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Bulletin Number 95-3
March 1995
ECONOMIC DEVELOPMENT CENTER
I ^777^Oda
POLITICAL ECONOMY PERSPECTIVES ON THE
1994 TURKISH ECONOMIC CRISIS:
A CGE MODELING ANALYSIS
Erinc Yeldan
ECONOMIC DEVELOPMENT CENTER
Department of Economics, Minneapolis
Department of Agricultural and Applied Economics, St. Paul
UNIVERSITY OF MINNESOTA
POLITICAL ECONOMY PERSPECTIVES ON THE 1994 TURKISH ECONOMIC CRISIS:
A CGE Modeling Analysis
A. Ering Yeldan
University of Minnesota, St. Paul, visiting
Bilkent University, Ankara
February, 1995
Research for this paper was supported by a project grant from Harb-Is (Union for Defense
Industry Workers of Turkey). I wish to acknowledge my indebtedness to Terry Roe,
Xinshen Diao, Korkut Boratav, Tuncer Bulutay, Merih Celasun, Bilsay Kurug, Ahmet
Ertugrul, Ahmet Tdktik, and to members of the Harb-Is Research Department for their
invaluable comments and suggestions; and to Ahmet K6se and Alper Ydmaz for their
diligent research assistance. Needless to say, none of them bear any responsibility on
the possible errors and/or emissions of the propositions that the paper claim.
POLITICAL ECONOMY PERSPECTIVES ON THE 1994 TURKISH ECONOMIC CRISIS:
A CGE Modeling Analysis
ABSTRACT
This paper investigates the role of the deterioration of the Turkish public
sector balances in the latter half of the 1980's and the evolution of the
economic crisis with the aid of a computable general equilibrium model. The
theoretical basis of the model utilized in the paper rests upon the Walrasian
and the Structuralist/Keynesian macro foundations. The model recognizes 15
production sectors, 3 socio-economic income groups and a central government;
and simulates the production, income distribution, consumption, capital
accumulation and foreign trade processes of the national economy within a
simultaneous system of algebraic equations. The distinguishing feature of the
model is that, it accommodates monopolistic mark-up pricing rules in the
industrial sectors, and endogenously solves for capacity utilization and
unemployment level through Keynesian mechanisms of effective final demand.
The model investigates the evolution of the crisis under three main headings:
(i) the role of the financial crisis and the unprecedented deficit in the
public sector balances; (ii) the roles of the foreign borrowing strategy of
the state and the short term foreign capital inflows on balance of payments
and the foreign exchange rate; and (iii) the role of the political-economic
relations of income distribution and inflationary processes emanating from
real wage increases and non-competitive pricing behavior in the industrial
sectors.
The general equilibrium results of the model underscore the importance of
intra-class relations of income distribution and conflict in the evolution of
price movements in the Turkish economy; and suggest that the sources of the
crisis lie in the historical role of the administrative interventions of the
state towards protection of the capitalist and rural incomes, which would
otherwise be squeezed out in favor of wage-labor in the late-1980's.
2
POLITICAL [O.,IONOMY PERSPECTIVES ON THE 1994 TURKISH ECONOMIC CRISIS:
A CGE Modeling Analysis
Since January 1994, the Turkish economy has suffered from a major financial crisis
which had been followed by a real contraction. Real Gross Domestic Product has declined
more than 5 percentage points over the year, with inflation rate soaring to almost 150%,
and the number of unemployed increasing by at least 600 thousand additional jobless
people. It is a generally well-accepted fact today, that the main sources of the crisis
can be traced down to the culminating pressures of large fiscal deficits on the part of
the state.
As a matter of fact, with observations of Public Sector Borrowing
Requirement (PSBR) reaching around to 13% of the GDP by the end of 1993,' it should be
regarded as no surprise that the fiscal imbalances would eventually erupt into a major
financial disequilibrium in the way we have witnessed over 1994.
In this paper, rather than merely summarizing these commonly known facts once again,
I will attempt to analyze the basic underlying processes of the crisis from a political
economy perspective of class conflict and pressure, together with conflicting interests
on income distribution and accumulation. Thus, instead of regarding the realized fiscal
imbalance of the state as a given fact -as if it originated in a vacuum with some
abstract (a-historical) dynamics on its own- the paper proposes to investigate the
underlying structural causes of the fiscal-cum-financial crisis from the point of view
of pressures culminating from conflicting private interests over partitioning of
national output.
I believe it is only through such a class-based perspective of
conflicting claims, that the very sources of the crisis can be dis-integrated and be
depicted in a historical perspective.
To this end, the paper employs a "Computable General Equilibrium" (CGE) model in
order to investigate the evolving patterns of the crisis in the Turkish macro-economic
context.
The theoretical basis of the model rests upon the Walrasian general
equilibrium system of optimizing agents facing endogenous price signals. In an attempt
to reflect various structural features and bottlenecks thought to prevail in the Turkish
economy -especially in the manufacturing sector- the model accommodates various market
imperfections and rigidities borrowed from the structuralist/Keynesian tradition.
Utilizing the CGE model as an "economics laboratory", I investigate the factors leading
to the fiscal disequilibria and finally to the culminating crisis through explicit
modeling of the strategic behavior of the antagonistic private agents in the factor and
product markets.
