The global financial crisis has demonstrated that a financially open economy has many areas of vulnerability. Even when a country keeps its own house in order, it remains at the mercy of developments in external financial markets. So, one lesson to bear in mind is that policymakers need to guard against not just domestic shocks, but also shocks that emanate outward from financial instability elsewhere. To accomplish this, complete financial openness is not the best policy. A second lesson is that Turkey’s prevailing growth strategy can neither be sustained nor generate enough employment. Therefore, it would be a mistake for the country to return to the status quo ante and resuscitate a model that fails to make adequate use of domestic resources. Most importantly, Turkey has to learn to live with a reduced reliance on external borrowing. The paper discusses the needed realignments in fiscal and exchange-rate policies.

The global financial crisis has demonstrated that a financially open economy has many areas of vulnerability. Even when a country keeps its own house in order, it remains at the mercy of developments in external financial markets. So, one lesson to bear in mind is that policymakers need to guard against not just domestic shocks, but also shocks that emanate outward from financial instability elsewhere. To accomplish this, complete financial openness is not the best policy. A second lesson is that Turkey’s prevailing growth strategy can neither be sustained nor generate enough employment. Therefore, it would be a mistake for the country to return to the status quo ante and resuscitate a model that fails to make adequate use of domestic resources. Most importantly, Turkey has to learn to live with a reduced reliance on external borrowing. The paper discusses the needed realignments in fiscal and exchange-rate policies.