.”

6

The

initial goal of the so-called managed uncertainty was to discourage hot money

inf‌lows—specif‌ically, the carry trade—during the surge in 2010–11.

7

However, the

framework was also later employed during periods of capital outf‌lows (such as

during the Eurozone crisis) and remained in effect until January 2014 to buffer the

economy from capital f‌low volatility.

8

Additionally, the CBRT took measures to

544 Politics & Society 50(4)