Our strategy will be as follows: first the model will be calibrated to the Turkish
historical path 1990-1993 (section II) so as to generate the evolution of the 1994
crisis; and then, I will try to disentangle the various socio-economic processes behind
this historical path via a series of counter-factual simulations (section III). In what
follows, I introduce the main features of the model in section I, and reserve section IV
for summary comments and conclusions. The formal algebraic equations of the CGE model
are listed in the Appendix of the paper.
I. The Computable General Equilibrium Model
I-1. The General Structure and Dimensions
The CGE model employed in this study is based on the recent 1990 Input-Output Table
of the Turkish economy published by the State Institute of Statistics (SIS, 1994a). For
the complete macro structure, it utilizes the 1990 Social Accounting Matrix which is
discussed in full detail in K6se & Yeldan (1994). Formally, it is built around 15
production sectors; 5 socio-econoiiic classes; 3 behaviorally distinct private households
and a central government.
It seeks to represent the economic activities of its
distinguishing agents via a simultaneous system of algebraic equations, which is brought
into equilibrium with the aid of a set of endogenous prices, wage rates and the foreign
exchange rate.
The theoretical structure of the model is based on a synthesis between the elements
of the traditional Walrasian general equilibrium framework (Dervis, de Melo & Robinson,
1982), and the structuralist (Taylor, 1981; 1991) schools of thought in an attempt to
reflect a closer and more realistic depictions of the Turkish economy. Based on this
synthesis, the distinguishing feature of the macro closure utilized in the model is a
series of macro adjustments on income distribution, foreign exchange, and fiscal
expenditures so as to create the necessary pool of aggregate savings to finance a predetermined level of investment expenditures. Within this adjustment process, in order
to sustain the required level of savings, three mechanisms are put to work: (i) within
4
classic Kaldorian income transfer is called for from rural and
the private sector
worker households with lower saving propensities to high-saving capitalist classes; (ii)
a portion of private savings is claimed by the state as coercive, forced savings in
order to finance its fiscal deficit; and finally (iii) any insufficiency of the
aggregate domestic funds is closed by alignments in the foreign rate of exchange and by
foreign transfers.
In the manufacturing industries, where a significant degree of concentration and
monopoly power are thought to be exercised, product prices are set through fixed
producer mark-ups over variable costs. Consequently, in the manufacturing sector the
level of output supplied is determined by the aggregate final demand, given the mark-up
For agriculture and services, given the lack of empirical
induced market price.
evidence on market structures, marginal cost pricing rules are hypothesized along with a
neo-classical production function to determine the output supply.
Given the mark-up based price structure, the model is able to capture the
endogenous inflation pressures originating from structural rigidities and conflicting
claims of various social classes on national output. The possibility of mark-up pricing
results in both a distorted price structure and an income composition favoring
profit/rent appropriators as discussed extensively in Boratav (1991) and Boratav, Tiirel
& Yeldan (1994).
The model distinguishes five socio-economic classes derived from their respective
categories of income formation: Rural class earns the agricultural value added;
industrial labor, receives manufacturing and energy sectoral wages; while services labor
receives the services wages as income. The two urban capitalist classes, industrial and
commercial/financial, capture the respective sectoral (residual) profits.
A major limitation of the model, with respect to overall income generation, is its
restricted capability to account for generation of financial/rentier incomes based on
arbitrage possibilities in the banking and the financial sectors.
Evidence suggests
that with extensive liberalization in the financial markets and the capital account in
the late 1980's, there has been a shift in the secondary relations of distribution
favoring rentiers and the financial centers (see, e.g., Boratav, Tiirel & Yeldan, 1994;
Yeldan, 1995).
However, given its Walrasian structure, the model focuses exclusively on
the real sphere of the domestic economy and does not have the appropriate mechanisms to
capture financial flows and the consequent patterns of rentier income generation. 2
In
this setting, the so-called profit income of the financial bourgeoisie, as distinguished
in the model, is derived from the value added of the commercial and financial services
sector by deducting wage payments. Thus, the financial sources of income can only be
captured to the extent they emanate from transactions with the real sectors of the
economy.
In the model the private agents and the public sector are distinguished as two
different bodies carrying out decisions on savings and composition of final demand.
Within the private sector, the functional sources of income are channeled into 3 prototype private household groups: rural, urban-labor and urban-capitalist. It is through
these three behaviorally distinct households that private saving and consumption
activities are represented.
1-2. Production Technology and the Labor Market
On the production, it is assumed that output of each sector is produced by a single
representative firm. The primary inputs consist of aggregate (physical) capital and
labor. Labor input is conceptualized into two categories of rural and urban, which are
employed, respectively, in agriculture and the non-agricultural (industry and services)
sectors.
The "capital" input is a heterogeneous entity for each sector, made up by the fixed
capital composition coefficients matrix, known in the literature as the B-Matrix. Stock
of capital, once installed, is regarded fixed and sector-specific. Yet, at the end of
each period, sectoral aggregate physical capital stocks are updated with the addition of
fixed investments, net of depreciation. Following Celasun (1986) and Dervis et. al.
