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Fatih Özatay, PhD - [Archive]

Fund flows between states 27/07/2009 - Viewed 1516 times

 

The question we asked yesterday was: If in the 'new financial system' amount of foreign funds will be lower; how can we achieve high growth? Here, financial sector refers to global financial system. One way to achieve this is increasing domestic savings rate. Second is, as Turkey, contributing in the design of the way the new financial system transfers funds to countries like Turkey. Third can be focusing on reforms that directly improve the competitiveness of Turkey and level of per capita income.

It is theoretically possible to accomplish all. Thus, they are not alternative for each other. Domestic savings rate is related to the savings rates of both the private sector and the public sector. I addressed this issue with an article series before. Consequently, it seemed quite hard to increase the savings rate of private sector. You can refer to Hasan Ersel's last two columns in Referans daily.

Increasing savings rate is theoretically easier for public sector than private sector as governments control their own budgets. However, the increase in savings must not be achieved through raising prices or indirect tax; in other words through a firefighting operation. Currently, social security system and health system contribute significantly to budget deficit. Their burden on the budget will increase further in the future. Therefore, permanent reforms should be implemented in these areas. Nonetheless, the reforms to be implemented in these areas will serve to prevent further deterioration. Given the importance of generalizing health services for a vast majority of public, it appears that there are a limited number of steps that can be taken.

A more important point in terms of increasing public sector savings rate is: Taxes can be collected from a quite small group. Presence of a large group that does not pay their taxes leads to unfair competition within corporate sector. Furthermore, the inability to collect taxes from certain groups result in imposition of higher indirect taxes (such as the increase in fuel-diesel oil taxes).  As a result, an undesired situation considering the vast majority of public arises. It seems that it is difficult for Turkey to achieve a healthy economic structure unless tax base is widened. Therefore, this issue must be the top priority item in the economics agenda.

There is a possibility put forth by Guven Sak at his column in Referans daily. In particular after 19902, international funds flow from private sector to private sector. Firms in countries like Turkey, for instance, receive funds directly from foreign banks. Before 1980's, fund flows were ensured from one state to another state.

In the coming period, there is a risk that amount of global funds transferred from private sector to private sector falls. This is for two reasons. First, the global system has been run over by a cylinder; amount of transferrable funds will be low for a certain period. Second, supervision and regulation of the financial system will be tightened in the coming period. This means that the financial sector cannot borrow as much as before in proportion to its capital. As financiers put it, leverage ratios will decrease.

In months where the 'financial part' of the financial crisis reared up and fund transfers from private sector to private sector came to a halt; i.e. in fall 2008, transferring funds through the IMF to countries like Turkey with easier conditions and at higher amounts as well allowing demand stimulating policies came on the agenda. This method was a type of fund transfer from one state to another (God knows why we did not use this method). With proper design, this system can substitute for fund flows from private sector to private sector at least for a certain period. It is necessary to elaborate on the design issue. I believe this is the issue Güven Sak invites all of us to discuss on.

The third alternative can produce results in the medium run. It works like this: since it is less likely that we can benefit from foreign savings as much as before, we should reduce the need for foreign savings without lowering the rate of growth.

 

This commentary was published in Radikal daily on 27.07.2009

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