Mi­cro­scope: Turk­ish econ­omy 2013, By Tap­tuk Emre Erkoç

Turkish Review - - CONTENTS - TAP­TUK EMRE ERKOÇ Staff writer

Turkey’s econ­omy ended 2013 amid both promis­ing macroe­co­nomic in­di­ca­tors and height­en­ing struc­tural weak­nesses. En­vi­able growth rates saw Turkey pre­serve its rep­u­ta­tion as one of the fastest ex­pand­ing economies in the world. On the other hand, a lack of con­sol­i­dated po­lit­i­cal and eco­nomic in­sti­tu­tions -along­side a frag­ile cur­rency- in­ter­est rate regime -- led do­mes­tic and for­eign in­vestors to ques­tion the econ­omy’s fu­ture tra­jec­tory

The cur­rent state of Turkey’s econ­omy is some­what un­sta­ble: At present it is un­clear whether the econ­omy will find sta­bil­ity in ex­pan­sion or con­trac­tion. This piece crit­i­cally ex­am­ines the strengths and weak­nesses of Turkey’s eco­nomic out­look, fo­cus­ing on 2013 fig­ures. The eco­nomic in­di­ca­tors com­pris­ing an ex­ist­ing synop­sis of the Turk­ish econ­omy are sum­ma­rized and scru­ti­nized, con­cen­trat­ing specif­i­cally on GDP growth rates, ex­port and im­port vol­umes, pub­lic spend­ing and debt fig­ures, in­fla­tion, ex­change and in­ter­est rates, and fi­nally un­em­ploy­ment level.

GDP growth

There is no doubt that Turkey has been ad­mired by com­peti­tors due to an in­creas­ing trend in GDP fig­ures, even dur­ing the dif­fi­cult pe­riod of the fi­nan­cial cri­sis in 2008. Fig­ure 1 clearly il­lus­trates that the Turk­ish econ­omy’s ex­pan­sion on a GDP ba­sis con­tin­ued through­out the first three quar­ters of 2013, de­spite a slight de­crease in the third quar­ter. If this growth is bro­ken down into its com­po­nents by means of the ex­pen­di­tures ap­proach to GDP cal­cu­la­tion, its in­ter­nal dy­nam­ics can be viewed. Ac­cord­ing to this par­tic­u­lar anal­y­sis, GDP growth in Turkey is strongly mo­ti­vated by govern­ment spend­ing, the mag­ni­tude of which ex­ceeds house­holds’ to­tal con­sump­tion. There­fore, the de­ci­sion mak­ers in the pub­lic in­sti­tu­tions, along­side politi­cians in the ex­ec­u­tive body, need to be watch­ful re­gard­ing an ap­par­ent trend in grow­ing pub­lic spend­ing which would have dire con­se­quences for Turkey’s pub­lic fi­nance. The fig­ures be­long­ing to the third quar­ter, where a sharp de­cline in govern­ment spend­ing was ob­served, give op­ti­mistic sig­nals in that sense.

Ex­ports and im­ports

One co­hort of schol­ars in macroe­co­nomic growth the­ory sup­ports ex­port-led growth poli­cies for de­vel­op­ing coun­tries. Right at the be­gin­ning of the rul­ing Jus­tice and De­vel­op­ment Party’s (AK Party) first term in Turkey, the Turk­ish econ­omy’s ex­pan­sion in terms of GDP growth rate was stim­u­lated by the ex­port-friendly poli­cies of the govern­ment, in line with the con­ven­tional wis­dom men­tioned above. Al­most si­mul­ta­ne­ously, the amount of im­ported goods rose, thanks to pe­ri­ods of lower ex­change rates. How­ever, more re­cent sta­tis­tics (as shown in Ta­ble 1) ring alarm bells as far as the trade bal­ance is con­cerned, sig­nal­ing in­sur­mount­able cur­rent ac­count deficit records. While the trade deficit in­creased by 2.79 per­cent in Jan­uary, it ex­pe­ri­enced a 37.31 per­cent rise year-on-year in De­cem­ber. Ex­change rate poli­cies, in­creas­ing costs in the do­mes­tic mar­ket, low-level tech­nol­ogy in the pro­duc­tion sec­tor and chang­ing at­ti­tudes in for­eign pol­icy, par­tic­u­larly to­ward Mid­dle Eastern coun­tries, can all be put for­ward as the driv­ing forces be­hind this in­creas­ing gap in in­ter­na­tional trade fig­ures. It is clear that Turkey needs to re­con­sider its cur­rent trade

