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    China’s slowdown and Turkey’s window of opportunity

    Güven Sak, PhD21 May 2016 - Okunma Sayısı: 1424

    China is changing, and the world feels its shock waves, far and wide. This process does hurt the Turkish economy, but much less so when compared to other emerging economies. I hear lots of complaining in Ankara and Istanbul. But I think if Turkey plays its cards well, the benefits could outweigh the costs.

    Here is the opportunity: It’s not only about the decline in the rate of growth of the Chinese economy, but also a shift away from low-cost manufacturing and exports. A qualitative shift is also happening, note Nicholas Stern and Fergus Green of the LSE this March. China’s energy demand is declining together with its demand for raw material imports. China is changing its industrialization strategy, and that has consequences: Crude oil? Iron ore? Soya? Their prices are dropping faster than a bad guy in a Bruce Lee flick, and are likely to stay down.

    What does this mean for your country? It depends on how much you rely on natural resource exports. It’s bad for Brazil, South Africa and Russia, which are rich in natural resources. It’s good for Turkey, which is poor in natural resources. So China’s slowdown is not that bad for Turkey in that sense. It is even directly beneficial, as Turkey is dependent on energy imports, and a price drop leads to a decline in Turkey’s current account deficit. It is also an indirect benefit, as Turkey is considered in the same group as Brazil, South Africa and Russia by portfolio investors. That also helps Turkey’s current account deficit. So not only the Chinese slowdown’s direct impact on Turkish economy is small, but it also creates an environment in which Turkey can receive more international funding.

    Yet Turks are complaining about the economy. Why? First, it is because of the relative slowdown in the Turkish economy. The economy is now growing at 3.0 - 3.5 percent, which is lower than average. And people feel it, especially because managerial quality in Turkish private sector is highly questionable, to say the least. Anyone can preside over growth, but it takes real skill to make cuts and focus an organization going through a slowdown. There is a World Bank study comparing the actual managerial performance of companies with the managerial competence that managers see in themselves. It is a cross-country study, and Turks lead the discrepancy between presumed and actual performance. We overestimate ourselves, thinking that we are doing a good job while actually performing badly. That is one of the reasons why I think that we are structurally ill-suited for economic slowdowns. We feel it more than other people.

    Also, Turkey is about to form its third government in a year. Looking for a reason why Turks are complaining about economic prospects? Political uncertainty coupled with policy uncertainty will do that. Disequilibrium in politics will always make the private sector uneasy. This of course, is excluding the wide ranging economic impacts of Aleppoesque scenes in Southeastern Turkey, not to mention the restrictions on the freedom of expression and its importance for innovation.

    Turkey’s transition to a market economy remains unfinished. It still needs to complete second generation of reforms to ground itself in a knowledge-based economy. China’s slowdown presents Turkey with an opportunity to get closer to that goal. If this opportunity presented itself about a decade ago when Turks were still enthusiastic about the country’s reform drive and the EU anchor was firmly in place, Turkey would surely seize it. But nowadays, Turkey lacks joy and vigor to complete its liberal transformation. We need the EU anchor once again for the next jump.

    This commentary was published in Hürriyet Daily News on 21.05.2016

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