An Overview of Macroeconomic  Developments in Turkey
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An Overview of Macroeconomic Developments in Turkey with special reference to the AK-Party Era (2002-04) Aykut Kibritçioğlu Associate Professor of Economics Ankara University, Turkey Tel.: (+90-312) 319 77 20, ext. 340 Fax: (+90-312) 319 77 36 E-Mail: kibritci@p olitics .ankara.edu.tr

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An Overview of Macroeconomic Developments in Turkey

with special reference to the AK-Party Era (2002-04)

Aykut Kibritçioğlu

Associate Professor of Economics

Ankara University, Turkey

Tel.: (+90-312) 319 77 20, ext. 340

Fax: (+90-312) 319 77 36

E-Mail: kibritci@politics.ankara.edu.tr

Homepage: http://dialup.ankara.edu.tr/~kibritci/wiiw.html

Vienna, 1-15 November 2004

Kibritçioğlu, November 1-15, 2004, (1/79)


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Outline of the Presentation

  • General Facts and Figures, 1970-2004

  • Political Climate, 1969-2004

  • Market for Goods: Inflation & Disinflation

  • Market for Goods: Production & Productivity

  • Labor Market: Employment & Real Wages

  • Foreign Exchange Market: Exchange Rates, and Currency Substitution

  • Balance of Payments and External Debts

  • Public Sector: Deficits and Debts

  • Financial Sector

  • Statistical Sources

  • Appendix: Selected Macroeconomic Indicators for Turkey (1970-2003)

Kibritçioğlu, November 1-15, 2004, (2/79)


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General

Facts and Figures, 1970-2004

Kibritçioğlu, November 1-15, 2004, (3/79)


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The 1980-1989 Transformation

1978 - 1980: Balance-of-payments crisis, productivity slowdown and accelerating inflation

January 1980: Announcement of a substantial stabilization and structural adjustment program in order to gradually liberalize the economy

1980 - 1982: Domestic financial liberalization

May 1981: Abandonment of the fixed exchange-rate regime

June 1984 - August 1989: Capital account liberalization and convertibility of the Turkish lira

Kibritçioğlu, November 1-15, 2004, (4/79)


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Post-1989 Macroeconomic Developments

December 1993 - April 1994: A major currency crisis and acceleration in the inflation

August 1999: Negative macroeconomic impacts of the Marmara earthquake

December 1999: Announcement of an exchange-rate-based stabilization program for 2000-2002

November 2000 & February 2001: Two successive banking and currency crises and political instability in Turkey

May 2001: Announcement of the new economic program

Kibritçioğlu, November 1-15, 2004, (5/79)


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Selected Macroeconomic Indicators [1]

annual

period

averages

Source: State Institute of Statistics (SIS), Central Bank of Republic of Turkey (CBRT), State Planning Organization (SPO), the IMF and J.P.Morgan; Kibritçioğlu’s calculations.

Kibritçioğlu, November 1-15, 2004, (6/79)


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Selected Macroeconomic Indicators [2]

annual

period

averages

Source: State Institute of Statistics (SIS), Central Bank of Republic of Turkey (CBRT), State Planning Organization (SPO), the IMF and J.P.Morgan; Kibritçioğlu’s calculations.

Kibritçioğlu, November 1-15, 2004, (7/79)


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Political Climate,

1969-2004

Kibritçioğlu, November 1-15, 2004, (8/79)


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Governments & Political Instability

in Turkey, 1969-2004

  • 1969-2004 = 36 years = 432 months

  • Average period between two general elections = 48 months = 4 years

  • Average life of governments = 15.4 months = 1.3 years

  • (ICRG=International Country Risk Guide; a declining PR index indicates an increase in the political risk.)

Kibritçioğlu, November 1-15, 2004, (9/79)


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  • Selected Events Marked as Black Columns in the Following Figures are:

  • January 1999:

  • 4. Ecevit-Government starts...

  • May 1999:

  • 5. Ecevit-Government starts...

  • January 2000:

  • 2000-2003 Program introduced...

