State of the Turkish Economy Emre Deliveli TOBB ETU, October 11 2005

State of the Turkish Economy

Emre DeliveliTOBB ETU, October 11 2005

e c o n o m i c p o l i c y r e s e a r c h i n s t i t u t ee k o n o m i p o l i t i k a l a r ı a r a ş t ı r m a e n s t i t ü s ü

State of the Turkish Economy Slide 2

Agenda

Overview of the Turkish economy Risks and priorities New anchor: EU What are the policy implications?


Turkish Economy: Basic Facts GDP US$ 300.6 billion (end- 2004) GDP per capita US$ 4,187 Highest growing country in world with 9.9 percent growth in

2004 Population 71.3 million, population growth rate 1.5 percent Population living in urban cities 60 percent, urbanization rate

32 percent Labor force 24.3 million Labor force participation rate 48.7 percent Unemployment rate 10.5 percent Life expectancy 68.7 years Infant mortality 3.8 percent Literacy rate 88.3 percent Gini coefficient 0.42 Percent of population living under 1$ per day 0.2


Economic growth

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

GDP

(bill

ion

USD)

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

GDP

ann

ual g

row

th ra

te

(%)

GDP growth rate

1977-2004 Gross Domestic Product (billion USD) and GDP growth rate


Turkish economy in the 1990s Despite huge potential, Turkish economy

significantly underperformed in the 1990s: boom and bust cycles in growth high and chronic inflation high public sector deficit fiscal indiscipline high levels of uncertainty (political and macroeconomic) very high interest rates

three economic crises, internal confict, 1999 earthquake… the 2001 economic crisis = GDP shrank by 10%


Putting risks into perspective: What has Turkey done so far?

Basic elements: Monetary Discipline Fiscal Discipline Public Administration

Reform Banking Sector Reform-

Corporate Restructuring

Basic Outcomes: Relative stability

Structural transformation process

Key: is it sustainable??


New policy framework after 2001

Granting Central Bank Full Independence

Ensuring Universality of the Budget Public Finance and Debt

Management Law Indirect Tax Reform (Special

Consumption Tax Law) Public Procurement Law Private Pension Law Civil Service Reform Pension Reform Reform on SEEs’ Governance Direct Tax Reform (Second Phase of

Tax Reform Tax Administration Reform Public Financial Management and

Financial Control Law

Electricity Market Natural Gas Market Sugar Market Tobacco Market Telecommunication International Arbitration

Public Sector Reforms Public Sector Reforms Public Sector Reforms Public Sector Reforms

Creation of Banking Regulation and Supervision Agency (2000)

Non-performing banks transferred to Savings Deposit Insurance Fund.

Transition to more bank activities.

Creation of Regulatory Creation of Regulatory AuthoritiesAuthorities

Creation of Regulatory Creation of Regulatory AuthoritiesAuthorities

Financial Sector ReformFinancial Sector ReformFinancial Sector ReformFinancial Sector Reform


A new process following the 2001 crisis?

Growth without inflation Interests rates are falling

down Productivity is rising

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

inflation

nominal interest

real interest rate

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Oca.99 Oca.00 Oca.01 Oca.02 Oca.03 Oca.04 Oca.05

Industrial Production

Interest Rate

Inflation

Non-inflationary growth (1999-2005)

60,0

70,0

80,0

90,0

100,0

110,0

120,0

130,0

140,0

150,0

160,0

1996 1997 1998 1999 2000 2001 2002 2003 2004

EmploymentProductionLabor Productivity

economic program

Productivity and Employment TrendsInflation and Interest Rates


GNP (billion $)

Growth (%)

Inflation (CPI%)

Public debt (% of GNP)

Budget Deficit (% of GNP)

Exports (billion $)

Foreign Reserves (billion $)

2001

150

-9,4

70

95%

17

31

19

2004

300

9,9

10

65%

10

60

35

Turkey’s Recovery since 2001

Transformation Relative Stability Superior Economic Growth

State of the Turkish EconomySlide 10

Weighted Average Maturity of Domestic Borrowing Raised Through the Market

0

5

10

15

20

25

2002

Jan

2002

Feb

2002

Mar

2002

Apr

2002

May

2002

Jun

2002

Jul

2002

Aug

2002

Sep

2002

Oct

2002

Nov

2002

Dec

2003

Jan

2003

Feb

2003

Mar

2003

Apr

2003

May

2003

Jun

2003

Jul

2003

Aug

2003

Sep

2003

Oct

2003

Nov

2003

Dec

2004

Jan

2004

Feb

2004

Mar

2004

Apr

2004

May

2004

Jun

2004

Jul

2004

Aug

2004

Sep

2004

Oct

2004

Nov

2004

Dec

Months

Maturity

Stability Implies Higher Maturity


1. Need for above average growth rates for net job-creation.

2. Risks due to structural transformation.3. Need for a credible and longlasting

anchor: EU?

