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Macroeconomic Developments and Future Prospects Central Bank of The Republic of Turkey Erdem Başçı Vice Governor December 17, 2007 TUSIAD – CEPII Seminar Paris 1 Outline 1) 1) Turkish Turkish Economy Economy –– the the Past Past and and the the Present Present 2) 2) What What Went Went Right? Right? 3) 3) Change Change in in Growth Growth Dynamics Dynamics 4) 4) What What Needs Needs to to be be Done? Done? 2 Turkish Economy – The Past and The Present Inflation and Growth Trends in Turkey (1981-2006, percent) 1990-2001 9.5 2002-2007* 75 13.9 % 55 7.5 Inflation (CPI) 74.0 % Inflation (left axis) 35 GDP Growth 3.0 % 6.7 % 14.2 % Industy Production Growth 3.8 % 7.4 % Capacity Utilization 75.8 % 79.8 % -5 1.5 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 3.1 % 3.5 Growth (right axis) 15 Investment Growth 5.5 The Share of Turkish Exports in the World Total (1950-2006, percent) 0.8 0.7 Non-Farm Employment 2.6 % 3.8 % Liberalization and export subsidy policy period Import substitution policy period 0.6 0.5 Exports (USD) 8.8 % 23.2 % 0.4 Floating exchange rate period 0.3 Exports (Real) 9.4 % 14.5 % 0.2 Source: World Trade Organization, TURKSTAT 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 0.1 * As of 2007Q3 Source: TURKSTAT, CBRT 3 What Went Right? 100 89.4 77.7 80 Net Public Debt / GDP 69.7 63.7 55.2 60 45.0 (2001-2007Q3, percentage) 40 40.4 20 2001 2002 2003 2004 2005 2006 2007Q3 Source: Undersecretariat of Treasury 40 29.9 30 Credits to Private Sector / GDP (2001-2007Q3, percentage) 20 32.2 25.1 18.7 17.9 11.7 14.0 10 0 2001 2002 2003 2004 2005 2006 2007 Source: CBRT 4 What Went Right? Public Sector Borrowing Requirement (1975-2006) 20% PSBR 15% 10% 5% 0% -5% -10% PSBR (excluding debt service) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -15% Source: State Planning Organization 5 What Went Right? Corporate Taxes (percent, 2007) Source: OECD 6 What Went Right? Economic Performance and Governance (2006) Gross National Income per Capita 80000 70000 60000 50000 Norway Governance Indicators: Political Stability Rule of Law Voice and Accountability Regulatory Quality Government Effectiveness Control Corruption Denmark Iceland Ireland Switzerland USA 40000 Holland Canada France 30000 Germany Japan Italy Sweden Singapore Greece Hong Kong Israel 20000 N. Zealand Slovenia Korea Portugal Czech Rep. 10000 0 Hungary Venezuela Russia Argentina China Indonesia Turkey -8 -6 -4 Poor Governance Mexico Chile Turkey 2006 2002 -2 0 Tunusia Malaysia 2 4 6 8 10 12 14 Good Governance Trend line is y=a+bx+cx2 curve; y=GDP per capita and x=governance index. Source: World Bank 7 What Went Right? Turkey’s Place in Global Competition (2007) 140 125 131 117 120 Number of Countries 102 104 100 Turkey’s Ranking 80 60 40 49 48 42 40 53 36 53 40 59 44 75 59 80 65 65 66 71 59 54 53 40 20 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 0 Source: World Economic Forum, The Global Competitiveness Report 2007-2008 8 Change in Growth Dynamics Sources of Growth (average contribution, percent) Period Growth Rate* Capital Stock Labor Total Factor Productivity Finland 1970-2000 3.1 18.7 0.4 69.3 Germany 1992-2000 1.7 12.2 -15.9 64.2 Sweden 1979-2000 2.2 36.8 4.9 63.5 France 1970-2000 2.6 62.2 -8.0 63.2 Denmark 1970-2000 2.5 49.0 14.4 61.7 Belgium 1970-2000 2.6 30.4 5.8 57.0 Italy 1980-2000 1.6 26.0 9.5 35.3 Japan 1970-2000 3.5 25.1 12.2 26.0 USA 1970-2000 3.1 33.8 40.5 25.1 Canada 1970-2000 3.2 40.5 49.0 18.7 1972-2000 4.1 69.2 19.5 11.3 2002-2006 6.6 52.7 3.1 44.2 Turkey * Excluding indirect taxes on imports Source: OECD; Saygılı, Cihan, and Yurtoğlu (2006) 9 Change in Growth Dynamics Investments per Employee (constant prices) 5 • In the 1980s and 90s capital deepening was observed in services (mainly driven by construction sector and infrastructure investments). • Investments in industry remained flat. Industry 4 Investments in industry have picked up after 2001. 