(1982), the gestation lag of new fixed investments is regarded as one year. Sectoral
depreciation allowances are compiled from the "depreciation costs" line of the 1990
Input-Output Table.
The model regards aggregate labor supplies as fixed and does not account for workleisure choices at the worker-household level. Consequently, producers face an
infinitely inelastic labor supply schedule independent of the wage rate. Labor demand
decisions, on the other hand, are sensitive to real wage movements, and are derived from
the marginal productivity conditions.
In the urban labor market, nominal wage rate is
exogenously set from outside of the model in an attempt to account for the rapid
advances in industrial labor remunerations observed during 1990-1993. Thus, the urban
labor market clears through quantity adjustments on employment, with a portion of urban
labor remaining unemployed.
For the agricultural sector, however, given lack of sound
6
data, the model resorts to flexible movements of the rural wage rate to clear the rural
labor market.
In the production sphere, the most important distinguishing attribute the model is
with regards to its specification of the pricing strategy in the manufacturing sectors.
In manufacturing, final product price is determined by imposing a fixed mark-up rate
over the average variable costs. This specification is designed to reflect the
oligopolistic market power which diverts the market price from the marginal cost, yet
guarantees the producer a steady and given level of profit income. In response to
increased wage and intermediate input costs, the producer secures its level of profits
via application of the fixed mark-ups, thereby passing increased production costs on to
the final consumers, inflating the overall producer price index level. This mechanism
generates an important source of structural inflation in the manner described in Taylor
(1991) and Bourguignon, de melo & Suwa (1991).
Figures 1 and 2 depict these processes in the manufacturing sectors. Given the wage
rate Wo in Figure 1, and the average variable costs as AVCo in Figure 2, the imposition
of the mark-up, p, sets the product price at PX;
and the quantity demanded can be read
0
from the aggregate demand schedule as To. An exogenous increase in the wage rate to Wi,
pushes the average variable costs to AVCi, leading to a higher final price and a lower
amount of quantity demanded. With lagging aggregate demand, output supply falls and, as
specified in Figure 1, unemployment increases.
[Insert Figures 1 and 2 approximately here]
Under these behavioral assumptions, the sectoral production technologies are
represented by constant elasticity of substitution (CES) production functions with
capital and labor as primary inputs. The elasticities of substitution are adopted from
the previous CGE modeling applications on the Turkish economy. As a general rule, the
capital and labor substitution elasticity is regarded to be higher in agriculture as
compared to industry and services.
In the manufacturing sectors, where mark-up induced pricing behavior is thought to
be prevalent, market supply is determined by the endogenous rate of capacity
utilization.
In this manner, denoting capital by K, labor by L, the underlying
production function by F(K,L), and the capacity utilization rate by U, output supply
becomes,
7
wage
1
W0
Lemand
tmployment
Figure 1.
The urban-labor market
pr
VC 0
T
T
I,
quantity
u
Figure 2. Oligopolistic pricing in the manufacturing industries
Xs = U F(K,L).
In this fashion, under the pre-determined price, product market equilibrium is obtained
by capacity adjustments, which in turn lead to reduced employment and supply at the
sectoral level.
1-3. Determination of Foreign Trade
The model regards world prices as exogenously given (the small country assumption).
Domestic import and export functions are derived through the so-called Armington
commodity specification of the traditional CGE modeling exercises. Accordingly, within
each traded sector, the domestically produced good (DC), the import (M), and the export
(E) are differentiated from each other by way of imperfect substitutability. Product
differentiation, in this context, is given from outside the model by way of independent
specification of an elasticity of substitution (in the case of import) and of
transformation (in the case of export). The import and export functions of the economy
are derived, then, as solutions to the respective optimization problems of the consumers
and the producers, given the relative price signals.
Determination of imports at the sectoral level is depicted in Figure 3. Domestic good
and sectoral import form a consumption composite along the convex isoquant yielding
the final consumer a given level of satisfaction. Given the import-domestic good
relative price ratio pM, cost minimizing amount of import is Mo. If the relative
price of import increases to Pm (by way of, say, increased tariffs or currency
depreciation), imports are reduced to Mi. Determination of exports follow the same
principles.
In Figure 4, combinations of supply to the domestic market, DC, and
export, E, are given by the concave transformation possibility frontier. Faced
with a relative export-domestic good price ratio PE, producer maximizes its revenues at
the export allocation Eo. An increase rate of foreign exchange (depreciation) leads to
a higher export to domestic price ratio, PE, increasing sectoral exports to the
level Ei.
[Insert figures 3 and 4 approximately here]
Given the aggregate demand for imports and export earnings in foreign currency
8
MO
M1
composite good
schedule
MO1%..
=
P%.,I
AA
oumestii guuu
Figure 3. Determination of import demand
domestic good
Figure 4. Determination of export supply
determined in this manner, the balance of payments constraint faced by the economy
becomes:
P'M =
PE. + REMIT + FSAV + GBOR
where REMIT denotes exogenous (in)flows of workers' remittances from abroad and GBOR
denotes government borrowing from the international finance centers. Residual foreign
savings to close the current account deficit is given by FSAV. These three quantities
are set at their historically realized levels in the model experiments. The balance of
payments equilibrium is maintained by endogenous adjustments of the (nominal) exchange
rate. With complete liberalization of the capital account and the shift to a fully
convertible foreign exchange rate in 1989, this approach is definitely the most
appropriate one in the Turkish context.
