Turkey Economic and Institutional Issues Gunes Kamber 14/03/2007
Plan of the Lecture 1. 2. 3. 4. 5.
Main characteristics of Turkish economy The 2000 IMF programme 2001 economic crisis Aftermath of the crisis Future challenges in the road to the EU
Basic Facts on Turkey • 17th biggest economy in the world (GDP) • GPD per capita : 8900$, upper middle income country • Candidate to European Union • 1990's, lost decade • Average growth rate 1990-2001: 2.4%
Boom Bust Cycles GDP Growth
10,0 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 -1,0 -2,0 -3,0 -4,0 -5,0 -6,0 -7,0 -8,0 1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Political Instability and Public Deficits-1 • 10 governments between 1989 and 1999, dominated by coalitions • Political Business Cycles • Populist policies by subventions to farmers and small enterprises • Resulting in high public deficits and public debt
Political Instability and Public Deficits-2 Public Deficit 0 1988
-5
-10
-15
-20
-25
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Political Instability and Public Deficits-3 Public Debt TO GDP Ratio 120
100
80
60
40
20
0 1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Composition of the Public Debt
High and Volatile Inflation Inflation 110
100
90
80
70
60
50
40 1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Money growth and Inflation
Dollarization • The ratio of foreign exchange deposit to total deposit 25% in 1990, 45% in 2000. • As a result of decreasing confidence to national currency • Dollarization – Decreases the efficiency of domestic politics – Makes the country vulnerable to external shocks
Exchange rate depreciation (US$/TL) 180 160 140 120 100 80 60 40 20 0 1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Chronic Current Account Deficits 3,0 2,0 1,0 0,0 -1,0 -2,0 -3,0 -4,0 -5,0 -6,0 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Fragile Banking Sector • High Concentration, 7 banks hold 75% of the total deposits • Highly national, only 5% of capital hold by foreign investors • Crowding-out of public debt, 40% of assets in Public securities • Exchange rate risks
The Effects on growth • • • •
Investment volatility Crowding out of private investment Inflation uncertainty Current account deficit
Investment Volatility 50,0 40,0 30,0 20,0 10,0 0,0 -10,0 -20,0 -30,0
19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
-40,0
Investment growth
GDP growth
High real interest rates
IMF Programme
The situation in 1999 – Earthquake – Interest rate increased to 100% – Good relationship with EU
• It covers three years • The programme had two main objectives – Bringing inflation to single digits in 3 years, 25%, 12 % and 7% – Ensuring the sustainability of Public Debt
IMF Programme • Instruments – Pre-announced exchange rate 1$+0.77 euros, announced to depreciate 25 %, money supply determinated by foreign capital inflows, fixed central bank assets – Primary surplus of 3.5% of GDP, with accrued fiscal discipline and taxes – Privatizations and Structural Reforms, Social Security, Telecommunications ,Energy
Government Budget Constraint
Government Budget Constraint
• • • • •
Primary surplus Interest payments (Domestic and Foreign) Increase in Debt Monetization Privatization revenues
Macroeconomic Developments in 2000 • Inflation came down to 35% at the end of 2000 • Nominal interest rates decreased to 40% • Strong growth in investment and consumption (especially in durable goods) • Current account deficit to GDP: -4,9%
2001 crisis • • • • •
Why? Real exchange rate appreciation Typical problem with IMF program Coalition problems, reform fatigue First wave in November and the crisis in February 2001
2001 crisis • 19 February, a political tension • Massive capital escape in one day, 7.5 billion $ which corresponds to 1/3 of Central Bank reserves • Overnight Interest rates increased to 6200% • Central Bank abandoned the fixed exchange rate, huge depreciation, 40% in one day • Debt to GNP ratio increased to 90% • Result: Inflation 70% • Decrease in GDP : -9,1%
Aftermath of the crisis • Quick recovery, External support, new IMF program, with same principles except for the exchange rate regimes and primary surplus of 6.5% of GDP • Vice-president of the World Bank assigned as the minister of Economics with extreme powers, unique voice of the economic administration • November 2002, first time in 20 years a unique party had the majority in the parliament
Growth and Inflation since 2002 2002 2003 2004
2005
2006
Growth
7,9
5,8
8,9
7,4
5,7*
Inflation
29,7
18,4
9,3
7,72
9,65
Debt/GDP
78,5
70,4
63,9
55,3
Serious candidate the EU since 2004 • Why this is so important? • For Europe – big country, a new large and dynamic market – Can help smooth transition with ageing problem – But Turkey is relatively poor, absorption problem
• For Turkey • Challenges waiting Turkey beside political problems
Official Convergence Criteria • Inflation, no more than 1.5% point higher than 3 lowest inflation rates • Deficit and Public Debt ( -3% and 60%of GDP) • Exchange rate stability • Long term interest rates stability • Current difficulties with inflation targeting
Determinants of long run growth • Y=F(K,L,A) • K : Capital – Investment – FDI
• L : Labor Force – Employment
• A : Total Factor Productivity
FDI
Labor Market
Labor Market • Participation Ratio – Female Participation – Discouraged Unemployed
• Agriculture – Almost 35% of the employment but only 15% of GDP – Disguised unemployment – Recent reforms from price support to income support
Informal sector • • • • •
Due to high tax burden, vicious circle Lower tax base Unfair competition Prevents innovation and FDI Share of major taxes in total revenues
Education • Exports based on low cost is not sustainable in the long run • Unequal education opportunities
