What has been the Role of Investment in Turkey ' s Growth Performance ?

Investment decisions occupy a central role among the determinants of growth. As empirical studies such as Levine and Renelt (1992) have revealed, fixed investment as a share of gross domestic product is the most robust explanatory variable of a country's growth. DeLong and Summers (1991) also provide evidence emphasizing the correlation of investment in equipment and machinery with growth. New growth theories have been developed that assign a growth-sustaining role to investment. Barro (1990) considers a simple endogenous growth model with infrastructure investment. Rebelo (1991) shows that differences in growth rates across countries may be explained by differences in government policy in an endogenous growth model. In Rebelo’s model, changes in certain policy variables such as an increase in the income tax rate decrease the rate of return to investment activities in the private sector and lead to a permanent decline in the rate of capital accumulation and in the rate of growth.Easterly and Rebelo (1993) study the implications of models that link fiscal policy to growth, and find a positive impact of infrastructure investment on growth. Investment is also the most variable component of GDP, and therefore an understanding of its determinants may shed light on the source of cyclical fluctuations. Policymakers are typically concerned about the ultimate impact of alternative policy measures on investment. In this chapter, we will examine the record of investment and growth for the Turkish economy over the period 1950-2007 in the light of both the neoclassical growth framework and also new growth theories that assign a growth-sustaining role to investment.