LDC external debt, trade and solvency of a nation: Time-series evidence for Turkey.

For over a decade after Mexico's announcement of repudiation in 1982, the LDC external debt problem is far from over, even though we may be less aware of it. Initially, the debt crisis was commonly considered as a liquidity problem arising from extremely unusual and unexpected combinations of worldwide recession and high interest rates. However, since 1982 to date, events have proved that this initial assessment was rather optimistic. Recently, it has become increasingly clear that the LDC debt problem goes beyond a pure liquidity problem. In this respect, we (like many others) acknowledge that many LDC debtors have a situation closer to insolvency rather than pure illiquidity. The lack of clear solvency criteria, however, makes it rather difficult, if not impossible, to distinguish between insolvency and illiquidity although, in theory, they differ fundamentally. In this regard, country specific factors appear to play a major role in determining whether or not countries escape from this crisis. Turkey experienced an external debt crisis in 1978. In fact, it was the first major crisis to surface. By the time, the LDC external debt became a widely known issue in 1982, Turkey had already re-entered the international credit markets and been acknowledged as an 'example' for other debtor countries. Since the introduction of a major policy reform program (which marks the switch from an inward-oriented economy based on import-substitution (ISI) to an outward-oriented one based on export-promotion), the macroeconomic performance of Turkey improved remarkably during the worldwide recession. The years from 1986 onwards, however, have been marked by uncertainty in macroeconomic policies. These developments in the second half of the 1980s, as a whole, have raised some doubts about Turkey's solvency and sustainability of the export-led growth (ELG) in general. The two main objectives of this thesis are as follows: first, to build a foreign trade model, and to estimate some income and price elasticities (employing recent time-series techniques such as 'cointegration analysis') for Turkey by using this model so as to serve the purposes of debt service and trade policy prospects. Second, to develop an intertemporal external solvency model for an indebted country, and to apply it to Turkey. The bulk of the empirical work lies in the form of estimating a set of long-run elasticities which enable us to calculate a reliable proxy for resources, and also to calculate the solvency index for Turkey. According to our results, Turkey is proved to be 'solvent' in the intertemporal sense although still suffers from a high debt burden. Besides which, our trade elasticity estimates for Turkey suggest that ELG strategies are preferable compared to the alternative of ISI strategies.