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    Is there a third perspective?

    Fatih Özatay, PhD16 August 2012 - Okunma Sayısı: 917

    The key to international competitiveness is lowering production cost of goods and services, which requires productivity gains, technologic advancement in production and more skillful labor force.

    In Tuesday’s column I said that the fall in current account deficit can be assessed from two different perspectives. From the growth perspective, it was impossible to see the drop in current account deficit as an improvement as it was related closely to the fall in growth rate. From financing perspective, on the other hand, the easing of current account deficit, that is, the fall in foreign fund requirement could be read as an improvement. 

    Unemployment still high

    Yesterday, unemployment figures for May 2012 were announced. Though the rate has eased substantially after the peak in 2009, it is considerably high in international comparisons and more importantly, it has become rigid. Since September 2011, unemployment rate has been floating between 9 and 9.3 percent. The rate stood at 9 percent in May. For the rate to settle at a reasonable level, growth must surpass the potential rate around 4.5-5 percent. Nevertheless, this in turn pushes up current account deficit, thus elevates the FX requirement. This imposes a significant threat for the Turkish economy. When we gear down to avoid such risks, current account deficit eases to some extent whereas concerns escalate about unemployment that becomes rigid in case of low growth.

    On top of these, we have a new challenge now: lowering current account deficit to an unthreatening level is possible only if growth is also lowered substantially. The first half of 2012 is the latest example on this: as of the end of June, annual current account deficit as a ratio to GDP was 8 percent at best, which is still high. On the other hand, growth rate will most probably be around 3.4 percent. So, we have a growth rate below the potential with a considerably high current account deficit. This is a new phenomenon for Turkey; yet it already has become a major challenge.

    We need a third perspective

    In the face of this challenge, we don’t need to limit our framework to one of the two perspectives I mentioned above. In fact, we need a whole new third perspective as we don’t want growth to fall below the potential, a potential with which we are not content in the first place. We don’t want to have a high current account deficit, either. Given the current state of the global economy, efforts to lower the deficit by raising exchange rate prove unfruitful as they might cause sudden hikes in exchange rate followed by a permanent rise in inflation. Therefore, the competitiveness gain the exchange rate intervention brings proves temporary. Besides, even if the world economy weren’t in trouble, exchange rate intervention is not a long-term source of competitiveness. The key to international competitiveness is lowering production cost of goods and services, which requires productivity gains, technologic advancement in production and more skillful labor force. In short, these cannot be tackled overnight, but it is necessary and useful to adopt this perspective.

    This commentary was published in Radikal daily on 16.08.2012

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