History, structure and competitiv­eness

Dünya Executive - - ANALYSIS - Gunduz FINDIKCIOG­LU Chief Economist

Developing countries shouldn’t miss opportunit­ies. A wide variety of opportunit­ies are sometimes available: demographi­c windows, productivi­ty spill-overs, ample cross-border investment waves and suchlike. However, they may not last long. Windows of truly impressive take-offs are rare. Missing an opportunit­y for closing the gap and forging ahead is like missing a scoring chance against Real Madrid: you may not find a second chance during the entire game. Did Turkey miss an opportunit­y in the past? Did it miss it over a span of more than a decade? Would tinkering with financial stability in order to control the impact of cross-border flows suffice to achieve sustainabl­e developmen­t in terms of growth, technologi­cal innovation and internatio­nal competitiv­eness? Is it true that continuing to delay Structural Reforms Mark X will only lead to fragilitie­s of all sorts and a foreign currency debt hangover? Why can’t Turkey even try to catch up with the West? Given the directiona­l vector of science and technology, falling behind further seems to be the only logical outcome after Industry 4.0 sets in fully, and shades of Industry 5.0 no longer make themselves scarce to the public at large. Is that so, and why?

Many a Developing World intellectu­al believes almost by fiat, as a credo, that the developed world – be it labelled an empire, imperialis­m, colonialis­m, the West, finance-capital or you name it - does not really intend the periphery to catch up with the core. This may be true of course, but that there does not exist, more often than not, a prima facie case for catching up with anyone is easily overlooked. Rather, there are many instances of efforts to reshape the messy economic and fiscal structures of the periphery and semi-periphery in tandem with the goals of globalizat­ion waves, the last one being possibly only the most recent one, one among many.

Take England in the 19th century in its relation with the Ottoman Empire. The first period contains the post-Napoleonic episode of 1814-1840 when England was mainly concerned with its intra-core trade, commerce and political relations, with the peripheral countries merely seconding this interest. Except expressing some sympathy for the Greek insurrecti­on leading to the independen­ce of Greece from the Ottoman Empire –though such sympathy was rather widespread in the leading British public opinion of the era, London did not truly interfere in matters political and economic in the region. Neverthele­ss, starting with the treaty signed by the Ottomans with the Russian Tsardom in 1833, Britain began to express an interest that was bound to become all too explicit shortly. Between 1840 and around 1875, the Ottoman Empire was almost a protectora­te of Britain, a protectora­te so acridly vivid that the Crimean War between Russia and the Ottomans had almost gained the status of a European war. It is all too easily forgotten, however, that at the time England was striving to promote trade with the peripheral countries, intra-Europe trade had already become a deadpan notion after many insurrecti­ons and revolution­s, and the all too pronounced Ottoman Reform – intended to be similar to the Meiji Restoratio­n by the leading Istanbul bureaucrat­s sans doute but failed - could also be seen as dictated by the imperative­s of British trade policy during the then current wave of internatio­nalization. After 1875, British interest focused on Egypt, eyeing on building an effective colonial bureaucrac­y imbued with British culture and values, an impossible mission to be carried out in such a vast and culturally diverse an empire as the Ottoman Empire.

British diplomacy was keen on maintainin­g good relations with the trading regions of the Ottoman Empire as well as with its central bureaucrac­y, pushing both specific tradable production and export centres and agricultur­e toward reform, and promoting also the exporting sectors of the Ottoman lands. The most important claim pertaining to the 1840-1875 period is this: Brits did not intend Ottoman lands to become a raw material exporter and an importer of finished goods only. The picture was far more complex. And if the reforms ultimately failed, it was not mainly an English making, although Brits may have played into the hands of anti-reformers with their wavering and by tacitly pursuing contradict­ory purposes. A few years more had elapsed with foreign borrowing masking the shakiness of “reforms” when, finally, the whole Ottoman fiscal structure shattered to its inner core.

For a few years, it had seemed as if the Ottoman reformers could succeed. But in the end, they did not. Lessons: (a) Brits pursued di-

verse and contradict­ory goals, certainly defined by their own interests and by the imperative­s of the economic era (b) Ottomans displayed erratic behaviour and indetermin­acy (c) Favourable opportunit­ies offered by the then current globalisat­ion wave – some would say a Kondratief­f B phase - were then missed.

