Signals for trouble are gaining ground. In this milieu it will be useful for us to learn lessons from the last two crises. Unfortunately if troubles gain more prevalence the lessons do not imply favorable outcomes for Turkey's economy. The lesson we should learn is hidden in the answer to this question: During the global crisis we performed worse in terms of production level and employment compared to the 2001 crisis though the economic conditions were more favorable before the former than the latter. Why?

It is evident that the second half of the point made above does not fit in the mainstream discourse. We were and are told that we did not perform that bad. Nonetheless figures imply the opposite. In the global crisis unemployment rate was much higher compared to the 2001 crisis (10.3 percent at the end of 2002 and 14 percent at the end of 2009). When the economy hit the trough in the global crisis, gross domestic product (GDP) dropped by 13.4 percent compared to the peak level. The drop in the 2001 crisis was 11.7 percent.

It is apparent why we look at the level of unemployment and income rather than variables such as exchange rate, interest rate, or the state of the stocks market. After all, the former two concerns a wider group of people. It could be enough to evaluate unemployment rate alone; however things are even worse with that respect. Almost everyone agrees that the economic conditions that prevailed before the global crisis were more favorable than those before the 2001 crisis. On Monday I presented the figures for budget performance: as of the end of 2007 (the result does not change as of the end of 2008, either) public debt, budget deficit, and the proportion of budget resources allocated for interest payments were lower when compared to 2001. The significance of this appears clearly when the problems Greece and Spain encounter are considered. Before the global crisis banking sector, which is one another critical area of concern, performed much better than the 2001 crisis. Currently (or before the global crisis) banking sector of Turkey performs incomparably better than in 2001. I believe we do not need to dig in to the details.

So, why were we affected severely by the crisis anyway? As the evaluations made at this column until today reveals, two fundamental factors gave way to this: the fall in exports and the sharp U-turn in foreign fund flows. During the global crisis Turkey's exports dropped rapidly as a result of the income loss faced by Turkey's trade partners.

Real value of goods and services exports, as given in GDP accounts, was 11.2 percent lower by the end of 2008 compared to the peak level in the first quarter of 2008. From that point on exports started to recover but was still below the peak level by the end of 2009. However, during the 2001 crisis real value of goods and services exports never fell below the pre-crisis levels. Though weak fluctuations were observed, the level always moved upwards.

The second reason is related with foreign capital flows. In the case of the both crisis a significant capital outflow was observed. Nonetheless there is a fundamental difference: When the difference between the net foreign capital inflow before the crisis and the net capital outflow during the crisis, i.e. the U-turn in the net foreign fund outflows, is taken into account it is seen that the turn was much sharper in case of the global crisis. This analysis gives useful tips as to which issues we have to focus on in the future. It is not sufficient to prevent the risk that no domestic crisis will burst. Elements such as budget discipline, a sound banking sector or low inflation rate are important but insufficient. We should also reduce the sensitivity to external shocks. To do this, we have to minimize the foreign fund requirement of the economy. This point was underlined in different contexts at this column: We have to increase domestic saving rate. Easy way to do this is to increase public savings. Tax collections in Turkey are low despite the high tax rates. It appears that this problem cannot be solved unless informality is overcome. Second, we have to ensure diversification in trade partners and export goods. These are necessary to reduce the volatility to potential future crisis. Of course the policies tailored to reduce high unemployment inherited from the crisis shall be the top priority. However, we can also reach a common ground that takes into account all three targets. It will be more than useful to focus on these given that the bells of trouble started to ring.

This commentary was published in Radikal daily on 03.06.2010