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    The two crises and confidence

    Fatih Özatay, PhD03 May 2010 - Okunma Sayısı: 874


    I will continue 'the story of two crises' series. My target is to draw some prospective lessons. The lessons to drag will be shaped on the basis of the answers to these fundamental questions: What are Turkey's main vulnerabilities in the second decade of the 21st century? What can we do to overcome these?

    A significant part of the answers to these questions might be already apparent for the regular readers of the series. For instance, reducing the dependence on foreign fund inflows, diversifying export markets, and changing the composition of the export goods in a manner that the impact of the fluctuations in foreign countries' incomes will be minimum. We will discuss these one by one, but first I would like to finish what I started and continue comparing 2001 and 2008 crises.

    Real sector confidence index is generated from the responses to the corporate sector survey carried out every month. Studies reveal a close relationship between private sector consumption and real sector confidence index in the same direction. As much as the index goes beyond 100, confidence of the real sector in the economy increases. A movement in the opposite direction implies that confidence of real sector decreases.

    I will leave the details to the end of the commentary. We can draw prospective lessons from the comparisons given in Graph 1 and Graph 2. Mechanical comparison says that after the 2001 crisis real sector confidence index re-achieved the pre-crisis level only after five quarters. This period was eight quarters in case of the 2008 crisis. Though in the 2001 crisis confidence fluctuated even after the fifth quarter, those fluctuations stemmed mainly from external shocks: unexpected early elections and Iraqi war.

    Second, in case of the 2001 crisis recovery in the real sector confidence started right away, in the first quarter following the GDP hitting the bottom. However in the 2008 crisis recovery in real sector confidence took almost a year. Finally, in the 2008 crisis real sector confidence dropped more steeply. Since confidence cannot improve alone, this difference in movements in case of the 2001 and 2008 crisis must have something to do with the economic policies that were and were not implemented. A tip for the lesson to be drawn: In order to reduce the production and employment losses; you should get prepared in goods days and save for rainy days (in short, reduce the dependence on foreign funds). I will address this issue in the 'drawing lessons' commentary I will write at the end of the series.

    So, the details are as follows: gross domestic product (GDP) values used are net of seasonality effects and the changes in the size of labor force. The peak GDP level before the 2001 crisis, which was achieved in the last quarter of 2000, was taken 100 and other levels were adjusted accordingly (Graph 1). The same was done also for the 2008 crisis. In the 2008 crisis the peak GDP level was achieved in the first quarter of 2008 (Graph 2).

    The '0' in the horizontal axis in each graph corresponds to the period where the peak GDP level was achieved. And the other values explain the current period in comparison with the peak period. The graph also includes real sector confidence index. I generated quarterly data taking the average of monthly data and made a rearrangement. Graph 1 covers the period from the third quarter of 2000 to the third quarter of 2003 while Graph 2 covers the period between the last quarter of 2007 and the first quarter of 2010.


    Graph 1. Movements of GDP and real sector confidence index during 2001 crisis


    Graph 2. Movements of GDP and real sector confidence index during the global crisis


    This commentary was published in Radikal daily on 03.05.2010