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Financialization, economic development and crisis

Final Report Summary - FINANCIALIZATION (Financialization, economic development and crisis)

Summary description of the project objectives:

This research project analyzed the impact of the recent changes in the realm of finance on economic growth and development. The research has a theoretical component and an applied component that focuses on the Turkish economy. In terms of methodology, research methods such as economic modeling, empirical data analysis and econometrics are combined with a historical political economy analysis. Two main research objectives and their details are as follows:

1. First, analyze theoretically and empirically the relationship between financialization and economic growth and development both in general and then specifically in the Turkish economy. The first objective of the research project will focus on a study of the role and place of financial markets and institutions in the Turkish economy and determine their impact on growth, development and distribution in an effort to uncover the dynamics of the accumulation process in Turkey in relation to finance, identify potential financial fragility points and how they relate to the productive side of the economy. In this regard, the research will raise three related but distinct questions:

a. First, what is the degree of dependence of the Turkish economy on movements of international financial capital?

b. Second, what are the consequences of increased financial dependence both in terms of international relations and in terms of domestic economic development?

c. Third, what are the characteristics and viability of alternative policies to curb the effects of international financial flows on the domestic economy?

2. Second, produce alternative economic policy options given the results of the first part of the research. Two main questions in this regard are:

a. What would be the most effective policies regarding financial markets to enhance economic growth and development?

b. What would be the most effective policies regarding financial markets to prevent financial fragility?

Research done and main findings:

These research objectives have been met through a number of studies started during the first period of the research project and completed in the second period of the research project:

1. THEORETICAL STUDIES: In a series of studies, the researcher theoretically analyzed the process of financialization (Orhangazi 2015a, 2015b, 2015c, 2015d, and 2016; Dufour and Orhangazi 2014 and 2016).

2. CAPITAL FLOWS: The findings of research done on the link between capital inflows and credit expansions suggest that net private capital inflows, after controlling for other determinants of credit, are positively correlated with periods of rapid credit expansion in Turkey. (Orhangazi 2014).

3. CAPITAL FLOWS: Analyses done by the researcher together with Dr. Gökçer Özgür on the role of capital inflow and credit expansions on the economy and potential fragilities reveal three particular issues: First, similar to the earlier experiences of both Turkey and other DEEs, the Turkish economy is still subject to a sudden stop risk. In fact, the risk is now higher as the country received record volumes of capital inflows, mostly in the form of short-term investments. Second, a main difference this time around is that the private sector (both banks and nonfinancial corporations) has significantly increased its foreign exchange borrowing and is now faced with a large net open position, increasing the risk of a currency mismatch. Moreover, the nonfinancial corporate sectors' foreign-currency-denominated debt to the domestic banking sector renders both sectors fragile at the same time. Third, the capital-inflow-dependent, finance-led growth model led to a significant expansion in credit to the private sector. The banking sector’s credit to deposit ratios climbed up, nonfinancial corporations’ debt to tangible asset ratios and household debt ratios rapidly increased, leading to an accumulation of a range of financial fragilities in the economy. (Orhangazi and Özgür 2015).

4. INVESTMENT: Analyses done by the researcher together with Dr. A. Gezici and Dr. C. Yalçin on the real and financial determinants of investment using a unique firm-level data set including almost all large firms as well as small- and medium-sized firms in Turkey for the period of 1996-2013, indicate that demand constraint or debt overhang is not statistically significant for the investment performance of firms, while credit constraint seems to still be effective, especially for small- and medium-sized firms and for export-oriented firms. (Gezici, Orhangazi and Yalçin 2016a).

5. EXPORTS: Analyses done by the researcher together with Dr. A. Gezici and Dr. C. Yalçin on the link between financial constraints and firm-level export behavior by using data on Turkish manufacturing enterprises for the period of 1996-2013 find that there is a positive and statistically significant export premium for financial constraints; that export starters face lower financial constraints; and that the average financial constraint effect of starting to export is positive in general and statically significant for a narrower index of financial constraints. (Gezici, Orhangazi and Yalçin 2016b).

6. RESEARCH AND DEVELOPMENT: Analyses done by the researcher together with Dr. A. Gezici and Dr. C. Yalçin on the impact of financial factors on R&D investment find that financing constraints are negatively correlated with R&D activity. The results also suggest that financing constraints are also important in the decision to start investing in R&D and that the same relationship holds between financing constraints and the level of R&D expenditures. (Gezici, Orhangazi and Yalçin 2016c).

