Turkey perfectly illustrates the problems of emerging countries with low savings rates

Turkey is a perfect illustration of the situation of emerging countries where national savings are insufficient to finance investment: As long as foreign investors (financial or corporate) have confidence in an emerging country, it can accumulate external debt to finance its investment and enjoy vigorous growth . B ut if confidence disappears for economic or political reasons, capital inflows stop and a vicious circle is triggered; Problems financing the external deficit lead to exchange rate depreciation, imported inflation and rising interest rates. Purchasing power and consumption then contract (due to the inflation) and investment contracts (due to the rise in interest rates), leading to a fall in actual and potential growth; The country responds to the weakening of its economy with expansionary fiscal and monetary policies. But fiscal deficits amplify the savings shortfall and excessively low interest rates relative to inflation amplify the exchange rate depreciation.