Impacts of Customs Union membership over European Union originated capital inflows to Turkey

ABSTRACT There had been various discussions over both the advantages and disadvantages of becoming a member of the Customs Union for Turkey. While these discussions mostly focus on the changes in the volume of foreign capital inflows, omitting conjectural changes, possible consequences of such integration had not been thoroughly analyzed and expressed. This study attempts to shed light on this issue by investigating Turkey's capital inflows before and after the Customs Union Agreement. Meanwhile, this paper takes also explicitly into considerations concurrent changes in the macroeconomic environment that could have affected Turkey's capital inflows as well as other countries'. Capital inflows plays a crucial role in economic development of nations, ranked at any level, (either the developed, or the developing or the under-developed) through transfers of technology, improvements of efficiency and increases in foreign trade volume. Nowadays in the world, where globalization is a very important determinant, FDI is especially important for emerging economies like Turkey. Turkey has a number of strengths that separate it from its neighboring countries such as a strategically advantageous location, a large and growing domestic market, and a strong potential for economic growth. However, chronic high inflation, unstable politic and social environment and a weak-banking system have inhibited Turkey's ability to attract substantial levels of investment. Considering the recent trend of economic and political instability, Turkey could not offer demanded adequate market conditions to foreign investors and the exaggerated optimistic expectations of related government agencies over the so-called "boom" of foreign capital inflows did not realize. Finally, even though Turkey has integrated with the most powerful economic union (partly in its Customs Union Organization) in the world starting from 1996, our statistical datas and findings indicate that Customs Union Agreement did not have remarkable impacts on Turkey's capital inflows from the EU countries and the forecast foreign investment amount did not occur. Key Words: Customs Union Foreign Capital Capital Inflow European Union Turkey VI