In the end, the depreciation of the TL will be beneficial to low-tech and labor-intensive sectors.

The automatic thermostat system that will cool down the economy is still active.  The Turkish lira (TL) has depreciated by approximately 20 percent against foreign currencies (FX) and the movement is continuing. Theoretically, all goods produced in Turkey have become 20 percent cheaper in comparison to beginning of the year. We have listened for years about how useful this would be. Now is the testing time. Will the exchange rate adjustment increase exports as argued? Which sectors will benefit from this movement? Will the outcomes be fortunate for all of us? To be honest, I do not think so. I believe that a competitiveness strategy based on the depreciation of the TL will not pave Turkey's way. Low-tech sectors are good for export diversification; however, export strategy cannot rely solely on those. Not in the case with Turkey. Let me tell you why.

Are you aware of the structure of Turkish industry? You have to import for production. The second point comes right away: the first point above is valid to a higher extent for certain sectors. In computers and electronics sector, the share of imported inputs is almost 60 percent. The mentioned ratio is 40 percent in the furniture sector, around 30 percent in the automotive sector and less than 20 percent in the textiles and readymade clothing sectors. If the TL depreciates, which products will become the cheapest? Obviously, the products of the sector which uses imported inputs at the lowest degree. On the other hand, the FX-denominated price of goods, the production of which is substantially based on imported inputs, will be affected relatively less.

Here is the third point: the sectors that helped Turkey enter the twenty-first century as a medium-tech rather than low-tech exporter country generally were those that used imported inputs to a larger degree. This is not necessarily an absolute fact, but this was the case in Turkey. This was the case because it lacked a solid industrial strategy and a foreign capital strategy based on it from the beginning. This was the case because investment climate indicators are designed with the attitude of an average student who is content with the minimum grade to pass the class, because the economy has been growing for the last eight decades solely "with the blessing of God."

The ongoing adjustment process will affect positively the export performance of low-technology sectors, only. The depreciation of the TL will not bring a bigger price advantage in sectors with high technology intensity, and thus high imported input intensity. A study by TEPAV economists highlights two key issues concerning the circumstances facing Turkish exporters in the European market. To begin with, it seems that the European market has narrowed as a whole due to the crisis and this is expected to continue in the near future. Second, in the European market, Turkey competes with the rising Southeast Asian economies in the export of low-technology products. Chief among these are China and Vietnam, which enjoy cheap labor. Concerning medium-technology exports, on the other hand, Central European countries appear to have a competitive advantage. Poland and Romania, late members to the European Union (EU), come to the fore in this category. Turkey is neither an EU member state nor can bear competitiveness based on cheap labor for long. The positive impact of the depreciation of the TL on exports will thus be limited.

In the end, the depreciation of the TL will be beneficial for low-tech and labor-intensive sectors. Why is the European market important for Turkey? Because Europe's import demand advances the technology content of Turkey's exports. So, do these two findings match? No, they don't. Then, it is bad news.

So, will the current account deficit decrease? Yes, it will. How can this be attained if exports increase only slightly? As imports become relatively more expensive and growth slows down, imports will decline. There will be no structural change. Imports will decline in the same manner as they had increased. Meanwhile, the depreciation of the TL will affect growth adversely with an uncontrolled pattern and directly undermine Turkey's capacity to attract foreign investments.

The core problem remains intact. Turkey still lacks an industrialization strategy. Everyone is having his own way. This is what I meant when I say that Turkey's economy has been growing "with the blessing of God."

This commentary was published in Radikal daily on 02.08.2011