bal­ance sta­tus and ini­ti­ate poli­cies that will re­sult in lower costs/higher qual­ity goods by fo­cus­ing specif­i­cally on tech­nol­ogy (know-how) and R&D in­vest­ments.

Pub­lic spend­ing and debt

An­other com­po­nent of macroe­co­nomic sta­bil­ity and sus­tain­able growth is the amount of pub­lic spend­ing along­side that of pub­lic debt. At the end of the day, “bal­anc­ing the books” -- cal­cu­lat­ing and com­par­ing pub­lic spend­ing and in­come -- reveals the health of the econ­omy. Fis­cal dis­ci­pline on the ba­sis of fis­cal rule stip­u­lates cer­tain con­di­tions for spend­ing decisions, as well as a limit to pre­vent over­spend­ing. In this au­thor’s view, the Turk­ish econ­omy’s strength even dur­ing highly tur­bu­lent times was tightly cor­re­lated to the suc­cess of its fis­cal pol­icy decisions. Thus the trend in grow­ing pub­lic spend­ing and pub­lic net debt stock pre­sented in Ta­ble 2 and Fig­ure 2 re­spec­tively could be con­sid­ered a de­vi­a­tion from the fis­cal dis­ci­pline that as­sured fi­nan­cial in­vestors and in­ter­na­tional reg­u­la­tory or­ga­ni­za­tions Turkey would no longer be a high-debt, over­spend­ing coun­try.

In­fla­tion, ex­change and in­ter­est rates

Con­tem­po­rary eco­nomic sys­tems have three in­ter­wo­ven macroe­co­nomic in­di­ca­tors: namely in­fla­tion, ex­change and in­ter­est rates. A slight change in any one has an ap­par­ent im­pact on the re­main­ing two, and the Turk­ish case is no ex­cep­tion. There is no doubt that the Turk­ish econ­omy’s promis­ing suc­cess dur­ing the last decade im­me­di­ately influenced price lev­els, and the con­sumer price in­dex sta­bi­lized ac­cord­ingly. The pol­icy-mak­ers giv­ing di­rec­tion to the eco­nomic poli­cies were ex­tremely proud of the “one-digit in­fla­tion rates” achieve­ment, and de­servedly so. Fig­ure 3 in­di­cates that re­cent num­bers for in­fla­tion rates pre­serve this legacy, with mi­nor in­creases in De­cem­ber 2013 and Jan­uary 2014. In­fla­tion rates through­out 2013 ranged from 6 per­cent to 9 per­cent; such ebbs and flows may be con­sid­ered sea­sonal ef­fects. The most dramatic in­ci­dent of the pre­vi­ous year was the US dol­lar and euro’s in­ex­orable up­turn de­spite the Turk­ish Cen­tral Bank’s in­ter­ven­tions. The euro started 2013 at around TL 2.3, whilst the dol­lar’s value was TL 1.8. By the end of the year, the euro was al­most worth TL 3.0 and the dol­lar was equal to TL 2.0, as in­di­cated in Fig­ure 4. This strik­ing change in ex­change rates was driven by con­tra­dic­tory mon­e­tary poli­cies from the US Fed­eral Re­serve and the Euro­pean Cen­tral Bank, as well as a down­ward trend in in­ter­est rates in TL de­posits. Even though de­pre­ci­a­tion in TL makes Turk­ish goods cheaper vis-à-vis their in­ter­na­tional com­peti­tors, the im­ported in­ter­me­di­ary goods spark ris­ing in­put prices in the

man­u­fac­tur­ing sec­tor, which con­se­quently has an in­fla­tion­ary pres­sure on goods in the medium term. The re­cent in­crease in in­ter­est rates on TL de­posits may de­cel­er­ate the pace of ap­pre­ci­a­tion in the afore­men­tioned currencies seen over the past year (see Ta­ble 3).