Relative stability Structural transformation

political stability

Risks:

, but depends on risk management


Structural transformation risk

Growth sustainability risk Risk of policy credibility Governance risk

structural risks

triggering factor

Macroeconomic vulnerabilities

Inherent risks


Risk 1: Structural Transformation of the Turkish economy An example from retailing

A projection for the future: Comparison of Spain and Turkey


Market Shares in Retailing: Decline of Traditional Shops

0

5

10

15

20

25

30

35

40

45

50

Mini-markets Local supermarkets Retail Chains


Winners and losers in retailing

Winners Losers

End-points Organized chains

Groceries, traditional shops

Distribution Suppliers Wholesalers

Transportation

Logistic firms Individual truck-owners

Production Brand-names Informal producers (quality??)


Risk 2: Sustainability of the Growth Process (1)

0

20

40

60

80

100

120

140

160

180

200

ind

ex (

2000

=100

)

Unemployment (sa)

Production (sa)

Employment (sa)


Sustainability of the Growth Process (2)

Productivity increase not sustainable? Current Account

Imports of intermediate and capital goods are increasing… more than exports

Rising Trade Intergration has not led to an adequate Financial Structure

…yet patterns & trends seem promising FDI inflows Unemployment


Risk 3: EU anchor is different from IMF anchor

IMF EUWhen you agree with the IMF, IMF is actively overseeing the performance.

When you start the negotiation process, EU Commission is passively overseeing the performance.

IMF stands by and actively participates as a guarantor of policy credibility.

EU stands apart and actively criticizes long afterwards.


Any anchor is not a guarantee for superior economic performance

FDI Inflows to Turkey (million US$)

0

500

1000

1500

2000

2500

3000

3500

4000

4500Authorized

Realized

Source: Foreign Investment Directorate, Treasury


Investment Climate Problems: Tax System and Administration Labor Regulations Informal Economy and Anti-competitive practices Access to and Cost of Finance Access to Land Local Administrative Barriers (i.e. Licenses and

permits) Corporate Governance and Restructuring Low Technological Base Lack of Innovative Capabilities Lack of Skills

without accompanying reforms


A doomsday scenario

Economic program lacks in new job-creation.

Losers from structural transformation attack the economic program.

Expansionary monetary policy and giving up fiscal discipline to increase domestic demand.

National unrest against EU. Lose of anchor, political turmoil. Triggering factors become active


Framework for sustainability of reforms

IMF program only provides minimum requirements.

More is neccesary for sustaining a politically viable reform program.

How to support the new modus operandi and enhance the competitiveness of the Turkish corporate sector?


Reforms on the public side

Reducing costs: competition in infrastructure markets.

Gaining legal flexibility: reform in bankruptcy and liquidation laws.

Localization – Regional Development Monitoring and regulating state aids


Changing patterns of behaviour on corporate side

Technological transformation Skills-training for the new technologies New governance structures

Outcomes: • Sustaining productivity gains• Keeping high dynamism of firms

We need:• Foreign direct investment• Better financial intermediation for domestic firms


Sustaining the reform:Social Policies to ease structural transformation

Social security reform: implementation of social assistance programs – poverty alleviation

Education reform Health reform Active labour market policies: bearing

the costs of skills training

EU Framework ?


Where’s the catch?

Governance structureFlexible and fast policy makingRule of law and credible

enforcement


Conclusion: A policy agenda

We should have policies targeted to higher growth rates, rather than being afraid of it.

We should have more than IMF program to attain above-normal growth rates:More reforms targeted to corporate sector.A stronger internal commitment to EU

anchor.Introduction of social policies.

Documents

State of the Turkish Economy Emre Deliveli TOBB ETU, October 11 2005