1-4. Income Generation and Fiscal Balances
Private household incomes are generated from sources of value added income,
transfers from the central government budget, and exogenous transfers from the rest of
the world. Private savings are determined via fixed saving propensity parameters out of
private disposable incomes; the residual income being spent in final consumption
expenditures. Sectoral allocation of consumption expenditures are given by fixed shares
(with the underlying assumption that preferences are Cobb-Douglas) derived from the 1990
Input-Output Table.
Another distinguishing attribute of the model is its detailed description
of the public accounts so as to trace out the inflationary pressures emanating
from the fiscal (im)-balances of the state. The public disposable income consists of
income taxes on the private sector, tariffs on imports, and the production and corporate
taxes levied on the producers. Aggregate public expenditures, on the other hand, are
composed of public consumption and investment, current transfers to the private
sector, subsidies on exports, and debt repayments to the rest of the world. In line
with the macro closure imposed in the model, the public savings rate and the aggregate
level of public investment are regarded as exogenous policy instruments, given
their historically realized values. In general, planned public savings fall short of
9
the thereby emerging public savingand
the realized investment expenditures;
investment deficit is covered through foreign borrowing plus forced transfers from
the private savings pool. This mechanism entails, on the one hand, excess demand
disequilibria in the product markets leading to inflationary pressures; and, on the
other hand, leads to real appreciation of the domestic currency through induced inflows
of foreign borrowing and short term direct portfolio investments. 3
The macro-closure of the model can be summarized more formally as follows: Let
GREV, GDTOT and GSAV denote, respectively, the public disposable income, public
consumption expenditures and public savings. Then,
GREV = GDTOT + GSAV
Here, GDTOT is taken exogenous at its current (nominal) historical value, and GSAV is
determined via application of the historically realized public saving rate out of public
With aggregate public investments, GINV, pre-determined (again at its
income.
historical value), the realized saving-investment deficit of the public sector becomes:
GSIDEF = GINV - GSAV
This deficit is the main source of the public sector borrowing requirement which, in
turn, is to be financed from the private savings surplus (HHSAV-PRINV), and net inflows
from the foreign economy (FSAV-ER). Thus, the overall macro-equilibrium of the domestic
economy becomes:
GSIDEF = HHSAV - PRINV + FSAV-ER
This mechanism -which blends elements of neo-classical closure on the private
sector together with a Kaldorian pre-determined investment level on the part of the
public sector- has a dual implication for the domestic economy: on the one hand, it
generates inflation of the overall price index, contracting private real incomes; and on
the other, through depleting investable funds, it reduces the productive potential of
I believe that this structure
the economy, restricting it to a lower growth path.
captures quite successfully the most recent Turkish reality with culminating
inflationary pressures at rates of 60 to 70 percent per annum; faltering and erratic
rates of growth with boom-and-bust cycles of real production; and stagnant exports and
10
an unprecedentedly high current account deficit accompanied by currency appreciation (in
purchase-price-parity terms).
This summarizes our discussion of the main attributes and distinguishing features
of the CGE model. We now turn to applications to the Turkish historical growth path
1990 through 1993 in the next two sections.
H. Historical Simulations of the Model, 1990-1993
Here I first utilize the model to track the historical 1990-1993 path of the
Turkish economy. It is important to note at the outset here, that one cannot expect for
any model to generate the "real life" on a one-to-one basis. Obviously, any modeling
exercise is but only a gross approximation of the reality, with the most important
variables of interest to be focused at a more detailed fashion, leaving others of
secondary interest to be outside the realm of the model's coverage. In this exercise
then, we focus first and foremost, on the variables and economic relations that deem
primary importance for our purpose at hand, namely that of analytically depicting the
underlying structural processes and main mechanisms which have culminated to the 1994
crisis.
To this end, the most important variables of interest that one will need to track
closely, offer themselves quite naturally to the list of: the annual rate of domestic
inflation, the exchange rate, grossrnational product and sectoral production, wages,
employment, fiscal balances, foreign trade transactions, and the macro aggregates such
as consumption, savings and investments. The values of the historically realized levels
of the a-forementioned variables between 1990 and 1993 are to be contrasted below with
the model's simulation values in Tables 1, 2 and 3, and the Figures 5, 6, and 7.
The historical validation exercise is carried out in 3 steps as summarized in Celasun
(1986: 44): first, the model's algebraic equations are calibrated to a social accounting
matrix of a given base-year data set (1990).
Here the values of various share and shift
parameters of the algebraic equations are generated so as to reproduce the base-year
data set as a "solution" of the model. Thus, the "base-year" solution values of the
model exactly replicate the SAM values of 1990. Beginning from this solution set, in
the second stage, the historically observed values of various exogenous variables and
policy parameters over the relevant time span, 1990-1993, are fed into the model as
given data. In the third stage, the technical parameters of the model are re-adjusted,
11
if necessary, in an iterative manner until the necessary "convergence" of the endogenous
variables with their historical values is achieved.
