Transcript New Era Cap

Turkey in Perspective:
Past, Present and Future
Sumru Altuğ
Koç University, CEPR and KU-TUSIAD ERF
May 2, 2013, Istanbul
Why Study the Turkish Experience?

In December 17, 2004, membership negotiations with
the European Union commenced.

Turkey today is a candidate member for the BRIC’s –
Brazil, Russia, India, and China.

From 1923 to now,


State-led economy → Trade and financial liberalization
Finally, Turkey was built on the ruins of the Ottoman
Empire which collapsed during World War I.
Our Periodization
FIVE Sub-Periods:
i) 1880-1913: Ottoman era to World War I
ii) 1913-1929: 1929 shows the year when post WWI recovery ends and a
new policy era begins
iii) 1929-1950: early Republic including the Great Depression and WWII
iv) 1950-1980: post-WWII era under import substituting industrialization
v) 1980-2005: era of globalization since 1980
Economic Indicators for Turkey, 1880-2005
1880 1913 1929 1950 1980 2005
Population (mill.)
13
17
14
21
45
72
Share of urban pop (5000 inhab) in total
pop (percent)
26
28
24
25
44
68
Share of agriculture in the labor force
(percent)
80
80
84
84
51
34
Share of agriculture in GDP (percent)
54
50
52
54
26
11
Share of industry in GDP (percent)
?
13
10
13
21
26
GDP per capita, PPP adj.
in 1990 US dollars
850
1200
1220
1620
4020
7500
GDP per capita as percent of
(W. Europe+US)
37
29
23
24
25
30
GDP per capita as percent of
developing countries
147
168
n.a.
188
219
225
GDP per capita as percent of
World
81
79
n.a.
77
89
117
Economic Indicators for Turkey, 1880-2005
1880
1913
1929
1950
1980
2005
Life expectancy at birth (years)
?
30 ?
30
47
62
69
Adult Literacy (ages above 15 in
percent)
?
10
10
32
69
89
18801913
1913
1950
19291950
19501980
19802005
19132005
19132005
Population
0.8
0.6
1.9
2.6
1.9
1.6
2.0
GDP per capita
0.8
0.8
1.4
3.1
2.5
2.0
2.4
Total agricultural output
1.3
1.0
2.7
2.9
1.2
1.7
2,3
?
3.1
5.3
7.7
5.8
5.3
6.5
Annual Growth Rates (in percent)
Total industrial output
Annual Growth Rates (in percent)
Output
Labor Capital
1880-1913
1913-1929
1929-1950
1950-1980
1980-2005
1.48
-0.72
2.71
4.95
4.07
0.73
-1.31
1.93
1.93
1.35
1880-1950
1950-2005
1.36
4.55
0.62
1.67
1.76
-0.03
1.82
6.31
4.21
1.37
5.35
Hum. Cap.
2.83
-1.31
6.75
6.76
3.06
3.06
5.08
General Observations



Sharp break between the pre- and post- World War II periods.
The growth rates of output and of the factor inputs such as labor,
capital, land and human capital are all significantly greater in the
post-World War II period.
We can explain this pattern with these observations.
 Rates of per capita growth accelerated sharply after World War
II in all regions of the world.
 Apprx. 20% decline in population in Turkey during and after
WWI
 More than 40% decline in GDP and GDP per capita.
 By 1929 GDP per capita turned backed to pre-WW 1 period.
 Growth rates for output, labor and most other variables were
negative for the period 1913-1929 as a whole.
 GDP per capita growth rates for Turkey until 1950 are below 1%
per annum
General Observations (cont’d)


1880-1913, (The late-Ottoman era) positive growth in output and the
factor inputs
After 1929, positive growth with two distinctly different political and
economic regimes:
 1880-1913, political and military disintegration of the Ottoman
Empire.
 1929 - , formation years of the Republic,



series of political and economic innovations.
Global context of open trade and financial regimes at the late
Ottoman era
After 1929, return to autarkic regimes world-wide.
General Observations


For better performance everywhere and especially in developing
countries, we need to look at the period after WWII.
The growth of output and factor inputs for Turkey are significantly
higher after WWII.
 Output grew at annual rate of nearly 5% during 1950-1980, and
4% during 1980-2005.
 Per capita increase in GDP at rates above 3 percent during
1950-1980 and at rates above 2 percent during 1980-2005.
 These per capita rates are above averages for the developing
countries as a whole.

