Turkey: A textbook case of the chronic difficulties faced by low-saving emerging countries

Emerging countries with low national savings rates have structural external deficits, which are needed to finance their investment. They therefore accumulate external debt, which increases the likelihood of a balance-of-payments and currency crisis, and they must constantly attract international capital flows. This requires continued high interest rates: savings in the rest of the world must be attracted to the country, and the risk that stems from high external debt as well as currency risk must be offset. Herein lies the trap: Either the low-savings emerging country maintains high interest rates, which then weaken its growth; Or it lowers its interest rates and its currency depreciates sharply, leading to higher inflation (a deterioration in the terms of trade) that also weakens growth by reducing real incomes. Turkey offers an excellent illustration of these structural problems and this trap.