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Turkey’s economy is sensitive to external shocks
Turkey suffered the highest reduction in GDP growth rate and more than doubled the average loss in output among Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, and South Africa.
Waters have been quite calm lately. Tensions that surfaced in May 2013 and peaked in January 2014 have gradually simmered. Financial climate has settled along with the summer. Apart from the red herrings, therefore, there is no significant daily matter to discuss concerning the Turkish economy.
This gives us a great opportunity to calmly think about the long-time economic challenges. On the other hand, the current peace and quiet is definitely a phase. Soon enough we will restart discussing when the Federal Reserve (FED) will raise interest rates and see that tension escalates in global markets. We should make the best of a few months ahead for a productive economic discussion.
For instance, we have to address among others the sensitivity of the Turkish economy to external shocks. All is well when we are talking about positive shocks, of course. It would be heavenly if the barrel price of crude oil decreased to $70 – or $50 – from the current $110, right?
But we should rather focus on negative external shocks, which we have encountered numerous times, mostly strong ones since 2008. The global financial crisis ignited by the bankruptcy of Lehman was the tipping point of the tension. It is an informative exercise to compare Turkey’s growth performance in 2008-2009 with emerging market economies.
The latest version of the IMF’s “emerging market economies” category involves 29 countries: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Egypt, Hungary, Indonesia, Jordan, Kazakhstan, Kenya, Lithuania, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, and Ukraine.
In the 2008-2009 period, 27 out of 29 countries had lower growth rates compared to the 2004-2007 average. Only Egypt and Morocco had meager (less than a percentage point) improvement in growth rates. Among the 27, Lithuania suffered the largest reduction in growth rate compared to the pre-crisis period with 14.2 points. It was followed by Ukraine with 13.8 points and Turkey with 9.4 points.
Turkey therefore ranks third on the list of growth losses. For a better comparative framework, I want to present average change in growth for the mentioned 29 countries: Average growth in the 2008-2009 period was 4.5 percentage points lower compared to the 2004-2007, less than half of decline in Turkey alone.
Some of the mentioned countries have quite small economies; so taking only large ones into account might be useful. When we take the emerging market economies in the G-20, we end up with 10 countries out of 29: Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Turkey. The average growth loss is 4.2 percentage points. So again, Turkey suffered the highest reduction in GDP growth rate and more than doubled the average loss in output.
The moral of the story is that the output loss suffered during the crisis was alarming enough. I do not address the consequences of later shocks. Let me just remind you that Turkey was raised as one of the most fragile countries between May 2013 and March 2015 when the FED announced that the economic policy response to the crisis was going to be tapered and reversed. The key goal of the quest for fundamental reforms in the period ahead should focus on easing such sensitivity.
This commentary was published in Radikal daily on 03.07.2014