  • November 2000 and February 2001:

  • Financial crisis occurred...

  • November 2002:

  • General elections & AK-Party-Government starts...

Kibritçioğlu, November 1-15, 2004, (10/79)


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Market for Goods:

Inflation & Disinflation

Kibritçioğlu, November 1-15, 2004, (11/79)


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Annual Consumer Price Inflation

(%, log scale)

  • In the late 1990s, Turkey was not able to join the global disinflation process observed explicitly...

Kibritçioğlu, November 1-15, 2004, (12/79)


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Kibritçioğlu, November 1-15, 2004, (13/79)


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Kibritçioğlu, November 1-15, 2004, (14/79)


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Kibritçioğlu, November 1-15, 2004, (15/79)


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Market for Goods: September 2004. (Official target for Dec. 2004: 12 percent)

Production & Productivity

Kibritçioğlu, November 1-15, 2004, (16/79)


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Indicators of Long-Run Growth in Turkey September 2004. (Official target for Dec. 2004: 12 percent)

  • Turkey’s economic growth performance was highly volatile.

  • Real GDP per capita rose 22 times between 1950 and 2000.

Kibritçioğlu, November 1-15, 2004, (17/79)


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Industrial Production Index (1980=100) September 2004. (Official target for Dec. 2004: 12 percent)

  • Turkish industrial sector demonstrated a remarkable growth performance since 1980.

Kibritçioğlu, November 1-15, 2004, (18/79)


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GDP per capita ($): Turkey & Selected Countries September 2004. (Official target for Dec. 2004: 12 percent)

  • In an international context, however, Turkey’s economic growth performance is relatively poor.

Kibritçioğlu, November 1-15, 2004, (19/79)


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Kibritçioğlu, November 1-15, 2004, (20/79)


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Kibritçioğlu, November 1-15, 2004, (21/79)


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Kibritçioğlu, November 1-15, 2004, (22/79)


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Kibritçioğlu, November 1-15, 2004, (23/79)


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Kibritçioğlu, November 1-15, 2004, (24/79)


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Kibritçioğlu, November 1-15, 2004, (25/79)


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Labor Market: labor productivity.

Employment &

Real Wages

Kibritçioğlu, November 1-15, 2004, (26/79)


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Kibritçioğlu, November 1-15, 2004, (27/79)


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Kibritçioğlu, November 1-15, 2004, (28/79)


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Foreign Exchange Market: following the 2000-2001 crisis.

Exchange Rates, and Currency Substitution

Kibritçioğlu, November 1-15, 2004, (29/79)


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“Black-Market” Exchange Rates (BMER) vs. Official Exchange Rates (OER)

and Annual Increases in OER (1950-2004)

  • Since May 1981, Turkey has a relatively flexible exchange rate system. This gradually removed the “black-market” for FX in Turkey.

  • In 2000, the monthly growth rates of nominal exchange rates were pre-determined to gradually disinflate the economy.

Kibritçioğlu, November 1-15, 2004, (30/79)


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Kibritçioğlu, November 1-15, 2004, (31/79)


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Kibritçioğlu, November 1-15, 2004, (32/79)


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Kibritçioğlu, November 1-15, 2004, (33/79)


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Kibritçioğlu, November 1-15, 2004, (34/79)


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Kibritçioğlu, November 1-15, 2004, (35/79)


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Currency Substitution in Turkey (1985-2004) foreign currencies following the 2000-2001 crisis seems to have stopped within the last 12 months.

FX Deposits to M2

  • High inflation and low credibility of government policies in the 1990s created a strong currency substitution. But it’s changing now...

Kibritçioğlu, November 1-15, 2004, (36/79)


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Kibritçioğlu, November 1-15, 2004, (37/79)


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Balance of Payments and External Debts during the AK-Party era.

Kibritçioğlu, November 1-15, 2004, (38/79)


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History of Taxation in Turkish International Trade in Goods (1925-2002)

Kennedy(1967)

Customs Union with the EU (1996)

Tokyo (1979)

GATT (1947)

Uruguay (1986-1993)

  • Foreign trade liberalization in Turkey is closely associated to Turkey’s relations to the GATT/WTO and the European Union (EU).

