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    Economic policy mistakes (2)

    Fatih Özatay, PhD06 February 2014 - Okunma Sayısı: 1264

    GDP growth will be a meager 4 percent in 2013. Turkey has suffered a “high current account deficit-low GDP growth” challenge in the last two years.

    It’s time for the second piece in the “economic policy mistakes” series. The first one rewound the scene and enumerated some important developments concerning the Turkish economy. I think it would be wise to discuss policy mistakes on that perspective. The first blow came on late May 22nd from Federal Reserve (FED) chair Bernanke as the declared that the FED might initiate tapering. This was planned to be followed by steps to raise the federal bond rate. After Bernanke’s statements, Turkey faced exchange and interest rate hikes and came to be cited in an increasing number of reports as one of the two countries which will be hit the hardest by the FED’s new policy. Was a crisis at our door?

    The key meaning of the FED’s statement for Turkey was that countries which have high foreign borrowing requirements were going to have difficulty accessing foreign funds. Turkey was chief among the countries with high foreign borrowing requirement for it had a high current account deficit. The deficit in proportion to GDP was a record-high 9.7 percent in 2011. Later in 2012 the ratio was reduced to only 6.2 percent in the expense of cutting GDP growth rate from 8.8 percent to 2.2 percent. Yet, current account deficit surged back in 2013, reaching probably to 7.5 percent in proportion to GDP (probably because we don’t know the GDP growth figure for the last quarter yet) against a meager 4 percent GDP growth rate. Long story short, Turkey has suffered a “high current account deficit-low GDP growth” challenge in the last two years.

    This is exactly where the economic policy mistake surfaced. Another reminder for clarification: current account deficit by definition equals to the difference between aggregate investments and aggregate savings. Current account deficit can therefore be cut down by reducing investments and/or raising savings. In Turkey, however, investment to GDP ratio is about two thirds of that in other emerging countries. That is, it is already low so cutting the rate further means stealing from future growth unless it is an “inevitable necessity”, in other words. I will elaborate on this “inevitable necessity” part the next time; I will skip it for now. Alike investments, Turkey’s savings are less than half of that in emerging countries. In short, Turkey’s performance is weak investments and disastrous in savings.

    Given the fact that the FED will introduce a policy that is to have harsh effects on countries like Turkey and that similar policies of the FED had played a key role in the crises faced in these countries, what would you do if you were in the shoes of the economy management? What do you think is the right thing to do? In my opinion, it was to advance upon the fragilities due to which Turkey is cited among the “fragile five.” That is, to prove the world that Turkey is endeavoring with all means possible to reduce its current account deficit.

    There were measures Turkey could have taken, although they were not easy. What are these? First, please note that aggregate savings are public sector savings plus private sector savings (corporate sector and households). For God’s sake, did Turkey do anything to limit the consumption growth since May 22nd? The Banking Regulation and Supervision Agency has launched certain steps to be put into effect in January and February 2014. And the Central Bank raised interest rates in late January 2014. In the case of both, decisions came with a six- to seven-month delay. And have you seen any step to cut public expenditures in order to increase public savings? In fact, public sector increased its consumption remarkably in the first half of 2013. The story does not end here; the delay was actually much longer. To be continued.


    This commentary was published  in Radikal daily on 06.02.2014