7. TRADE: Analyses done by the researcher together with Dr. A. Gezici find that on the one hand, Turkey's participation in international trade has significantly increased, and, on the other hand, Turkey has received record volumes of foreign capital inflows. They show that Turkey has indeed managed to increase its export volume and changed the composition of the exports towards more sophisticated products. However, the boom in exports has been dependent on imported components, leading to persistent trade deficits as the foreign share of value added in gross exports has continuously increased and the terms of trade as a whole moved against Turkey. Persistent current account deficits were financed by mostly short-term capital inflows, which contributed to the formation of a domestic credit expansion. Both the exporting and domestic-market-oriented firms increased their borrowing. Household indebtedness has also increased as a low/stagnant wage policy formed the backbone of the increasing exports. (Gezici and Orhangazi 2016).

In short, the research summarized above addressed the issues listed in the first objective of the research project and each research paper also addressed the second objective of the research project by including a policy discussion at the end.

The career reintegration of the researcher has been successfully accomplished. This is in line with the goals of the grant as the “action is intended to improve considerably the prospects for the permanent integration of researchers who are taking up, for the first time, a stable post in Europe,” as described in the People 2011 Work Programme. The researcher has permanent employment as full-time associate professor in the Department of Economics. He teaches both undergraduate and graduate level courses in the department. He has also been serving as the Vice Dean of the Graduate School of Social Sciences for the last two years. Furthermore, he served or is serving on the boards of directors of a number of research centers, including the Sports Research Center, European Union and International Studied Research Center, Continuing Education Center and Middle East and North Africa Research Center. For the last two years, he also served as a member of the Economics Department hiring committee.

The researcher has established collaborations at the University level, national level as well as international level. At the University level, the researcher collaborates with Dr. K. Ali Akkemik of the Economics Department. At the national level, the researcher established collaboration with a working group of financialization led by Prof. Dr. Galip Yalman at the Middle East Technical University in Ankara. He also established collaboration with Dr. Gökçer Özgür of the Hacettepe Univeristy in Ankara and Dr. Cihan Yalçin of the Research Department of the Central Bank of the Republic of Turkey. At the international level, the researcher has been active in participating in conferences as well as organizing joint research with Dr. Noemi Levy of the UNAM in Mexico City, Prof. Dr. Gerald Epstein of the Political Economy Research Institute at University of Massachusetts Amherst, Dr. Mathieu Dufour of the City University of New York, Dr. Armağan Gezici of Keene State University and Dr. J. W. Mason of the City University of New York.

In terms of further career development perspectives, the researcher has completed all the requirements for promotion to full professorship. It is expected that he will be considered for promotion in 2017. He has already planned or started some joint work with some of the above mentioned collaborators. In fact, he has a full research agenda for the coming two years and plans to go on a research leave some time next year. The University provides paid research leaves for faculty and the researcher will be applying for one and the chances of getting one is high.

Wider societal implications of the project

The relevance and socioeconomic significance of the project can be summarized as follows: First, the research has identified the main drivers of economic growth in Turkey. Second, it has identified the main sources of fragility in the economy. Third, it has gone further in detail and examined three sources of economic growth: investment, export market participation and research and development activities. The economic and financial turmoil that the world economy and especially the European economy is going through makes it extremely urgent to study and understand the financialization phenomenon, the relationship between finance and economic growth and development and requires the production of a set of alternative economic policy options. This research project carries significance in this regard. Furthermore, the spread of the financial crises is forcing everyone to think about alternative policy options. Unfortunately, economics literature has not produced enough research regarding new policies. A systemic analysis of the current state of the Turkish economy can help devise policies that would potentially have relevance for other developing economies. Hence, by raising this question, this research also hopes to contribute to the toolbox of developing country economic policy makers.

The project's case study country, Turkey, is a candidate country for full membership. Since the 2001 crisis, Turkish economy has recorded strong growth rates while financially it has been running high current account deficits and high household borrowing. This research project assessed the relationship between financial factors and growth and development indicators in the case of Turkey and presented a contribution to a better understanding of the dynamics of the Turkish economy. This is also highly relevant for the future of the European Union economy as Turkey is the largest candidate country and even without membership to the union occupies a significant relevance for it.

In terms of the economics literature, although there is a large body of literature on both the current stage of international financial system and on development economics, there is relatively very little research done from a critical perspective. This research project posed original questions and brought together different strands of literature together in an attempt to provide new insight to the fundamental question of economic development. As such, successful completion of this research should be considered as an important contribution to the literature.

Finally, this research has great relevance for the European Research Community. This research project contributes to the discussion on a topic that is at the centre of attention of the European community. There is a growing interest among scholars and the general population alike in international financial issues.

Internet addresses

There was no website proposed for the project in the grant agreement. However, the findings of the research is being published through three websites:

The researcher is a research affiliate at the Political Economy Research Institute at University of Massachusetts Amherst and working paper versions of the research findings are published on their webpages.

The researcher also makes the papers available on his homepage ( and on the Academia webpage (ÖzgürOrhangazi)