The values of various public sector aggregates that are taken as exogenously given
under the historical validation exercise are listed in Table 4. Here, the realized
ratios of the public sector's consumption, savings and investment to the aggregate GNP
are utilized as given policy variables; and are parametrically changed in the next
section, in our quest for the answer to "what would likely to have happened if the
respective policy actions had assumed different values?". These "counter-factual" model
simulations will provide valuable insights on the role played by the government's policy
actions on the culminating crisis.
In the foreign economic sphere, inflows of "foreign capital" and "workers'
remittances" are set at their given values. With respect to the world prices of traded
commodities, a uniform rate of 5% foreign inflation is assumed. In the labor markets,
following the "supply of civilian labor" line of the SIS Labor Statistics, domestic
labor supply is increased at a rate of 1.5% per annum. Finally, in the non-agricultural
sectors, an annual rate of 3% growth of neutral total factor productivity is assumed.
We take the model's historical performance in turn.
II-1.
The Historical and the Model Simulation Values of Domestic Prices, Exchange Rate
and The Macro Aggregates, 1990-1993
The three most important prices for our analysis are the overall domestic price
level, the foreign rate of exchange (TL/US $), and the urban-labor wage rate. Among
these, the first two are solved endogenously by the model, whereas the nominal wage rate
is regarded as given by non-economic factors.
The 1990-1993 historical and the simulated values of the price level and the
exchange rate are given in Table 1. The domestic price level reflected in the model is
the "producer price index" and is a weighted average of the gross sectoral producer
prices. The foreign exchange rate reflects the "annual average" of the daily domestic
currency values of the US dollar. In the model, this variable is endogenously solved to
close the balance of payments accounts. As can be observed both variables trace out
their historical values closely, the highest discrepancy being observed in the 1991 rate
of foreign exchange with a divergence of 9%. 1991 is the year when foreign savings
turned into negative and the remittances declined by %12. Yet, in the same year, the
12
current account balance was observed to yield a surplus of $258 million. Thus this
asymmetric movement in the balance of payments results in the observed divergence as the
In the remaining two years,
model tries to account for these opposite trends.
discrepancy of the simulated value of the exchange rate is less than 0.5%.
[Insert Table 1 approximately here]
Figure 5 portrays the urban-labor market. As stated above, nominal wages are given
exogenously.
The historical wage rate developments are adapted from the SIS
Manufacturing Industry Surveys, and, in general, represent the "organized/formal" labor
wages. In this regard, by implementing the manufacturing wage figures over to the whole
economy, the historical data carries a bias towards exaggerating wage cost increases in
the specified period. Consequently, in the model simulations, the urban wage rates are
raised by 40% in real terms over the three years. In nominal values this figure amounts
to an increase of 465%.
[Insert Figure 5 approximately here]
The rate of unemployment is depicted in reference to the left-hand axis of Figure
5. The simulated unemployment ratio exceeds the official historical rate by as much as
4 percentage points; but generally follows the realized trend. Considering that there
exists important differences in the definitions of the unemployment concept used in the
model vis-a-vis the official statistics, and the dubious quality of the labor statistics
overall, the model solutions in the labor market were regarded as "sufficiently close"
to the historical realizations.
In fact, the production figures as reported by the model track their historical
values very closely; and reproduce the value of gross national product both in net
factor prices and in producer values. As can be observed from Table 2, the only
discrepancy in the nominal GNP is observed in 1993, at the rate of 1.5%. Components of
expenditures on the national product are listed in the remaining lines of Table 2, where
the model's expenditure structure is found to compare closely with the historical
structure. 4
[Insert Table 2 approximately here]
13
Table 1. Prices, Wages and the Foreign Exchange rate
1990
Price Level (a)
Foreign Exchange TL
Urban Wage index(b)
Price Indexes:
Agriculture
Mining
Industry
Model
1991
Historical
Model
1992
Historical
Model
1993
Historical
100
2607
100
158
4565
202
159
4181
202
258
6887
353
257
6882
353
415
10934
565
408
11007
565
100
100
100
146
163
172
151
163
155
255
263
267
245
262
253
421
426
448
398
413
395
Notes:
a. Producer Price index
b. In nominal prices (regarded as exogenous to the model)
Table 2. Gross National Product and the Macro Aggregates
GNP (a)
GNP(f.p)(a)
Model/Hist GNP
Composition of GNP (%)
Pub Disp Income
Public Consumption
Public Savings
Public Investment
Public Sav-lnv Deficit
Private
Private
Private
Private
Disp Income
Consumption
Savings
Investment
Foreign Deficit (b)
1990
395.3
361.4
1991
Model Historical
621.1
622.5
561.7
562.4
1.0
1992
Model Historical
1072.1
1069.1
969.1
967.5
1.0
1993
Model Historical
1788.7
1818.3
1638.6
1617.2
1.0
13.5
10.2
3.3
8.6
5.2
13.1
12.9
0.5
8.8
8.4
11.7
11.6
0.5
7.6
7.3
12.5
13.5
-1.0
7.4
8.5
11.6
12.6
-1.0
6.8
7.9
10.3
13.7
3.4
6.9
10.4
86.5
69.1
16.8
14.9
88.2
69.4
18.7
10.3
88.3
72.0
16.3
8.5
88.9
70.1
18.8
12.3
88.4
73.3
15.1
9.4
90.7
71.2
19.5
14.1
3.3
-0.1
-0.2
2.1
2.1
5.3
Notes:
a. SIS, new GNP series, in current trillion TL.
b. Balance of payments, "capital movements" item.