Turkey’s average performance is better than that of the Latin
American countries. See Pamuk (2007), Data from Maddison
(2003).
Figure 1: GDP per capita as percent of (W. Europe+U.S.), 1880-2005
Turkey
S. Europe
L America 8
S. Korea
Africa
Middle East
80
70
60
50
40
30
20
10
0
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Questions

The analysis of Turkey’s experience poses some
challenges.
 Turkey’s growth experience is better than the
average performance of most developing
countries.[Pamuk (2007)]
 Why Turkey was not able to achieve the
performance of some of the East Asian economies?

Per capita incomes of S. Korea and Turkey were
approximately equal in 1960.
Puzzles
Altug, Filiztekin, and Pamuk, European Review of Economic History, 2008
argue that Turkey’s experience is characterized by some “puzzles.”
 TFP (Total Factor Productivity) growth is low and the contribution of
TFP to overall growth is only 15%.
 The rate of capital accumulation is low.





The East Asian countries achieved a rapid structural transformation through
high saving and investment.
3-3.5% growth in the capital-output ratios for a variety of East Asian
countries during the period 1966-1990.
1.2% growth in the capital-output ratio in Turkey during 1960-2005.
For the period 1960-1980, this growth rate is 3.14%, (comparable to East
Asian countries)
The rate of transition from agriculture to non-agricultural activities is
low.

The share of population remaining in agriculture in Turkey by 2000 is nearly
35%, one of the highest in Europe.
Resolving the Puzzles

We identify three reasons for explaining
these puzzles:
The role of human capital
Institutions and political economy
considerations
Macroeconomic policy-making
The role of human capital







10% literacy level in 1923.
This fact itself may help to explain why, despite a broad-reaching
set of military, political and economic reforms, the Ottoman
Empire was not able to transform itself into a modern state.
Human capital may also have an effect on the quality of
institutions.
Educational policies in Turkey in the last 80+ years have
succeeded in bringing the literacy rate to 86.5% by 2000.
The average level of schooling for the workforce remains at 5.3
years.
Are these worries allayed by current policies?
The share of government spending accruing to education is
3.82% of GDP in 2002 whereas the OECD average is 5.73%.
Institutions




Define institutions as a formal or informal set of rules in
the sphere of economic, political or social interactions.
The idea that institutions are a key determinant of
growth has witnessed a revival.
The disparity in observed income worker i.e.,
productivity, may only be explained by differences in
social infrastructure [Hall and Jones (1999)]
``The institutions and government policies that determine
the economic environment within which individuals
accumulate skills, and firms accumulate capital and
produce output.''
Institutions

There exists the problem of quantifying the impact of institutions
over a long horizon.

Democratic Capital [Persson and Tabellini (2006)], one variable that we
found informative for our purposes.




Cumulation of periods of democratic rule as in a simple capital
accumulation equation using Polity IV measures of democracy and
autocracy.
This measure can be constructed for Turkey since the 1880's because
there is potentially very rich information on the political regime since that
period.
If there is a change of regime, say, a military take-over, then the
existing stock of military capital starts depreciating at some given
rate.
The next figure illustrates our measure of democratic capital for
depreciation rate of 0.05.
Democratic Capital
delta=0.05
18
16
14
12
10
democratic capital
8
6
4
2
1996
1984
1972
1960
1948
1936
1924
1912
1900
1888
1876
0
Narrative



1876, the first Constitution in a Muslim Country.
1877, abolition of the first constitutional assembly.
Until 1908, absolutist era of Abdulhamit.