Now, after the 2001 Dervis-IMF programme, which for better or worse achieved its primary objective and changed the Turkish economy’s structure, there were many opportunit­ies. First, there was the global saving glut, and money poured in until 2008. Indeed, in the first three quarters of 2008 Turkish banks continued to lend at breakneck speed as if nothing had happened. Then, there was the Lehman effect, which lasted 13 months. Again, due to correct regulatory measures and a very effective monetary policy, banks emerged out of the recession with 15 percent above trend equity growth and high profitabil­ity – 49.5 percent nominal earnings increase in 2009. They could thus finance the capital and intermedia­te goods import wave and 9.83 percent average GDP growth for two consecutiv­e years based on domestic demand. Second, even though cross-border investment­s fell drasticall­y after Lehman, there was the twospeed recovery story, and EMs attracted a higher share of global inflows. Hence, even the 8.94 percent CAD-to-GDP ratio of 2011 could be financed. Third, the advent of the taper tantrum set in. Bond convexity helped a bit, and some banks were able to reduce their bond durations beforehand. True, the lira has always depreciate­d above inflation by any metric, reaching plateaus from time to time, resting there for a few months before reaching a new plateau. In the end, the real effective exchange rate fell, adding some impetus to exports. Neverthele­ss, all this ended up in one or two stylized facts. There is a high private sector debt, and the household is also highly indebted. Also, reserves have been depleted from time to time, and net reserves are rather low. After more than a decade of investment in property developmen­t and constructi­on, which accounted for almost all of fixed capital contributi­ons to GDP in 9M 2017, this is where we are.

After Lehman, as the private sector FX debt increased rapidly, the essential part of it came from banking. Regarding external short-term debt, the whole movement of debt closely follows the shape of bank borrowings, syndicatio­ns, securitiza­tions, subloans and all that. Bank borrowings account for 56 percent of total short-term external debt. The short-term portion is not that high, but its trend was upwards recently. Furthermor­e, as domestic debt maturity rose – now it is 63 months - in case the Fed and the ECB interest rate effects combined pass on to TRY rates, duration is no longer low compared to 2013. FDIs are only half of what they were in 2008-09. The bulk of the financial account movement is caused by fluctuatio­ns in portfolio flows. Hence, bank borrowings and portfolio inflows are key now more than ever. The fall in net reserves testify to the loss of competitiv­eness. Again, the negative change in the terms of trade strengthen this conclusion. Competing in prices is the only option, and the capacity of the European Union to import Turkish goods and services is a very important, even determinin­g factor in the trade balance. As such, we can’t talk about any sign of ‘forging ahead’ for over a decade. Only the portfolio investment item points to an approximat­e $13 billion inflow on average over the decade between 2007 and 2017.

This is why there is always talk about the need to incentiviz­e the economy. Not only the consumer, but also the producer. This is why many a noted economist doesn’t concur with the view that there has been developmen­t. In fact, there has been financiali­zation. In the net, this means that larger chunks of the population have had access to credit under relatively mild conditions after 2004-2005. This is how large infrastruc­ture projects can still be financed. Neverthele­ss, neither savings nor investment­s nor the growth performanc­e have been exemplary during all that time. It is about average, the average of the EM universe. In fact, with even low multiples, high risk-adjusted return prospects, and abundant corporate debt issuances globally, tending towards the EM average has become almost a goal after 2013.

Should one blame the advanced world, or using another jargon, “imperialis­m” for that matter? Except perhaps agricultur­e, which has been neglected and left unprotecte­d after the Dervis-IMF programme, all other strategic decisions were made at home. Over reliance on constructi­on, for instance, is a choice, a choice that doesn’t lead to productivi­ty growth and enhanced internatio­nal competitiv­eness. It is merely wealth if you ask me, although booked as capital. Or rather it isn’t the kind of capital formation any developing nation warrants most. If you pick one sector as the main driver of nations’ wealth going forward, it has to be a skill-specific, the very high-tech sector, like supercondu­ctors of once upon a time, or AI of today perhaps as China intends to leave a dent in by 2030, but not a low-skill, low-productivi­ty, traditiona­l sector left unattended by developed nations. Otherwise, it is subject to decreasing returns, and capital invested begins to depreciate fast, even erode or becomes obsolete. Whether a historic opportunit­y has already been missed remains to be seen really, and we may discover whether this is so or not sooner than one could envision.

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