Un­em­ploy­ment

Sus­tain­abil­ity in eco­nomic growth is mostly as­sured by more jobs and less un­em­ploy­ment. The Turk­ish econ­omy again looks good on this count, with one-digit un­em­ploy­ment rates of around 9 per­cent. Al­though num­bers ex­ceed­ing 10 per­cent were recorded dur­ing the se­cond half of 2013, the un­em­ploy­ment rate fell be­low 10 per­cent again af­ter a three-month two-digit pe­riod. Fig­ure 5 il­lus­trates this trend, which oc­curred be­tween Jan­uary and Oc­to­ber 2013. The high­est in­crease in em­ploy­ment lev­els oc­curred in the con­struc­tion sec­tor, which added 100,000 jobs. Fi­nally, the youth un­em­ploy­ment rate rose from 18.1 per­cent to 19.3 per­cent; more note­wor­thy than other un­em­ploy­ment rates, as its eco­nomic, po­lit­i­cal and so­cial im­pact is far greater than that of other wors­en­ing macroe­co­nomic in­di­ca­tors. The Turk­ish econ­omy has ex­pe­ri­enced a very suc­cess­ful pe­riod in which it was among the fastest grow­ing economies in the world, com­pet­ing with In­dian and Chi­nese growth rates. In­creas­ing ex­port fig­ures, sta­bi­lized in­fla­tion rates and promis­ing GDP growth com­bined to give a stronger and trust­wor­thy eco­nomic out­look. How­ever, re­cent de­vel­op­ments both glob­ally and lo­cally left Turkey’s econ­omy look­ing rather more frag­ile, rem­i­nis­cent of the es­tab­lished “mid­dle-in­come trap” faced by de­vel­op­ing coun­tries.

To over­come the eco­nomic traps Turkey faces today, the ra­tio­nale of the eco­nomic poli­cies be­hind the pre­vi­ous pros­per­ous pe­ri­ods need to be re­vis­ited, and se­ri­ous in­vest­ment al­lo­cated to tech­no­log­i­cal en­hance­ment and R&D. In ad­di­tion, pol­icy mak­ers in Turkey must re­call that po­lit­i­cal sta­bil­ity and en­sur­ing rule of law are indis­pens­able for sus­tain­able eco­nomic growth and de­vel­op­ment. When all’s said and done, eco­nomic per­for­mance is highly as­so­ci­ated with the psychology of in­di­vid­u­als -- in­clud­ing con­sumers, en­trepreneurs and in­ter­na­tional in­vestors -- which is sus­cep­ti­ble to the ad­verse con­se­quences of dis­cre­tionary at­ti­tudes from po­lit­i­cal fig­ures. Turkey’s aim of be­com­ing a sta­bi­lized econ­omy is highly con­tin­gent upon the mi­croe­co­nomic foun­da­tions of macroe­co­nomic sta­bil­ity, in­clud­ing in­di­vid­u­als, en­trepreneurs and non-state ac­tors.

JAN. 28, 2014 PHOTO: ZA­MAN, ALİ UNAL

In­fla­tion rates through­out 2013 ranged from 6 per­cent to 9 per­cent. Here cen­tral bank head Er­dem Başçı an­nounces the Jan­uary 2014 in­fla­tion re­port.

GRAPH­ICS: ZA­MAN, AD­NAN SARIKABAK

AUG. 9, 2012 PHOTO: ZA­MAN, İSA ŞIMŞEK

In­creas­ing ex­port fig­ures, sta­bi­lized in­fla­tion rates and promis­ing GDP growth com­bined to give a stronger and more trust­wor­thy eco­nomic out­look.

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