Large territorial losses
Worst rating on the autocracy scale
WWI – 1922, interregnum period
1923, Establishment of Republic of Turkey




One-party rule led by a single leader, Mustafa Kemal Atatürk.
Creation of a formal law-making body
Parliamentary elections
Lightening of the autocracy index
Narrative


1946, multi-party elections
1950, Democratic Party ascends to power






Rising incomes
Rise in the influence of landed interests and private sector
industrialists
Steady increase in democratic capital during the 1950’s
Populist policies
Agricultural subsidies in Turkey prevented those employed in
agriculture from moving to more high productivity sectors.
1980, Open economy orientation to Turkish industry


Trade liberalization
Export subsidies
Democratic Capital: A Cross-Country
Comparison
14
12
Democratic Capital
10
8
Turkey
South Korea
Argentina
6
4
2
0
1940
1950
1960
1970
1980
Yıl
1990
2000
2010
Democratic Capital: A Cross-Country
Comparison
18
16
14
Democratic Capital
12
Spain
10
Turkey
Greece
8
Portugal
6
4
2
0
1940
1950
1960
1970
1980
Year
1990
2000
2010
Institutions (cont’d)


Political economy considerations may explain the insufficient
utilization of resources for Turkey, whether they be capital or labor.
In contrast to East Asian countries, Turkey followed more gradualist
and populist policies.
 Agricultural subsidies prevented those employed in agriculture
from moving to more high productivity sectors.
 An open economy orientation to Turkish industry came only in
1980.
 The E. Asian countries had been following industrial policies
geared to open trade regimes much earlier.
 Turkey failed to adopt policies that would promote greater
international competitiveness
 Concentrating on exports of technology-intensive goods.
 the distribution of export subsidies took a more prominent
place.
Macro-economic policy-making




The E. Asian countries: prudent macro-economic policy-making
Even following the 1997 financial crisis, the economies of E. Asia have
shown a rapid recovery.
By contrast, the principles of modern macro-economic policy-making have
taken a long time to take hold in Turkey.
Frequent foreign exchange shortages and foreign exchange crises
Regardless of the economic policy regime – whether it is import-substitution or
trade and financial liberalization –.[1950s]
 A foreign exchange crisis following the oil price shocks of the mid-1970’s laid, in
many ways, the groundwork for the military coup of 1980.




The financial crisis in 1994: worsening fiscal deficit combined with loose
monetary policies.
The 2000-2001 crisis: banking crisis with largest GDP decline in Republican
history
Institutional reforms adopted in the wake of the 2000-2001 crisis - fiscal
discipline, central bank independence, banking regulation and supervision prevented worst effects of 2008 crisis.
-0.2
-0.4
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
1945
1943
1941
1939
1937
1935
1933
1931
1929
1927
1925
1923
Inflation
0.8
0.6
0.4
0.2
GDP Deflator (Temel)
GDP Deflator (Saygili)
0
19
23
19
26
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
Openness
60
50
40
30
x/gnp
20
10
0
m/gnp
open
Budget Deficit as a Share of GDP
Business cycle dates: Classical cycles
Examine Turkey’s cyclical experience in a comparative perspective.
 Turkey
S.Africa
Argentina Brazil
Chile
Mexico
89:2-89:3 72:1-72:2 82:4-83:2 95:4-96:2 81:4 -83:1 82:3-86:4
91:1-91:3 74:4-75:1 84:4-86:3 97:3-99:3 98:3-99:4 94:3-95:3
94:2-95:1 76:2-77:1 87:3-90:1 01:2-02:3 08:3-09:2 00:4-03:1
98:4-99:4 77:3-77:4 90:4-92:3 03:2-03:4
08:2-09:2
01:1-02:1 84:3-86:4 95:1-96:1 05:3-06:2
08:4-09:2 89:3-93:1 98:3-02:4 08:4-09:2
98:2-98:3 08:3-09:2
08:2 Tequila crisis (1994-1995), Russian sovereign debt crisis (19981999), global economic crisis (2008-2009). Other crises (2000-2001)

Business cycle dates: Classical cycles
(cont’d)

