Financial Reforms and the Decomposition of Economic Growth: An Investigation of the Changing Role of the Financial Sector in Turkey

Turkey undertook a far-reaching structural adjustment program in 1980. As an integral element of this program, financial liberalization was geared towards increasing domestic savings and directing them efficiently towards financing investment projects, a goal assumed to create positive impacts on economic growth. After 20 years the effects of these reforms in financial markets are still a matter of concern among academics. The aim of this paper is to examine the role of the financial sector in the economy as a whole and to assess the sources of gross output of the sector. In doing so, financial reforms can be connected with different sources of growth, and the impact of reforms on the production of financial services in the pre- and post-liberalization periods can be analyzed. To accomplish this aim, a methodology based on the Leontief’s input–output models is introduced. The results imply that the production sector of the Turkish economy has increasingly become increasingly independent from the use of financial services produced by the banking and insurance sectors particularly in the post-reform period.