Sources: Department of Treasury; SIS; Boratav et.al (1994).
-3.4
6.9
10.3
5.4
Figure 5. Manufacturing Wages and Unemployment
Unemployment rate
f)
0
12
10-
Wage Rate
rI
-
k
cn
I UU
Wage rate
-IMM-N-ummm
140
.
120
8
-
100
80
6
U Model
D Historical
60
40
2
20
0 -
--
--
-
1990
1991
1992
Years
-
1993
0
1-2. The Historical and the Model Simulation Values of Foreign Trade Variables, 19901993
Variables pertaining the foreign trade relations are documented in Table 3. We
observe that even though "import" variable is tracked closely, the model's "export"
figure suffers from higher discrepancies vis-a-vis to its realizations. (See Figures 6
and 7). The foreign currency values of aggregate exports generally track the historical
path, yet, a band of close to $ 1 billion dollars are kept between the simulated and the
realized values. Here the important data problem was to convert the export magnitudes
which were reported in Turkish Lira units in the SIS 1990 Input-Output Table, into
foreign currency equivalents by using a single (yearly average) foreign rate of
exchange. This was then complemented with export data obtained from other sources
(mainly from the Treasury Trade Statistics) for the rest of the period. In reality, the
foreign exchange rate adjusts daily, and thus, the aggregate value of foreign trade
transactions recorded in domestic versus foreign currency denominations is expected to
yield differences, especially when there is a need to reconcile different data sources.
In a similar vein, the composition of exports reported in the SIS Input-Output Table was
not consistent with the similar data reported by the Department of Treasury Trade
Statistics, which was the main source of foreign trade data for the post-1990 period.
In particular, exports of primary agriculture were substantially lower in the SIS data.
However, in order not to violate the overall consistency of the 1990 SAM balances
reflected from the SIS, I had to accept the divergencies of the Input-Output data as the
given structure.
[Insert Table 3 approximately here]
[Insert Figures 6 and 7 approximately here]
The values of the exogenous variables along the historical path are documented in
Table 4.
Table 5, in turn, lists the sectoral mark-up rates implemented throughout the
validation exercise, along with the endogenous solution values of the "capacity
utilization rates".
In the course of the historical path, based on the evidence of
Istanbul Chamber of Industry (1993) data, the mark-up rates are adjusted upwards by 20%
between 1990 and 1991; and held at their respective rates onwards.
14
Figure 6. Ex orts
16
Historical
Model
1412-
-
10CO
en
o
8 -
5m
6-420
1990
t
1991
Years
I
i
i
1992
1993
Figure7. Imports
30-
Historical
Model
25
•n
Wo.
15
m
105
01990
-
1
1991
1992
Years
1993
Table 3. Foreign Trade
Exports (mill $)
Composition of exports (%)
Agriculture
Industry
1990
12959
1991
Model Historical
13593
11320
1992
Model Historical
14715
13425
1993
Model Historical
15349
14379
6.2
18.1
81.9
9.1
90.9
19.7
80.3
92.5
14.8
85.2
93.8
15.1
84.9
22302
Imports (mill $)
Composition of imports (%)
5.9
Agriculture
12.9
Consumer manufact
81.2
Producer manufact
21909
21047
24596
22872
28388
29429
4.2
3.8
13.8
4.5
13.1
82.4
82.4
5.2
13
81.8
4.3
12.7
83.1
13.2
82.6
7.5
5.8
13.9
80.3
Table 4. Exogenous Variables under the Historical Simulation
(In nominal prices)
1990
34225.80
Public Investment
43083.50
Public Consumption
16239.20
Current Transfers
3.47
Public Savings/GNP (%)
3.12
Public Factor Income/GNP (%)
-4280.70
Public Foreign Borrowing (a)
12928.20
Foreign Deficit (b)
3248.00
Workers' Remittances (c)
Hicks-neutral productivity growth (%)
1993
1992
1991
54761.30
80178.30
27606.60
0.44
0.65
1326.80
-456.60
2819.00
3.00
79403.80
144802.10
46931.30
124664.10
246163.50
131407.60
-1.04
-3.42
-0.08
1571.90
0.03
1936.30
95126.80
2790.00
3.00
21351.40
3008.00
3.00
Notes:
a. Net foreign borrowings item in the central budget accounts of the Treasury.
b.Balance of payments, capital movements item; converted into TL using the midyear foreign exchange
c. Million US$
Table 5. The Mark-up Rates and Capacity Utilization in Manufacturing Industry (%)
Food Processing
Textiles, Clothing
Chemicals
Petroleum Products
Soil Products
Metals
Machinery
Mark-up Rates
1993
1990
22.2
26.7
37.4
31.1
36.1
30.1
42.8
35.6
58.1
21.1
29.9
Capacity Utilization Rate
1992
1991
1993
95.1
91.5
92.1
99.9
89.7
87.9
89.8
69.7
95.3
90.6
90.3
95.6
83.1
85.4
85.9
25.4
89.3
92.5
92.3
35.9
86.1
89.4
88.9
99.4
[Insert Table 4 approximately here]
[Insert Table 5 approximately here]
Model results indicate that the highest rate of capital utilization is realized in
the petroleum products industry, with the lowest rate being observed in chemicals and
the soil products. It has to be noted here, that the capacity utilization figures as
reported by the model do not suggest any propositions with regards to sectoral
managerial activity and/or marketing difficulties as such, but should be taken mainly as
a "technical" variable to close the product market commodity balances. With the final
price pre-determined by the fixed mark-ups, the marketed output is adjusted by the
"utilization" parameter in an attempt to bring forth equilibrium with aggregate demand.
