Capital account convertibility (KAC): The Turkish case

The Capital Account Convertibility (KAC) is a significant outcome of the globalization process. The restoration of stability and growth, in order to increase the efficiency and saving in the economy were the major aims of the KAC, in other words financial liberalization. The analysis of the financial liberalization on the Turkish economy shows that, the economy has been exposed to significant amount of hot-money flows during 1990s. The statistical data used in this study verifies, the increase in short-term capital in and outflows, after the convertibility of the Capital Account. The results indicate that, the vulnerability of the Turkish economy increased due to the sudden and volatile flows of capital. The correlation between the increasing speculative capital flows, portfolio investment, financial crises, unexpectedly low levels of foreign direct investment, and instability supports the argument of premature liberalization in Turkey. Finally, the successful implementation of the economic policies is suggested, together with controls on hot money flows, in order to achieve macroeconomic stability, and increase the amount of FDI, and the real rate of growth (rather than the speculation led growth observed) in the economy. Keywords: Capital account, capital flows, financial liberalization, FDI and PI. JEL Classification: F, F2, F3, F21, F32.