Turkey in Perspective: Past, Present and Future

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:

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

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

Life expectancy at birth (years) ? 30 ? 30 47 62 69

Adult Literacy (ages above 15 in

percent) ? 10 10 32 69 89

Annual Growth Rates (in percent) 1880-

1913 1913

1950 1929-

1950 1950-

1980 1980-

2005 1913-

2005 1913- 2005

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

Total industrial output ? 3.1 5.3 7.7 5.8 5.3 6.5

Annual Growth Rates (in percent)

Output Labor Capital Hum. Cap.

1880-1913 1.48 0.73 1.76 2.83

1913-1929 -0.72 -1.31 -0.03 -1.31

1929-1950 2.71 1.93 1.82 6.75

1950-1980 4.95 1.93 6.31 6.76

1980-2005 4.07 1.35 4.21 3.06

1880-1950 1.36 0.62 1.37 3.06

1950-2005 4.55 1.67 5.35 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).



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.

Questions

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

0 2 4 6 8 10 12 14 16 18

1876 1888 1900 1912 1924 1936 1948 1960 1972 1984 1996

democratic capital

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

Democratic Capital: A Cross-Country

Comparison

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.

Inflation

Openness

0 10 20 30 40 50 60

1923 1926

1929 1932

1935 1938

1941 1944

1947 1950

1953 1956

1959 1962

1965 1968

1971 1974

1977 1980

1983 1986

1989 1992

1995 1998

2001

x/gnp 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 (1998-

1999), global economic crisis (2008-2009). Other crises (2000-2001)

Business cycle dates: Classical cycles (cont’d)

 Hong Kong Malaysia Singapore S. Korea Taiwan Israel 82:1-83:1 97:2-98:4 85:3-86:2 77:4-78:1 00:1-02:3 82:3-82:4 84:4-86:1 00:4-01:4 98:2-99:1 79:2-80:4 07:4-08:2 01:3-03:3 89:3-90:1 08:4-09:2 01:3-02:1 81:2-81:3 09:1-09:2 97:4-99:1 08:2-09:2 97:2-98:1

03:2-03:3 08:4-09:1 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

HK Malaysia Singapore S. Korea Taiwan Dur (qtr) PT 3 3.5 2.5 4 3

Dur (qtr) TP 31 18.5 28.33 39 26 Ampl(%) PT -2.76 -4.12 -1.65 -7.1 -2.36

Ampl(%) TP 51.38 30.87 52 52.48 30.68 Israel S. Africa Turkey Argentina Brazil Dur (qtr) PT 2.7 7.7 3.6 8.5 2.7 Dur (qtr) TP 50.5 28 12.4 11.75 9.7 Ampl (%) PT -0.72 -3.16 -4.44 -11.33 0.63 Ampl(%) TP 37.6 22.83 20.2 16.64 9.56 Chile Mexico

Dur (qtr) PT 5.5 4.5 Dur (qtr) TP 46.5 21.75 Ampl(%) PT -5.57 -4 Ampl(%) TP 48.96 19.66

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.