Truths and lies about Turkey’s economy
Yazan: mustafaemingul Ağustos 8, 2007
Never mind those wearing the blinkers of ideology, I am stunned to see valued academics, whose words I respect, commenting on Turkey’s economy in an unfair fashion, distorting its basic figures.
A few days ago I listened to Professor Gülten Kazgan, a renowned name from the left of the political spectrum, give a speech at a meeting. Although a veteran commentator her mind remains extremely vigorous, and she still follows the daily developments of the economy.
She drew such a pessimistic picture of the economy that, listening to her, some might say, “It is a must that we land in Samsun again (the starting point of the Independence War) and reorganize the National Forces.” But my occupation is also economics and I will state here the question that I asked to her as one economist to another.
It is 2002 and you are the prime minister. Let’s assume that you were asked to lower the budget deficit to 1 percent of gross national product (GNP), reduce the inflation rate to single-digit levels and drop the net debt stock to 45 percent of GNP. While doing all this, you will attain an annual growth rate of 7 percent. Furthermore the unemployment rate will decline from 12 percent to 9.8 percent. At the same time you will contain the current account deficit to around 2 percent of GNP and real interest rates to between 4 and 5 percent. You will also curb the inflow of hot money. How would you do that? I have asked this very same question to many “huge” academics on various occasions. And there is no answer of course. Is this a “we only criticize without offering constructive suggestions” approach?
Now I am addressing another question to my readers. Look at Table-1. If you were presented with these data in 2001 and asked whether you would accept and make good a country with such glorious figures by 2006, would you say, “No thanks, not for me”? We wouldn’t even believe such a transformation was possible outside of our dreams.
Now here is the issue: Turkey followed the best option presented to it after the 2001 financial crisis. You have to choose from what you have to hand that is applicable and in compliance with the existing conditions you are in and the realities you face, not your dreams or wishes. In my opinion, including the path that Kemal Derviş chose, Turkey had no other rational option. Besides, with respect to the quality of application, the model adopted since 2002 has given extraordinarily good results.
Table-1 is very important since all the current debates are going on over these data, which were officially released by the authorized institutions of the state, like the Turkish Statistics Institute (Turkstat), the Treasury, the Central Bank of Turkey, etc. But those who reject these figures have no healthier data collection and analysis institutions.
Three major crises struck between 1994 and 2001, all of which hit the economy with more than 7 percent declines, and they caused the country to “lose” the 1990s. But now it has been growing uninterruptedly since the first quarter of 2002. This growth depends neither on the “fields” of state enterprises, nor on “consumptions explosions,” nor on public deficits. This growth, on the contrary, stems from exports, private sector investments and increases in productivity. What was the total factor productivity (TFP) between 1990 and 2000 — the lost decade — and where has it climbed to now? The TFP is the most important productivity and long-term prosperity indicator. The average TFP during the lost decade was 3.3 percent. What does this mean? Only 3.3 of everything produced was the result of productivity (that is, the amount of output created per unit input used). Some 23.5 percent was the result of labor and 73.2 percent resulted from capital increases. The TFP, on the other hand, has risen to 42 percent now and it is heading toward a position between 70 and 80 percent.
It is true that the apparent growth of Turkey’s real GNP is greater than its real grown as a consequence of the currency effect, that is to say, due to the depreciated dollar against the YTL. But did the Turks have the chance to say in 2001, “We are not playing any more. If the dollar hadn’t risen so high, things would be better” as the country entered into a desperate darkness as the dollar hit a peak? We are now at ease in paying our external debts thanks to the decline in the dollar’s price, just as we suffered when the dollar was “overvalued.” Even rental contracts were being arranged in dollars or euros. We got tired of encountering foreign currency, rather than our own money, everywhere. It was not unusual to see landlords and tenants quarrelling over this issue. About 70 percent of the deposits in banking were in foreign currencies and only 30 percent were in Turkish lira. Now the figures are exactly the reverse. We have witnessed days in which our own money is in circulation. What is so bad about it?
Debt stock shrinks to 45% of national income
Let’s talk a little about debts. The increase of public debts in dollars has been taken under control, as seen in Table-3 and Table-4. Debts in YTL are still increasing, but at a significantly diminishing rate. The trend definitely indicates that the increase will eventually become a concrete decline. But some deliberately evaluate debt figures incorrectly. If you have a company, or at least a family budget, do you only look at the money you borrowed or do you evaluate what you did with that money and the changes in the costs of your borrowing? When you ask what has been done with borrowed money, then we come face top face with the GNP. The GNP means the sum of all produced goods and services in the country within a year. So we have to look at the balance of debt stock to GNP. Indicators other than this are wrong. It is obvious in Table-1 that this figure declined to 45 percent from 97 percent. This is well below even international standards. The budget deficit has also fallen further below international standards, in a very short time and under hard circumstances.
While this is the case in public debts, the most-debated issue is external debts. Turkey’s external debts have remained constant for years — they were stable at around $65 billion in terms of the dollar. Incidentally, debt to the International Monetary Fund (IMF), which was $24 billion just five years ago, has also been paid and reduced to $8 to $9 billion. Gentlemen, you can only get rid of the IMF by paying your debts, not by running up huge flags on every rock you find. The real nationalism means steering the country well and rescuing it from its debts.
While the public external debts do not increase, the private sector’s debts are growing. Private sector external debts are around $122 billion, $40 billion with short-term maturity. Banks and companies share this debt fifty-fifty up and down. This is a risk factor. However, in a market economy, companies cover their risks. There is nothing to do. The important point is they are not secured by the government. So this is the matter of borrower and lender companies. But the existence of stability and confidence is very important for both sides.