Thus, the size of the capacity utilization rate should be interpreted as an indicator of
the overall vigor of the domestic economy along the lines of Keynesian effective demand,
rather than as a marketing problem of stock management.
III. Evolution of the Crisis and Its Components
In this section, I will utilize the 1990-1993 simulated growth path as a benchmark
to investigate quantitatively the processes behind the 1994 crisis via a set of counterfactual scenarios. I take up three interrelated issues: (i) the role of the financial
crisis and the unprecedented deficit in the public sector balances; (ii) the roles of
the foreign borrowing strategy of the state and the short term foreign capital inflows
on balance of payments and the foreign exchange rate; and (iii) the role of the
political-economic relations of income distribution and inflationary processes emanating
from real wage increases and non-competitive pricing behavior in the industrial sectors.
I-1. Fiscal Balances of the State: Experiment El
Over the analyzed period, the most striking indicator over the public sector
balances pertain to its borrowing requirements. As a ratio of GNP, the PSBR increased
rapidly from 7.4% in 1990 to reach 10.9% in 1991, and has shown a rigid stability at
that plateau. Concurrently, volume of public savings deteriorated severely, and fell
15
from 3.5% of GNP in 1990, to 0.4% in 1991, and to -3.5% in 1993. This collapse was also
reflected on public investments, which experienced a decrease of 3.8% annually in real
terms over 1990-1993.
In addition to these developments, net factor earnings of the public sector -an
item which consists mainly of net revenues of the state enterprises- fell from
their GNP ratio of 5% in 1985, to 3.1% in 1990, and to 0.6% in 1991, with being
practically zeroed out in the remaining of the period. Thus, the public sector has
suffered an income loss of close to 5% of the GNP in just five years. On the other
hand, the 1993 value of the current transfers, which is the major expenditure
item in the fiscal accounts, exceeded its 1990 level by 70% in real terms,
amounting to an increase of 6.6-folds in nominal prices.
Had these adverse developments not occurred in the public sector balances, what
would their consequences be for the domestic economy? How would the macro balances
differ from the realized path? In this first experiment, I will take these questions
entirely at an hypothetical level in the abstract, to study quantitatively the
contribution of the deterioration of the fiscal balances on the evolution of the crisis.
Under Experiment El, I first increase the public savings-GNP ratio to its 1980's average
of 4%, from its realized value of -1.3% over 1991-1993; and reduce the annual rate of
increase of nominal public consumption expenditures from 78% to 45%. Likewise, the rate
of growth of current transfers is reduced to 45% in nominal terms; and finally, to
compensate for the revenue losses of the state, net factor earnings of the public sector
is increased to its 1980's average of 3% of the GNP, from the 1990-1993 average of 0.3%.
The results of the experiment are documented under the heading El in Tables 8, 9 and 10.
The simulated rate of inflation (in producer prices) is portrayed in Figure 8.
Accordingly, under the assumptions of the experiment, the annual rate of price increase
is calculated to average 35% over the 1990-1993 period, down from its historically
realized rate of 60%. This result is further complemented by positive developments in
employment, which increases by 2 index points; and in production, where real GNP
increases by 3.1% over its 1993 value.
[Insert Figure 8 approximately here]
The experiment results reveal an annual increase of 19% in the public disposable
income in real terms. This is possible because of the implemented parametric increases
in the net factor earnings and also due to the increased tax earnings as a result of
16
Figure 8. Domestic Inflation Rate: Experiment E1
Arr
43U
400
350
300
.
250
'
200
El
150
100
50
0
1990
1991
1992
Years
1993
expansion in the economic activity. With explicit assumptions on public expenditures
calling for real reductions through the experiment, the public saving-investment gap is.
reduced by 26.3% compared to its 1993 value, attaining a ratio of 7.4% to the GNP.
[Insert Tables 6, 7 and 8 approximately here]
At this juncture we should ask the following: "Is it possible to make such an
isolated assessment of fiscal balances of the state, independent from all the historical
socio-economic developments of the period?" In order words, could the Turkish state
have replicated the model's technical results which were obtained under a set of
exogenous assumptions? This question invokes the political economy issues of income
distribution and real income generation within the private sector.
Table 8 suggests some interesting generalizations on this issue. For instance we
observe that, under the assumptions of the experiment, the real income level of the
urban-capitalist household falls by %4.2 in 1991, and by 5.2% in 1993, as compared to
its historical values. In similar vein, rural incomes also suffer a loss of 3.1%; with
the urban-workers becoming the only group which becomes slightly better off. The major
reason why the former groups suffer a loss is because of the reduction of the current
government "transfers" to the private sector and diversion of factor incomes in favor of
the public sector. The worker household maintains its income mainly due to the fact
that nominal wages are assumed constant at their historical levels throughout the
experiment. Consequently, under the assumptions of the experiment while public income
improves, private incomes erode.