3 Services 2 1 Agriculture 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 0 Source: Saygılı, Cihan, and Yurtoğlu (2006) 10 Change in Growth Dynamics Capital and Labor Productivity (relative to EU-7 average) 0.50 7 Productivity of Capital (right) 0.45 Trend in labor productivity shifted in 2001. 6 0.40 5 0.35 Labor productivity (right) 4 0.30 0.25 3 Drop in productivity of capital was not due to convergence to EU average, but inefficiencies in the use of capital stock. 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 2 1972 0.20 Source: OECD, Saygılı, Cihan, and Yurtoğlu (2006) 11 Change in Growth Dynamics Capital Productivity in Turkey and major EU countries (1995 prices, USD) Turkey 0.4 0.3 Spain France There is still room for capital deepening. Belgium 0.2 Italy Germany Denmark 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 0.1 Source: OECD, Saygılı, Cihan, and Yurtoğlu (2006) 12 What Needs to Be Done: Productivity Convergence to EU Capital Stock per capita (PPP, 1995 prices, in thousands, USD) 300 Finland 1993 Finland 2003 250 Spain 2003 200 Spain 1993 150 100 Turkey 2003 50 Two success stories: • Finland: Productivity gains • Spain: Capital deepening plus productivity gains Turkey 1993 0 0 5000 10000 15000 20000 25000 Income per capita (PPP, 1995 prices, USD) Source: OECD, Saygılı, Cihan, and Yurtoğlu (2006) 13 What Needs to Be Done: Business Environment Ease of Doing Business * (Turkey’s Ranking, 2007) 136 Employing workers 128 Dealing with licenses 112 Closing a business 68 Getting credit Protecting investors 64 Ease of doing business 57 Trading across borders 56 Paying taxes 54 Starting a business 43 34 Enforcing contracts 31 Registering property 0 40 80 120 160 * Low scores are associated with better conditions for doing business Source: World Bank, Doing Business 2008 14 What Needs to Be Done: Energy Prices Electricity Prices for Industry (US dollars per kilowatt-hour including taxes,, 2006) Ireland Portugal Austria Hungary Turkey Mexico Slovakia Czech Rep. Spain Switzerland Poland South Korea USA Taiwan Norway New Zealand France Kazakhistan 0.00 0.05 0.10 Source: Energy Information Administration 15 What Needs to Be Done: Governance Governance Indicators of Turkey and EU-15 * (2006) 2.0 EU-15 1.0 Turkey 0.0 -1.0 Control of Government Regulatory Voice and Rule of Law Corruption Effectiveness Quality Accountability Political Stability *Governance indicators are between –2.5 ile +2.5. Higher forecast figures indicate better governance. Source: World Bank 16 What Needs to Be Done: Social Security Reforms The Ratio of Transfers from Budget to Social Security Institutions to GDP (percent) 4.5 3.5 2.5 1.5 2007* 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 0.5 * Forecast for 2007 Source: Undersecretariat of the Treasury, Ministry of Finance 17 What Needs to Be Done: Employment Costs Employment Taxes (as a percentage of labor cost, 2006) Source: OECD 18 What Needs to Be Done: Tax Burden Tax Effort Ratios in Turkey 1995-2004 Tax Effort Indicators (a tax effort ratio above one indicates excessive taxation) (1995-2004) Tax burden rising Tax burden remains elevated Tax burden stays light Tax burden easing Source: World Bank 19 What Needs to Be Done: Education Employment by Economic Activity (2002 Q3 – 2007 Q3, cumulative change, percent) 40 Mismatch Between Needs and Supply (Distribution of University Graduates 2003) Education Agriculture Computer Sciences France 9.3 0.3 3.0 Germany 7.7 2.1 3.9 United Kingdom 10.8 0.9 6.2 USA 13.1 1.0 3.9 Turkey 30.0 3.9 1.0 35.9 21.4 20 12.5 2.9 0 -20 Industry Services Construction Agriculture -40 Total Employment -24.3 Source: OECD; Saygılı, Cihan, and Yavan (2006) Source: TURKSTAT 20 What Needs to Be Done? Progress Progress in in any any of of these these reform reform areas areas will will add add to to the the growth growth potential potential of of Turkey. Turkey. 21 Macroeconomic Developments and Future Prospects Central Bank of The Republic of Turkey Erdem Başçı Vice Governor December 17, 2007 TUSIAD – CEPII Seminar Paris 22