Kibritçioğlu, November 1-15, 2004, (39/79)


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Kibritçioğlu, November 1-15, 2004, (40/79)


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Exports to Imports Ratio in Turkey (1923-2003, affected Turkey’s trade in goods with the rest of the world.annual)

Kibritçioğlu, November 1-15, 2004, (41/79)


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Exports to Imports Ratio in Turkey (1950-2004, affected Turkey’s trade in goods with the rest of the world.monthly)

  • The share of the agricultural products on exports decreased in Turkey, and the volatility of exports to imports ratio in Turkey declined since early 1980s.

Kibritçioğlu, November 1-15, 2004, (42/79)


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Kibritçioğlu, November 1-15, 2004, (43/79)


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Export and Import Price Indices foreign trade deficits are increasing since early 2002.

(1982=100, monthly averages)

Kibritçioğlu, November 1-15, 2004, (44/79)


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Goods Composition of Turkish Exports and Imports foreign trade deficits are increasing since early 2002.

(1969-2003, ISIC, percent)

Exports

Imports

Kibritçioğlu, November 1-15, 2004, (45/79)


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Goods Composition of Turkish Exports and Imports foreign trade deficits are increasing since early 2002.

(1969-2003, BEC, percent)

Exports

Imports

Kibritçioğlu, November 1-15, 2004, (46/79)


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Country Composition of Turkish Exports (1980-2003, percent) foreign trade deficits are increasing since early 2002.

Kibritçioğlu, November 1-15, 2004, (47/79)


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Country Composition of Turkish Imports (1980-2003, percent) foreign trade deficits are increasing since early 2002.

Kibritçioğlu, November 1-15, 2004, (48/79)


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Kibritçioğlu, November 1-15, 2004, (49/79)


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Kibritçioğlu, November 1-15, 2004, (50/79)


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Erratic Nature of Net Short-Term Capital Inflows improvements have not fully translated into the annual data yet.

(billion USD, annual data)

1994

crisis

capital

account

liberalization

2000-01

crisis

Kibritçioğlu, November 1-15, 2004, (51/79)


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Net Short-Term Capital Inflows (billion USD) improvements have not fully translated into the annual data yet.

capital

account

liberalization

  • One indication that Turkey’s policies are on the right track would be a return to positive short-term inflows at a steady and sustainable level. But a substantial increase in longer term capital inflows is not observed in Turkey.

Kibritçioğlu, November 1-15, 2004, (52/79)


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Kibritçioğlu, November 1-15, 2004, (53/79)


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current 2000-2001 financial crisis declined significantly after January 2002.

account

liberalization

capital

account

liberalization

  • The effects of both current and capital account liberalizations realized in the 1980s can roughly be followed by the fluctuations in the CAB to GDP and net short term capital inflows to GDP ratios.

Kibritçioğlu, November 1-15, 2004, (54/79)


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Kibritçioğlu, November 1-15, 2004, (55/79)


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“Hot Money” Mechanism in Turkey nominal industrial output is significantly lower than that of the net short-term capital inflows to output ratio.

Political Process

(Voters, Political Parties & Bureaucrats)

It‘s not only “capital account liberalization” itself which caused macroeconomic problems in Turkey after 1989.

High Public Sector Deficits

High Real International Interest Rate Differential

Decreasing or Stable Nominal Exchange Rates

interest rate parity

high inflation

Net Short-Term

Capital Inflows from Abroad

upward pressure on FX rates

But everything changes,

if there is a CC at the door…

...

Kibritçioğlu, November 1-15, 2004, (56/79)


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Kibritçioğlu, November 1-15, 2004, (57/79)


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Kibritçioğlu, November 1-15, 2004, (58/79)


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Kibritçioğlu, November 1-15, 2004, (59/79)


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Public Sector: debts increased significantly after the 2000-2001 financial crisis, but in the AK-Party era it declined again slightly.

