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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