Hong Kong
82:1-83:1
84:4-86:1
89:3-90:1
97:4-99:1
03:2-03:3
08:4-09:1
Malaysia
97:2-98:4
00:4-01:4
08:4-09:2
Singapore
85:3-86:2
98:2-99:1
01:3-02:1
08:2-09:2
S. Korea Taiwan
Israel
77:4-78:1 00:1-02:3 82:3-82:4
79:2-80:4 07:4-08:2 01:3-03:3
81:2-81:3
09:1-09:2
97:2-98:1
08:4-09:1

East Asian crisis (1997-1999) , bursting of the dot.com bubble and US
slowdown (2000-2001), global economic crisis (2008-2009)
Business cycle characteristics
Dur (qtr) PT
Dur (qtr) TP
Ampl(%) PT
Ampl(%) TP
Dur (qtr) PT
Dur (qtr) TP
Ampl (%) PT
Ampl(%) TP
Dur (qtr) PT
Dur (qtr) TP
Ampl(%) PT
Ampl(%) TP
HK
Malaysia
Singapore
S. Korea
Taiwan
3
31
-2.76
51.38
Israel
2.7
50.5
-0.72
37.6
Chile
5.5
46.5
-5.57
48.96
3.5
18.5
-4.12
30.87
S. Africa
7.7
28
-3.16
22.83
Mexico
4.5
21.75
-4
19.66
2.5
28.33
-1.65
52
Turkey
3.6
12.4
-4.44
20.2
4
39
-7.1
52.48
Argentina
8.5
11.75
-11.33
16.64
3
26
-2.36
30.68
Brazil
2.7
9.7
0.63
9.56
Mexico and Turkey: How Similar Are
They?


Both countries are OECD members and among the
larger emerging market economies.
They have memberships in trade arrangements involving
their region.



Mexico is a member of the North American Free Trade
Agreement (NAFTA).
Turkey entered into a customs union agreement with the
European Union in 1996 and possesses candidate status for full
EU membership as of 1999.
They have also experienced a long process of
adjustment, including trade and financial liberalization as
well as programs of stabilization and reform.
The Post-2001 Period for Turkey


The 2000-2001 banking and financial crisis was among
the most severe for the Turkish economy.
In its aftermath, Turkey implemented a wide set of
reforms as part of the IMF-sponsored stabilization plan of
May, 2001:





It transited to a floating exchange regime;
it implemented banking and financial sector reform;
it moved to central bank independence; and
it adopted a regime of fiscal discipline.
Finally, Turkey transited to an inflation targeting regime,
which occurred formally in 2006.
Disinflation and normalization in the
Turkish economy since 2002

As a consequence of these reforms,
 Inflation
dropped from 45% in 2002 to around
7% today;
 nominal interest rates fell from 65% to 7%;
 capital flows; increased from $3.4 to $72
billions per year;
 FDI flows were $123 billions since 2002;
 GDP growth averaged 5% over 2002-2012.
The global economic crisis and
beyond




Turkey was strongly affected by the global economic
crisis: GDP contracted 4.8% in 2009.
However it recovered quickly, with 9.2% and 8.5% GDP
growth in 2010 and 2011, respectively.
Growth moderated to 2.2% in 2012 due to precautionary
measures taken by the authorities to curb credit growth
reaching 40% and a CA deficit of almost 10% of GDP in
2012, as well as due to global slowdown.
In the post-2010 period, the Turkish monetary authorities
also departed from the standard inflation targeting
approach, and instituted polices with macro-prudential
objectives.
Opportunities in the Future: 2023 Goals

2023 Goals:
 Propel
the Turkish economy to be among the top 10
economies
 Increase GDP per capita to $25,000
 Increase the quantity of exports to $500 billion per year.

To achieve these goals, Turkey’s advantages
include
 its
demographic structure;
 its past reform efforts; and
 its relatively strong financial buffers.
Can Turkey Achieve Its Goals?

But sustaining growth into high income is
difficult.
 Turkey
needs to deepen structural reforms to boost
productivity, energy efficiency, female employment;
 increase domestic savings to avoid volatility of growth
due to dependence on foreign financing;
 deepen integration both with the EU and the world.