Crowding out and making room effect in Turkey

Dunya Executive - - COMMENTARY - Tevf k GUNGOR Columnist

Turkish economist Mahfi Egilmez accurately interprets the improvements in the economy on his website, “Writing for Myself.” His sphere of influence appears to regularly attract at least 25,000 readers and the headline of the article published on Sept. 25 ran: “Excluding and Making Room Effect in Turkey.”

Egilmez explains the “Excluding and Making Room Effect” as follows: In circumstances where extreme public sector demand for resources is provided for fund markets and leading private sector firms are excluded from these sources is called a “crowding out” effect. This extreme public sector demand actually prevents the private sector from being able to compete with itself and excludes the private sector from the market. In the case where extreme public sector demands from the borrowing fund market, there are mainly two reasons why creditors prefer the public sector to lend money: (1) The risks are lower in the public sector and there is a general consensus on this, so creditors prefer lending to the public sector. (2) The public sector doesn’t care about the cost of borrowing as much as the private sector does, so can offer higher rates for the money it borrows.

The private sector becomes more able to benefit from such sources as a result of the public sector decreasing its demand on the borrowing market, which is called “crowding in.” When the public sector regulates its budget deficit, it requires less borrowing. Therefore, it decreases its borrowing demand and interest rates fall.

Having stated these definitions, Egilmez explains the improvements in Turkey in the context of these fac- tors. He says the “excluding effect” dominated Turkey where the borrowing market was composed of savings and similar sources. It had created a trend that caused borrowing resources in the foreign and domestic market to flow towards the public sector.

This trend has been reversed for the last 15 years. The public sector decreased its demand from both the foreign and domestic borrowing markets. The main reason for that were measures taken to decrease budged deficits since the 2001 crisis with a transition to a strong economy program. The advantage of the private sector using these funds instead of the public sector is reflected by an increase in the rate of GDP growth. During the 16 years where the “excluding effect” was dominating the market (1986-2001), GDP increased from TL 51.2 billion to TL 245.4 billion, meaning a 3.8-fold increase. Whereas in the “making room effect” period of 16 years (2002-07), GDP rose almost seven-fold, from TL 359.4 billion to TL 2.8 trillion.

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