Financial Developments and Economic Growth

INTRODUCTION 

From an economic perspective, it can be easily said that if a country has financial developments associated with financial openness, economic growth directly exists in that country. Although this approach is true theoretically, in practice, example of Turkey prows that this approach does not reflect the truth exactly. The phrase "exactly" must be underlined because almost all of the economic laws are based on the assumption of "ceteris paribus (when all other situations are constant)". Therefore, when talking about a country's economy, it is necessary to take into account the unstable situations, too. Researches show that every country that takes liberalization steps in finance, gets an intense flow of money to its country in the short term, but if a country is not ready for this flow of money, it causes deeper crises such as deflation (deflation is one of the simplest examples given in this regard and intense money in the environment also causes deeper crises without infrastructure). Said infrastructure includes strong fiscal and monetary management, which also includes topics such as reinforced banking regulation and supervision and, in this article 1980 - 2016 from Turkey relationship between financial development and economic growth linked to financial system will be examined. 

Financial Developments And Economic Growth 

The functions of the financial system include factors such as reducing risks, allocating resources, providing information about investments, overseeing managers and implementing corporate control, mobilizing savings, and facilitating the trade of goods and services. (İNANÇLI, et al. 2016) Financial systems emerge as an important factor in the economic growth process as they meet the funding function in order to spread new technologies and accumulate capital (Altıntaş, et al. 2010). There are four types of approaches that financial development causes economic growth, economic growth causes financial development, and there is a mutual relationship. The impact of the structure and functions of financial systems on economic growth is one of the most discussed issues in the literature (Aydın, 2019). These discussions show that; financial developments do not have the same effect in every country. When the reason for this obvious difference is investigated, the following result appears; Financial systems are classified as bank-based financial systems and market-based financial systems due to the structural characteristics of the institutions and channels that provide fund transfer and their weight in the market (Altıntaş, et al. 2010). Therefore, in countries where financial developments result in positive effects, the financial system is built on a strong banking system infrastructure and is subject to a strict regulatory and regulatory mechanism that acts as the framework of the financial system. Outsourcing in the early 1980s in Turkey, and significant changes in the financial sector with the liberalization policy was initiated. Following the enactment of the Capital Markets Law and the establishment of the IMKB in the early 1980s, institutional reforms such as the establishment of the Interbank Money Market, the initiation of Open Market transactions, the establishment of the Exchange Interbank and the Gold Markets were carried out in the second half of the 1980s (Altıntaş, et al. 2010). Turkish authorities have gradually liberalized their trade policy and controlled interest rates. These liberalization efforts contributed to an average 5.5% increase in economic growth in the period 1982-1989, but this early success was overshadowed by the emergence of serious financial crises in 1994, 1998-1999 and 2000-2001. These crises have led to negative economic consequences in terms of increased interest rates, overproduction losses and the failure or expropriation of approximately 30 domestic banks (Ari, A. 2018). 1980 - 2000 samples from Turkey to the development of the financial regulatory and supervisory system can be effective in a short period of time without infrastructure but after a while it proves the potential dangers even harder. Although it is important to establish a supervisory and regulatory framework, the more important one is that these supervisory systems are independent. Since the Banking Regulation and Supervision Agency (BRSA) is effectively created and the close links between the system's holdings and political authorities undeniably strengthen this extreme risk-taking environment, weak control and regulation of the system is one of the factors causing this crisis (Ari, A. 2018). Emphasizing the independence of supervisory institutions is very important in creating an environment of trust in the economy. The fact that the real sector contributes to the development of the banking sector is an indication that there is an atmosphere of confidence in the economy. The environment of trust existing in the economy means an increase in investments for the producer and consumption and savings in terms of the consumer. In emerging economies, the banks' financing sources increase the credit supply of banks and increase their maturities as their loan costs decrease. This is a factor that increases firms' production and investments. The environment of trust created as a result of increased production and realization of investments has shown itself in the banking sector at the time of the study (Contuk et al., 2016). By looking at all these examples, 'which steps Turkey has made towards the post-2001' must be asked as the question. Because, Turkey inflation declined to single digits in about 60% after 2001, the budget deficit fell to 2% of GDP in 2016 from 12% in 2001. In this case, Turkey has decreased to 35% from 80% of GDP in 2001, the public debt. Turkey production in 2016 and, except for the period 2008-2009 crisis has increased continuously. Moreover, Turkey despite the global economic crisis, falling GDP per capita has doubled. Finally, all this reduced income inequality, reduced poverty by more than half, expanded access to high-quality health, education and municipal services, and narrowed income disparities across regions.1 post-2001 financial development in economic growth under the bear so a positive result, Turkey's IMF-backed program implemented after the severe crisis in 2001, effective fiscal and monetary management, reinforced banking regulation and supervision, such as the floating exchange rate regime and inflation targeting strategy, stability provision and restructuring efforts lie. Apart from all these matters, political stability has also been achieved in the recovery of financial stability. Indeed, the failed coup in July 2016, factors such as political instability, changes in the political system in April 2017 referendum caused the currency crisis in 2018 together with the undone structural reforms. 

Conclusion

Turkey's financial system should be seperated as 'before 2001' and 'after 2001', because the relationship between financial development and economic growth are emerging that result. Although the relationship between financial developments and economic growth is considered to have a positive relationship in the literature, the main issue to be considered is whether the financial markets or system is strong or not. If there is a situation where financial markets are not strong, financial developments disrupt a country's macroeconomic stability, creats a negative relationship between financial developments and economic growth. Before liberalization in the financial field and the developments it brings, a deep financial and financial restructuring is required for its sustainability to occur. With a strong banking system, an independent and strict controller and regulatory mechanism, the roads leading to a devastating economic crisis will be closed one by one. Turkey's the domestic economy's external financing should continue investments to reduce dependence, reliance on imported inputs, increase savings and make the market economy more competitive. Turkey should have structural reforms to reduce the deficit and sit in between developed countries. Thereby, Turkey's financial development will make financial environment extremely open and will provide continuity in economic growth. Stressing the rule of law, protecting property rights, preventing political uncertainties, increasing the regulatory powers of independent institutions taking into account the free market principles will bring along a long-term economic development. 

 Çağatay Çağlayan

REFERENCES

Altıntaş, Halil, ve Ayrıçay, Yücel, (2010), “Türkiye’de Finansal Gelişme ve Ekonomik Büyüme ilişkisinin Sınır Testi Yaklaşımıyla Analizi”, Anadolu Üniversitesi Sosyal Bilimler Dergisi, Cilt:10, Sayı:2, ss.71-98.

Ari, A. (2018). Financial Openness, Financial Stability, and Macroeconomic Performance in Turkey: A Comparative Perspective. In Turkish Economy (pp. 151-169). Palgrave Macmillan, Cham.

Aydın, Y. (2019). Finansal Gelişme ve Ekonomik Büyüme İlişkisinin Kırılgan Beşli Ülkeleri İçin Analizi. Ekonomi Politika ve Finans Araştırmaları Dergisi, 4(1), 37-49.

Contuk, F. Y., & Güngör, B. (2016). Asimetrik Nedensellik Testi ile Finansal Gelişme Ekonomik Büyüme İlişkisinin Analizi. Journal of Accounting & Finance, (71).

İNANÇLI, S., ALTINTAŞ, N., & Veysel, İ. N. A. L. (2016). Finansal gelişme ve ekonomik büyüme ilişkisi: D-8 örneği. Kastamonu Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 14(4), 36-49.