Download Econ 401 November 26, 2012 Speculative-led growth and the 2001 Crisis

Econ 401
November 26, 2012
Speculative-led growth and the 2001 Crisis
Structural problems in the 1990s
 Economic growth picked up in 1995
 This period was also characterized by massive amount
of short term capital along with high real interest rates
 However, domestic imbalances were serious.
 Government debt had grown rapidly over the preceding
decade exceeding 60 per cent of GDP at the end of 1999,
and two-thirds of this was domestic debt.
 The Public sector borrowing requirement (PSBR) was over
24 per cent of GDP, with 22 per cent taken by interest
payments and 2 per cent by primary deficits.
 With interest rates exceeding inflation by more than 30
percentage points, fiscal sustainability could not be
secured without lowering inflation and hence nominal and
real interest rates
 As long as there was steady capital inflow, economic
growth prevailed
Structural problems in the 1990s
 Fragile Banking sector
 It had come to depend on high inflation and high
interest rates by lending to the government which
had become the single most important borrower in
the domestic market:
 In 1999 total new debt issues by the government
were twice as much as total banking sector credits,
and interest payments on public domestic debt had
come to exceed 15 per cent of GDP.
 Banks carried relatively large open foreign exchange
positions as borrowing abroad and foreign exchange
deposits by residents provided important sources of
finance for their investment in government paper
Stabilization leading to crisis
 The main motivation behind the agreement with the IMF




(signed in December 1999) was how to control government
budget and inflation
Inflation reduction based on a fixed exchange rate was the
major charactersitic of the program
Disinflation, currency appreciation and exceptionally low real
interest rates combined to generate a strong domestic
demand-led recovery in much the same way as in most
episodes of exchange-rate-based stabilization programs,
with GDP rising by more than 7 per cent in 2000 after a
sharp contraction in the previous year
Together with the appreciation of the currency and a rising
oil import bill, this led to a surge in imports which increased
by 35 per cent in 2000, while export growth remained at 7
per cent.
The trade deficit doubled to more than $20 billion, pushing
the current-account deficit to an unprecedented 5 per cent
of GDP, about three times the level targeted in the program.
Stabilization leading to crisis
 The Turkish exchange-rate-based stabilization
program followed a familiar path with a surge in
capital inflows, an upturn in economic activity, a
significant appreciation of the currency, mounting
trade deficits, and rising exchange-rate risks
 Rapid exit of capital started in November 2000
 The Government undertook fresh commitments,
including further spending cuts and tax increases,
the dismantling of agricultural support policies,
liberalization of key goods and services markets,
financial sector restructuring and privatization.
 Continued real appreciation of the currency and
the growing trade deficit created considerable
uncertainty over the sustainability of the fixed
currency.
 http://www.radikal.com.tr/2001/02/20/t/index.shtml
 Massive flight from the Turkish lira could not
be checked despite rising interest rates, with
overnight rates reaching 5,000 per cent and
liquidity drying up.
 Since the attack on the currency threatened
complete loss of control over monetary policy
as well as a rapid depletion of international
reserves the government was forced to
abandon the peg and to float the currency,
again with the support of the IMF.
Policies after the 2001 Crisis
 Fiscal discipline
 Focus on primary surplus (i.e. budget surplus after
deducting interest payments)
 Reduction of social expenditures
 Cutting the subsidies to agricultural sector
 Monetary discipline tied to inflation targeting
 Floating exchange rate
 Flexible and informal labor markets
 Subcontracting (taşeron) in private sector
 Contract-based (sözleşmeli) working arrangements in
public sector
 Governance reform
 Privatization
 Autonomous regulative and supervisory institutions
1998
2007
2009
GDP
100
144.2
138.4
Inflation Rate
84.6
8.8
6.3
Investment rate
22.9
21.4
16.8
Public Deficit
(PSBR) as a share
of GDP
9.7
0.1
5.1
Current Account
(% of GDP)
0.7
-5.9
-2.3
Foreign capital and economic growth
 Annual Growth rate is 3.6 percent between 1998-
2007
 The same number was 4.9 percent between 1980-88
and 4.3 percent between 1989-1997. (Compare these
numbers with 6.8 percent from the period of ISI).
 The most important dynamics of growth turns out
to be capital inflows
 Until 1989 demand-induced growth resulted in higher
trade (current account) deficit that was financed by
external sources such as external debt
 Starting in 1989, it was the capital inflows that
triggered an economic growth by financing
government and private expenditures and by keeping
an appreciated domestic currency which led to
growing current account deficit
Foreign capital and economic growth
Foreign
Capital/GDP
GDP growth
rate
1984-1988
2.2
6.2
1989-1993
3.3
5
1995-1997
3.4
7.7
2000
8.1
6.3
2002-2007
9.8
7.2
Foreign capital and economic growth
 Another evidence for the changing relationship
between capital inflow and economic growth:
 Annual average growth rate fell from 4.3 (1989-1997) to
3.6 percent (1998-2007), while the annual average current
account deficit rose from 1 percent to 4.6 percent as a
ratio to GDP in the same period.
 Why did Turkey become more dependent on imports?
 Real appreciation
 Customs Union with the European Union in 1996
 Turkey actually had some advantages in terms of textile, however,
the main problem turned out to be the common trade policies
against third parties such as China
 Even the export industries started to rely more on
imported goods
 How to finance the external deficit
 Debt or non-debt generating capital inflows
 FDI played a significant role in the last period (2002-
2007)
Real exchange rate in Turkey
An increase indicates real appreciation
real exchange rate index (1995=100)
200
180
160
140
120
100
80
1994 crisis
2001 crisis
60
Export-growth
40
20
real exchange rate
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
Jan-87
Jan-86
Jan-85
Jan-84
Jan-83
Jan-82
Jan-81
Jan-80
0
 ''Merkez Bankamızın en son döviz rezervleri açıklandı ve
yeni rakamlarla tarihimizin yeni ve çok yüksek bir
rekorunu elde ettik. Yıl sonu itibarıyla 100 milyar dolar
hesabını yaparken, 2002 yılında, biz göreve geldiğimizde
27,5 milyar dolar olan Merkez Bankası rezervlerimiz, şu
an itibarıyla 103 milyar 114 milyon dolara ulaştı. Bu,
Türkiye'nin gücünü, Türkiye ekonomisinin gücünü ve
krizlere karşı dayanıklılığını ifade eden rekorun da
ülkemize, milletimize hayırlı olmasını diliyorum'‘
(R.T.Erdoğan, August 11, 2012)
 Görevi devraldıklarında Türkiye'nin Uluslararası Para
Fonu'na (IMF) olan borcunun 23,5 milyar dolar
seviyesinde olduğunu ifade eden Erdoğan, bu borcun
bugün itibarıyla 1,7 milyar dolara indiğini söyledi.
Distibutional effects of the recent period
Real
wage
index
Worker’s
U
productivity
U*
Terms of
Trade
(agricul)
Real int. Return
on hot
money
1997
100
100
6.8
8.3
100
17.5
17.6
1998
105
101.1
6.9
8.5
125
39.7
38.7
2000
130
116.1
6.5
10.9 101
-10
13.3
2001
107
115.6
8.4
12.3 78
23.5
-7.1
2002
95.8
125.9
10.3 14
8.4
33.1
2007
98
168.8
10.3 16.6 81.9
11.4
34.6
2008
98
167.9
11
17.4 Na
10.3
-8.9
2009
90.5
167.2
14
20.6 Na
5.4
17
78