Group 6: Group 6 Presentation for EC470 TURKISH ECONOMY PRESENTED BY: BORA BÜYÜKAKGÜL MUNKHBAATAR GANBOLD


SOURCES OF GROWTH ANDFINANCING GROWTH : SOURCES OF GROWTH AND FINANCING GROWTH


An Outline for the Presentation: An Outline for the Presentation Definitions related to growth Overview of the Turkish Economy since 1923 and especially after 1980 Sources and Financing of Growth Summary and Conclusion


Definitions: Definitions Economic growth: Reflection of the increase in the level of production of goods and services by a country over a certain period of time. Financing of growth: Efficient allocation of scarce funds to finance capital formation that is crucial for economic growth.


Why Economic Growth is important?: Why Economic Growth is important? Economic growth is used as a measure of increased material well-being generated through economic activity.


Slide6: "In order to raise our new Turkey to the level that she is worthy of, we must, under all circumstances, attach the highest importance to the national economy.“ Mustafa Kemal Atatürk The social reforms introduced by Ataturk had one overriding goal: to increase economic prosperity. Turkey’s devotion to economic growth has perhaps been Ataturk’s most enduring legacy (Singer 1938)


With the economic growth, national prosperity can be achieved.: With the economic growth, national prosperity can be achieved. Economy grows, Turkey grows...


Reporting the Growth: Reporting the Growth Economic growth is usually reported as a percentage increase in Gross Domestic Product (GDP) for a country. GDP = C + I + G +NX


SOURCES OF GROWTH : SOURCES OF GROWTH CONSUMPTION (for C) INVESTMENT (for I) GOVERNMENT SPENDING (for G) EXPORT - IMPORT (for NX) IMPORT SUBSTITUTION


FINANCING OF GROWTH: FINANCING OF GROWTH DOMESTIC SAVINGS -BORROWING (IF INV.>DOM.SAVINGS) FOREIGN SAVINGS -CAPITAL FLOW -FDI COMPOSITION OF CURRENT ACCOUNT


Slide11: Foreign direct investment (FDI): investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Capital flow: International capital movement or International borrowing and lending Current account: sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). A current account surplus increases a country's net foreign assets by the corresponding amount.


Slide12: SOURCES OF GROWTH AND GROWTH FINANCING IN TURKISH ECONOMY


Slide13: An Overview of Turkish Economy (1923-2006)


Time periods: Time periods The 1923-1929: Early Republican The 1930-1949: Etatism(State-Led Industrialisation) The 1950s: Democratic Party The 1960s: Planned Industrialization The 1970s: Boom and Bust


Time periods: Time periods The 1980s: Trade Liberalization and Reforms The 1990s: Capital Account Liberalization The 2000s: Banking Sector Crises and Reforms We will be concentrating on periods after the 1980s trade liberalization and reform period


Important dates after 1980: Important dates after 1980 Late 1970s - Deep economic recession 1980 - Jan: Stabilization and trade liberalization 1980 - Sept: Military take-over 1981 - Managed floating-exchange-rate system 1989 - Liberalization of the capital account. 1991 - Persian Gulf crisis 1994 - Financial crisis of FX and interest rates 1998 - Russian crisis 1999 - Two earthquakes 2000 - Disinflation and economic restructuring 2001 - Banking Sector Crisis


Economic growth since 1980: Economic growth since 1980 Main dynamics assumed to be related with the economic growth: Government Spending Investment Export Main dynamics of financing of economic growth Capital Flows FDI


Government Spending as a Source of Growth: Government Spending as a Source of Growth Dating back to 1930’s (Keynes), governments intervene where there is either not enough investment from the private sector or in case of public goods. Government has to serve its citizens! As government spending increases, either on the consumption or the investment side, it helps to economic growth but causes inflationary pressures on the economy. After 1980’s, unproductive “wasteful” investments and populist policies beginning in 1987 bring about the consequence of undesired but unevitable budget deficits in real terms, hence there is an increasing trend of PSBR until the end of 1990’s.


