Turkey: The typical case of an emerging country with a shortfall in savings

Turkey enables us to perfectly illustrate the "curse of emerging countries with a shortfall in savings". If an emerging country has insufficient domestic savings to finance the investments it needs, it first accumulates large external debt. In periods when other countries are less keen to lend to an emerging country with a shortfall in savings, this country’s currency depreciates. The exchange rate depreciation leads to inflation and rising interest rates, which slow down activity. In the medium term , the accumulation of external debt and the exchange rate depreciation put an end to the capital flows to this country, whose risk becomes too high, and it then has to rebalance its foreign trade, leading to a marked decline in domestic demand and growth, as we can see now in Turkey.