The essays making up this thesis combine two important milestones in Turkey's bid for global integration: Turkey’s prospective accession to the European Union (EU) and capital account liberalization.
The first essay deals with possible economic consequences of Turkish accession to the EU, focusing on transfers as the cause of EU’s objection to admit Turkey and investigating whether the transfer may be a price worth paying for the European households. The idea presented here is that adherence to the Copenhagen criteria leads to an improvement in Turkish institutions, which in turn increases Turkish total factor productivity (TFP) in the model. We find that a TFP increase in Turkey enhances the utility of the households in the EU and therefore may compensate for the negative effect of the transfers. The second essay deals with the same issue in a dynamic general equilibrium setting. This time, we assess quantitatively whether, from the European perspective, enlargement of the EU to include Turkey is welfare enhancing. Finally, the third essay concerns the capital account liberalization experience of Turkey in order to account for the changes in the Turkish economy after the country’s
opening to capital flows and analyses whether Turkish households are better off because of this opening up.
1 General Introduction 1
2 May free capital mobility before accession be unfavorable for admission to the EU? 5
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 EU Accession and TFP growth . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 The Model without Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3.1 The Benchmark Model . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3.2 After Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3.3 Exogenous Labor Supply . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3.4 Exogoneous Migration . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4 The Model with Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4.1 The Benchmark Model . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.4.2 After Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.5 Policy Implications for Turkey . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.6 Variants of the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.6.1 Model with capitalists and workers . . . . . . . . . . . . . . . . . . 20
2.6.2 Different Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.8 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.8.1 Proof of Proposition 1 . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.8.2 Proof of Proposition 3 . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.8.3 Proof of Proposition 4 . . . . . . . . . . . . . . . . . . . . . . . . . 29
3 Worthy Transfers? A Dynamic Analysis of Turkey's Accession to the European Union 31
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2 The Benchmark Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2.1 The Optimal Solution . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.2.2 Equilibrium Conditions . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.3 Worthy Transfers? The Dynamic Impact of a TFP Increase in Turkey . . . . . 37
3.3.1 Calibration and Simulation . . . . . . . . . . . . . . . . . . . . . . . 37
3.3.2 Comments on Results . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.3.3 Capital Mobility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.3.4 Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.4 The TFP-convergence Hypothesis . . . . . .. . . . . . . . . . . . . 45
3.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4 Capital Account Liberalization: The Case of Turkey 57
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.2 Effects of Capital Account Liberalization . . . . . . . . . . . . . . 58
4.3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4.3.1 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.3.2 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
4.3.3 Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4.4 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4.4.1 Calibration of the Household and Production Parameters . . . . . . . 65
4.4.2 Exogenous Processes . . . . . . . . . . . . . . . . . . . . . . . . . . 67
4.5 Experiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
4.5.1 Simulation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
CONTENTS v
4.5.2 Welfare Gain? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4.5.3 Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4.7 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75