Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Global financial system wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Balance of trade wikipedia , lookup
Fei–Ranis model of economic growth wikipedia , lookup
Fear of floating wikipedia , lookup
Balance of payments wikipedia , lookup
Chinese economic reform wikipedia , lookup
Protectionism wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
ECON 401 November 19, 2012 Fragile Economy in the 1990s How to deal with corruption and rent-seeking policies? The economic policies of the earlier period were criticized on the basis of creating rent-seeking acitivities. Presence of import licenses and investment permits created rents for private groups (rent-seeking) It was more profitable for firms to use their resources in order to capture the rents Was it different under the new liberal period? Liberalization of external trade and domestic markets would remove all opportunities associated with rent-seeking. Rent-seeking and corruption through fictitious exports (hayali ihracat) Land speculation in urban and touristic areas Bailing out of private firms in distress The responsibilities about creating these rent-seeking acitivities were given to the institutions/positions directly related to the ruling party. Annual growth rate was 4.9 between 1980 and 1988 The same rate was much higher if we just focus on the years between 1983-1987 That was achieved as a result of the shift of production from domestic to external markets There was more than five-fold increase in exports between 1979 and 1988 Almost eighty percent of this rise came from manufacturing exports (textile, clothing, iron and steel) This period was indeed led by exports in terms of numbers, but: Domestic demand was limited following the lower incomes for workers and farmers Growth in exports was enforced by extensive export subsidies (tax rebates and subsidized credit) and policies targeting low exchange rate Major Problems of the 1980s The growth of exports came mostly from using the excess capacity that was kept idle in the last period of the 1970s The share of investments allocated to industry fell from 29 % to 16 % in 1988 (almost one-third of these investments was concentrated in construction sector) In a period where outward orientation was supposedly directed to increased manufacturing exports through significant price and subsidy incentives, distribution of investments revealed a declining trend for the sector. • The shift of SEEs from productive manufacturing sector to infrastructural activities such as transport, communications, and energy. Major Problems of the 1980s The implications of the non-conformity between the stated foreign trade objectives towards manufacturing exports and the realized patterns of accumulation away from manufacturing constituted one of the main structural problems of the growth pattern of the period Exports became industry’s only solution to gain higher profits given the lack of domestic demand and high costs of financing the new investment In other words, it was easier for the private sector to capture high but temporary profits by switching from domestic to external markets, rather than use its savings (i.e. profits) for long-term productivityenhancing investments in manufacturing industry. Major Problems of the 1980s However, the same period also witnessed a significant rise in external debt The economy still depended on external sources for economic growth, therefore imports grew at a high rate External debt rose from 25 % of GDP in 1980 to 60 % of GDP in 1988 There was a steady support for Turkey’s policies by international financial markets Turkey being one of the primary examples of new economic policies Major Problems of the 1980s This export-led growth seemed to reach its limits towards the end of the 1980s It was not (politically) possible to keep the domestic demand at the same low levels The level of real wages in 1988 was below that in 1977 There were significant demonstrations organized by major trade unions in 1989. Huge defeat for the ruling party in municipal elections in early 1989 All these developments led to an increasing trend in wages (first in the public sector) and agricultural support prices How would the government finance these new expenditures? 1990s Capital account Liberalization in 1989 No restrictions on the movement of foreign exchange Starting in 1989 there was a surge in short-term capital inflows in Turkey The inflow of capital helped, at least in the shortrun, to overcome the acute distributional pressures present in the Turkish economy during the period. The economy expanded at a faster rate than would otherwise have been possible and the rising capital inflows provided a way of satisfying the distributional claims of the key groups involved. Workers, particularly in the public sector had huge rises in their wages and salaries Real wages in manufacturing industry increased by 90 percent between 1988 and 1991 Farmers received higher support prices and other subsidies How did the private sector respond to higher wages in manufacturing industry? Imperfect market structures and high markup pricing Cost x (Markup + 1) = Sale price During the 1990s, high markups enabled firms to gain more profits in the presence of higher wages and other labor costs Declining ratio of intermediate costs to labor costs From 12 % in 1988 to 6.5 % in 1991 Lower prices for domestically produced intermediate goods through SEEs Lower import prices for intermediate goods through real appreciation of Turkish Lira Labor shedding One of the major characteristics of the labor market adjustments throughout the 1990s has been widespread layoffs and an overall intensification of marginalized labor employment. In 1994, the number of informal workers exceeded the number of formal employees in private manufacturing industry In 1995, about 95 percent of all firms in manufacturing industry employ less than 10 workers; they employ only onefourth of all formal workers and pay only one-fourth of the wage paid by the larger firms Following the higher wages and agricultural subsidies in the public sector, government started to run huge deficits Government could have financed these expenditures by raising tax or printing money The public sector deficit started to be financed through domestic agents who increasingly borrowed from abroad. The stock of domestic debt was only about 6% of the GNP in 1989, just when the liberalization of the capital account was completed. It grew rapidly, and reached 20% by 1997. In 1993, shortly before the onset of the crisis almost all the central government’ s budgetary expenditures were being allocated to current expenditures (mainly wage and salary payments), interest payments on domestic and external debt and transfer payments It was extremely difficult to sustain economic growth in an environment characterised by over-expansion of public expenditures and inadequate increases in public revenues. Financing of budget deficits relied on new money from abroad The rising foreign capital inflow to Turkey created a pressure in the direction of appreciation of the exchange rate in real terms The appreciation of the exchange rate, in turn, helped to undermine export growth and encouraged a parallel process of import expansion. It was clear that the rising current account deficit (i.e. trade deficit), covered by primarily short-term capital inflows could not provide a basis for a sustainable growth process Crisis broke out in April 1994. This, in turn, generated a major outflow of short-term capital. There was also a major depreciation of the exchange rate Rising power of finance Share of Wages in Value added Real Agricultural wage Terms of index Trade Share of Interest gains in GDP Real Return int. on hot money 1988 15.4 100 100 9.8 -2.5 -7.3 1993 20.7 232 130 18.2 17.9 4.5 Rising power finance Return on hot money It yields the net return to a foreign portfolio investment, which switches into TL, captures the interest income offered in the domestic economy and switches back to the foreign currency at the end-of-period exchange rate. The difference between interest earned and the loss due to currency depreciation is the net earnings appropriated by the investor