The effects of international capital flows on economic growth: The case of Turkey

Domestic savings is the main source for financing the necessary investment for economic development goals of the countries. In developing countries savings rates are low. Therefore, foreign capital made possible an increase in domestic investment over domestic saving.Turkey initiated a long lasting structural adjustment programme in the 1980?s. The liberalizing process intensified by dismantling the restrictions on the movements of foreign capital in 1989. But this capital account liberalization did not magnetize much foreign capital inflows to the Turkish economy. The share of the foreign direct investment in total capital inflows remained low and the lions share in capital flows was the short run speculative capital or ?hot money?. This type of speculative capital inflows would had adversely affect the economic growth of the country.The basic aim of this dissertation is to assess the effects of capital inflows of different structure on economic growth for the Turkish economy. In doing so, the Granger non-causality tests are used to empirically examine the effects of foreign capital movements on economic growth. The results suggest a one way causality, from portfolio investments (PYSA) to gross fixed capital investments (SSSA); form current account balance (NXSA), to total domestic savings (SSA); from import (MSA) to export (XSA) and from intermediate goods import ( MRSA) to ? .However, there exists a stronger relationship from portfolio investments (PYSA) to gross fixed capital investments (SSSA). This finding is points out to some sorts of dependency between short run portfolio investments and fixed investments. For example the fixed investment rises when short run capital inflows accelerated, and decreases when speculative capital inflow fell down. Domestic interest rates stay high in order to attract more capital inflows. High interest rates combined with economic and political instability crowds out foreign direct investment. Financing deficits via speculative foreign capital inflows is a temporary solution to economic problems.Keywords: Economic Growth, Saving, Fixed Capital Investment, Foreign Direct Investment, Portfolio Investment and Current Account Deficit