% Change of PSBR in GDP and GDP Growth: % Change of PSBR in GDP and GDP Growth


Investment as a Source of Growth: Investment as a Source of Growth Private investment constitutes the major part of the growth, because it is assumed to be increasing productivity. The share of investment in GDP decreased in crisis years, on the other hand it made a peak one year before crisis times. Are Savings=Investments ???


Slide22: TURKEY’S SAVING AND INVESTMENT TO GDP RATIOS IN PERIODS 1987-2005 WORLD COUNTRIES MEAN SAVING AND INVESTMENT TO GDP RATIOS IN PERIODS 2003-2005


Export as a Source of Growth: Export as a Source of Growth According to the international trade literature ELG Hypothesis refers to a positive correlation between export growth and real output growth. In the 1980-2005 period average annual rise in export 12.1%. 1980-1990 → annual average increase in export 16.1% 1990-2005 → annual average increase in export dropped to 9.5%


Export as a Source of Growth: Export as a Source of Growth An increase in export from 1980 until 1994 through the increasing capacity of manufacturing. After 1994, crawling peg and floating exchange rate regimes helped the exchange rate to stabilize. After the 1994 crisis CB changed the fix exchange rate to crawling peg regime, leading to an increase in exchange rates. Devaluation in order to tighten domestic demand and increase export. After 1994, export revenues mostly increased depending on the exchange rates.


Turkish Trade (non-) Balance (Million $): Turkish Trade (non-) Balance (Million $)


Export as a Source of Growth: Export as a Source of Growth 2007, March → export = 8.890 Million Dollars → import = 12.967 Million Dollars Since 2006, March → export increased by 20 % → import increased by 11,8 % Trade Deficit decreased by 2,8%


Capital Flows in Financing Growth: Capital Flows in Financing Growth 1980 → foreign trade liberalization, export oriented industrialization policies 1989 → the liberalization of capital movements 1989 → the economic growth was based on consumption that was financed by short-term capital inflow. 1990 → short-term foreign exchange (fx) credits


Capital Flows in Financing Growth: Capital Flows in Financing Growth until 1992 → Portfolio investment → slow and mostly in the form of government securities 1994 → net portfolio investment peaked and started to decline after the financial crisis 1997 → Turkey experienced major inflow from international banks


Impact of Capital Flows on Real Economy: Impact of Capital Flows on Real Economy Private consumption is positively related to capital flows, but public consumption is not. Significant effect of capital flows on private investment.


Capital Flows: Capital Flows Foreign direct investments → a small part of total capital flows until recent years. Short-term interest rate differential is misused rather than real growth opportunities in the economy.


Capital Flows and GDP Growth: Capital Flows and GDP Growth


Portfolio and Direct Investments Realised (in billion $): Portfolio and Direct Investments Realised (in billion $)


Foreign Direct Investment in Financing of Growth: Foreign Direct Investment in Financing of Growth Noteworty increase espacially after 1980 In 1980-2002 period 35.2 billion US$ FDI allowed, 27.2 billion US$ starting from 1990 on FDI done by acquisition, provide the founding capital newly established or increase the capital of the domestic firm.


Foreign Direct Investment (Cont’d): Foreign Direct Investment (Cont’d) Turkey has not been FDI destination for investors until recent years. Generally half of the allowed FDI inflow to Turkey in every period. Total value of inflow (including real estate) reached to $ 9.686 million in 2005, with a threefold increase relative to the 2004 value of $2.847 million.


SUMMARY: SUMMARY Pros and Cons of Sources of Growth: Government Spending Investment Export Pros and Cons of Financing of Growth by: Capital Flow FDI Until what extend they are feasible?


Concluding Remarks and Suggestions: Concluding Remarks and Suggestions While Turkey’s GDP growth rate is slowly converging to the developing countries level, its savings and investment rates are not. Turkey’s domestic saving and investment rates show that they are likely to register only moderate increase in the medium term. Turkey therefore has to rely on more productive use of its capital stock (and complement it with greater accumulation of human capital) and on external sources, providing necessary conditions for more FDI, to finance its emerging investment-saving gap. Fiscal and sectoral reforms to attract moderate level of external capital will thus be critical.


Slide44: Thanks for your attention... Q&A