Another attractive point in external debt figures is the change in the increase of external debt stock. Turkey’s external borrowing rate is significantly declining. The increase rate of external debt was 15 percent in 2002 and has now declined to 5 percent. As the necessity to borrow declines, domestic resources step in, maturities lengthen and costs decrease, investors will turn to domestic markets. But it is still early for this.
Maybe the most critical point is that there is a false mentality of “borrow nothing, do nothing” in some circles. This is a “poor but happy nation” trick of leftist bureaucracy. Turkey is a relatively poor country that has a huge and young population and its citizens’ expectations are high in the globalization era. That’s why we have to grow more and invest more. Our national savings are not enough to make these investments right now, so we have to borrow from international markets and grow with debts. You can see the borrowing tendencies of Japanese, German and American companies. As you see the financial leverage rates — debts over equity ratio — of the companies are fairly high. In Japan and Germany in particular growth is totally based on debts. However they had borrowed from domestic markets not external markets. Of course you borrow from domestic markets if there are enough resources and they have lower costs. But why not borrow from abroad if it is more economical? Large companies, which fold their profits, also borrow. While these companies are proud of their profits, some miserable ideologues are mourning them, aiming to confuse people and show the government as responsible for this failure. Indeed there is no problem, but there is success. We have to thank the players that provide this environment.
The financial leverage of Turkish companies may be higher and they may borrow more. But they are prudent. Moreover the profitability of Turkish companies has tended to increase in recent years.
Current account deficit falls as competitiveness rises
Many assert that the reason for the appreciation in the value of our currency is tied to high real interest payments. They say the current account deficit soars because our money is too valuable. Let’s take these claims one by one. They say Turkey had a current account surplus in 2001, but now it has a deficit. If there are people who would like to live in that country with its current account surplus, good luck to them. Whenever the Turkish economy enters a crisis period, this means that all production and imports will be halted. This is where the surplus stems from. However, at the same time, it is why unemployment hits all-time highs. Turkey with a current account surplus had 12 percent unemployment, and this was the official figure. It is quite shameful to see an academic expressing a longing for the year 2001.
Secondly, even the average kid on the street knows why Turkey has a current account deficit. Has Turkey been able to establish its production economy? Was the process that has been going on since 2001 a period of establishing an economy of production, or was it about saving the financial system of a state in economic trouble and decreasing an inflation rate of about 60 percent, pulling down interest rates which had hit 96 percent. Does it make sense to speak of a second phase before having established the basics? Did we have no problems in prioritizing and sorting in the economy? What is the meaning of “limited resources”?
So a valuable currency causes a current account deficit, but a depreciated currency (remember Turkey’s continuous devaluations in the past) closes the gap? No, if it did we wouldn’t have been struggling with difficulties in the balance of payment since the ‘90s; and we would not be speaking about current account, competition and added-value issues. Turkey’s dependency on imports is not a problem of today. It is a historically present problem.
The current account deficit will reduce not when the value of the Turkish currency goes down, but when Turkey finds new markets, masters competition, learns how to establish national brands and internalizes the concept of cutting costs.
Earlier I wrote about productivity increase. Everyone can see the long distance we’ve gone in finding new markets. Turkey is experiencing a boom in its foreign markets, thanks in part to a Foreign Trade Undersecretariat led by the vision of State Minister for Foreign Trade Kürşad Tüzmen together with the perseverance of Rifat Hisarcıklıoğlu, head of the Turkish Union of Chambers and Commodities Exchanges (TOBB), in encouraging leading civil society organizations such as the Turkish Exporters’ Assembly (TİM), Turkish Confederation of Businessmen and Industrialists (TUSKON) and the Independent Industrialists and Businessmen’s Association (MÜSİAD). And the result is there. The rate of increase in exports has surpassed that of imports since November of last year. And the current account deficit has clearly shown a downward tendency. Look at the figures. I wonder if other countries have intellectuals who hate the happiness of their own country.
Another misconception relates to interest rates. Look at Table-1 to see where the nominal rate once stood, and where it is now. In 2001 it stood at 96 percent and it is now 17.5 percent. You can see the real interest rate in Table-2. During the crisis Turkey paid exactly 34 percent in real interest payments. According to recent Treasury data, since 2005 this figure has been around 8 percent. As of April this year it was 7.4 percent on average. This will fall further when the figures for July are announced.
True, Turkey still pays too much for interest in comparison with similar countries. However, they don’t have the same ruinous starting point as Turkey had. One would have to be blind in order not to see the amazing improvements we have made. When the interest rates fall to international standards, the inflation rate gets fixed around 4 percent, when the debt stock falls below 30 percent of GNP, the interest payments Turkey has to make will fall. If Turkey can keep up the current stability for another five years this could well prove possible.
Turkey should value its success, not hide it
Since I have already run short of space allocated for this page, let me add a few brief words on other various issues:
1-The amount of land sold to foreigners during this government’s term is not that high. It is equal to land sold in previous government terms. Those who say the whole country is being sold off must prove this assertion with evidence. The Land Registry Administration announces figures each year, and the prime minister has said in the past that no land was sold in the Southeastern Anatolia Project (GAP), an integrated, multi-sector development initiative, or in the Harran region. Those claiming otherwise are short on evidence.
2-Companies are not being closed in large numbers. The rate of established and liquidated companies in the first half of 2007 is 3 percent. The economy is in a transforming period, and this rate is normal when sectors’ structures are taken into consideration.
3-It is said there are an increasing number of notices for unpaid bills being issued. This is normal in a growing economy. Again, we have to make ratio analyses. The rate of nonpayment in banking figures is extremely low. If this is not the case why are they trying to give out loans with enthusiasm?
In summary, Turkey is recovering from a really bad situation. We must not conceal our success; instead we should appreciate it. We have to work more, protect and support stability and come up with new ideas.