Deficits and Debts

Kibritçioğlu, November 1-15, 2004, (60/79)


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Kibritçioğlu, November 1-15, 2004, (61/79)


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Kibritçioğlu, November 1-15, 2004, (62/79)


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Kibritçioğlu, November 1-15, 2004, (65/79)


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Kibritçioğlu, November 1-15, 2004, (66/79)


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  • Since increasing sharply... the latest general elections in November 2002, the public sector’s domestic debts increased more than 65 percent in terms of USD, while its external debts expanded only around 15 percent.

Kibritçioğlu, November 1-15, 2004, (67/79)


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Financial Sector increasing sharply...

Kibritçioğlu, November 1-15, 2004, (68/79)


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Banking Sector Fragility in Turkey increasing sharply...

  • Turkish banking sector experienced difficulties many times within the last 25 years, as a result of their own excessive risk-taking behavior in the past.

For Methodology: see Kibritçioğlu (2003), “Monitoring ...”.

Kibritçioğlu, November 1-15, 2004, (69/79)


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For Methodology: see Kibritçioğlu (2003), “Monitoring ...”.

Kibritçioğlu, November 1-15, 2004, (70/79)


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Banking Sector Fragility in Turkey crisis, and according to the BSF index, it is taking excessive risk again...

  • The recent developments in the FL to FA ratio indicate that the external open (short) position of Turkish banking system is decreasing now...

Kibritçioğlu, November 1-15, 2004, (71/79)


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Kibritçioğlu, November 1-15, 2004, (72/79)


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Istanbul Stock Exchange’s National 100 Index exhibits a different pattern after the 2000-2001 financial crisis: It is very close to 100 percent now...

Kibritçioğlu, November 1-15, 2004, (73/79)


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Annual Increases in ISE’s National 100 Index exhibits a different pattern after the 2000-2001 financial crisis: It is very close to 100 percent now...

Kibritçioğlu, November 1-15, 2004, (74/79)


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Kibritçioğlu, November 1-15, 2004, (75/79)


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Concluding Remarks the AK-Party era. Since spring 2004, however, it follows a relatively stable path.

  • Inflation and interest rates are declining gradually.

  • In the Turkish manufacturing industry, the labor productivity is increasing and real wages remain low, while the industrial production index is rising again.

  • There is still a deep unemployment problem in Turkey. Production increases are not fully translated into employment increases yet.

  • Excessive risk taking behavior of the banking system (in terms of the BSF index) is expected to decline towards historical averages.

  • Real effective exchange rates do not show an appreciation of Turkish lira anymore.

  • Further structural reforms, stronger privatization efforts and continuity in political stability are needed in the country.

  • In Turkey, it is expected that a decision of the heads of EU governments next monthin favor of the start of the accession talks for full-membership in early 2005 will positively affect the Turkish economy, particularly in terms of the FDI inflows.

Kibritçioğlu, November 1-15, 2004, (76/79)


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  • Statistical Sources the AK-Party era. Since spring 2004, however, it follows a relatively stable path.

  • for Figures and Tables

  • CBRT/TCMB, Electronic Data Distribution System.

  • SPO/DPT, Main Economic Indicators.

  • UT/HM, Treasury Statistics.

  • ISE/İMKB, Annual Yerabook.

  • IMF/IFS, IFS & DOTS.

  • Penn World Table (PWT), 6.1

  • Pick’s/World Currency Yearbook

Kibritçioğlu, November 1-15, 2004, (77/79)


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Appendix the AK-Party era. Since spring 2004, however, it follows a relatively stable path.:

Selected Macroeconomic Indicators for Turkey,

1970-2003

Kibritçioğlu, November 1-15, 2004, (78/79)


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Source: State Institute of Statistics (SIS), Central Bank of Republic of Turkey (CBRT), State Planning Organization (SPO), the IMF and J.P.Morgan; Kibritçioğlu’s calculations.

Kibritçioğlu, November 1-15, 2004, (79/79)