Budget deficiencies and the political economy of external borrowing in Turkey

Among advanced and developing countries, or nations with similar levels of development, there exist certain differences in terms of economic sustainability, growth, and development. The inadequacy of traditional approaches in explaining the macroeconomic dynamics behind these economic development disparities among countries has led to the emergence of the institutional economics approach, which considers political and institutional factors, especially after the 1990s. This study aims to examine the impact of political and institutional factors on budget deficits and debts in Turkey. The focus of this study is centered around how these two macroeconomic concepts are influenced by political and institutional factors. Initially, the study delves into the conceptual framework of budget deficits and external borrowing, as well as political and institutional factors, and evaluates economic indicators in the context of Turkey. In the concluding section of the study, the situation in Turkey is analyzed using annual data spanning from 1990 to 2020. Employing the ARDL modeling method and utilizing the Stata 17 program, co-integration and the same approach's error correction model are applied to test the hypothesis. According to the obtained results, variables such as economic freedom, democracy, currency and price stability, and the Guidotti-Greenspan ratio have been tested for their effects on the budget deficit and the ratio of gross external debt to gross domestic product. An increase in economic freedom and currency/price stability variables has been found to have a decreasing effect on the budget deficit as a percentage of GDP. Conversely, an increase in the Guidotti-Greenspan ratio and the democracy index has an increasing effect on this ratio. Similarly, an increase in economic freedom and the Guidotti-Greenspan ratio leads to a decrease in the ratio of gross external debt to GDP, while an increase in currency/price stability and the democracy variable has an increasing effect.