One can underline the experiment results in the following manner: in the Turkish
economy under the conditions of the early 1990's, during when urban real wages scored
rapid increases, and the production and export performance of the domestic economy gave
faltering signals, the rapid erosion of the fiscal balances of the state served for the
protection of the urban-capitalist and rural incomes in real terms. This protection
amounted to as much as 5.9% for the urban-capitalists, and to 3.1% for the rural
households. The costs of this "protection" to the domestic economy entailed the rapid
surge of the domestic price inflation from its possible annual rate of 35% to 60%, and
the loss of aggregate investment growth of 17.8%, and export revenues of 3.8%.
Thus, I advance the following proposition: in the Turkish economy the public sector
fiscal crisis of the early 1990's have served for the crucial function of sustaining and
re-distributing the private capitalist incomes. At the micro level, this meant
17
Table 6. Macro Economic Indicators: Experiments E1 & E2
Historical (a)
1991
1993
1990
3I95775.3 392807.6 430427.5
GNP
12928.2
-288.7 22891.2
Foreign Deficit
56827.3 52441.3 44506.8
Public Disp Income
Private Disp Income 340072.9 346507.4 391147.2
Aggregate Consumption
43083.5 50706.3 59236.5
Public
273501.1 272685.1 309041.8
Private
Domestic Savings
13743.8
1735 -14729.7
Public
66571.8
73822.3 82105.4
Private
Aggregate Investment
34225.8 34632.1 29999.1
Public
59017.9 40636.5 60267.9
Private
11187.9
11320.5 14379.1
Exports (c)
24817.9 21909.4 28388.2
Imports (c)
Experiment El (b)
1991
1993
0.4
3.1
-3.5
10.7
18.7
19.5
-3.2
-2.3
Experiment E2 (b)
1993
1991
-7.3
-0.6
-100.1
-2.1
-5.3
-2.2
-7.7
-0.7
-8.4
-2.1
-10.2
-3
-2.3
-0.7
-5.8
-7.3
809.3
-3.1
120.5
-4.2
-0.6
-0.9
7.3
-9.4
0.2
14.1
1.2
0.9
16.2
18.2
3.8
2.4
-2.3
0.3
0.7
-1.6
-5.7
-46.1
14.6
-23.9
Notes:
a. In Real 1990 prices, billions TL.
b.Percentage changes over the "historical" values.
c. Millions US$.
Table 7. Equilibrium in the Public Sector
1990
Revenues from Taxes
Indirect taxes
Tariffs
Income Taxes
Corporate Taxes
Net Factor Income
Transfer Expenditures (c)
Public Disposable Income
Public Sav-lnv Deficit
Net Foreign Borrowing
Memo:
Public Sav-lnv Def/GNP (%
Historical (a)
1991
1993
Exp El (b)
1991
1993
Exp E2 (b)
1991
1993
23601.6
13494.0
24243.4
6686.2
12400.0
19188.2
56827.3
24361.2
13198.5
25568.2
6212.2
2559.1
20797.5
52441.3
25723.8
15541.4
28974.7
6427.3
1575.8
35714.5
44506.8
1.9
4.2
-1.6
0.9
362.4
1.2
18.7
7.2
12.9
-2.2
3.9
745.1
-30.9
19.5
20482.0
-4376.7
32897.0
1326.8
44728.7
1936.3
-24.2
3.5
-26.8
-2.4
-6.3
10.6 -100.0 -100.0
5.2
8.4
10.4
6.3
Notes:
a. In Real 1990 prices, billions TL.
b.Percentage changes over the "historical" values.
c. Includes payments on export subsidies
7.4
0.0
0.4
-0.6
-1.1
-0.6
-1.7
-2.2
8.2
-3.8
7.9
-8.2
-11.9
-6.5
1.2
-5.3
10.5
Table 8. Production, Employment and Private Incomes: Experiments E1 & E2
1990
Real output (a)
Agriculture
96529.4
Energy
19966.4
Consumer manuf
108056.6
Producer manuf
127691.0
Construction
51112.2
Services
260953.3
Unemployment rate (%)
6.3
Real Wages (c)
Rural
822.3
Urban (d)
9514.2
Private Disposable Income (a)
Rural
71932.0
Urban-worker
93605.2
Urban-capitalist
167006.4
Historical
1991
1993
Experiment El (e)
1991
1993
Experiment E2 (e)
1993
1991
99377.7
20436.5
106150.7
116705.8
40716.2
273736.8
11.8
97704.5
24290.5
116168.6
139457.5
488896.3
313790.3
10.3
0.0
-0.1
0.2
1.9
12.8
-0.2
11.8
1.2
2.9
3.3
5.6
28.7
1.0
8.8
0.0
-0.6
0.1
-1.2
-1.9
-0.2
12.4
-0.5
-0.9
13.0
-15.8
-38.1
-2.1
13.1
830.4
12429.4
1022.6
13242.5
-2.4
0.0
-2.6
0.0
-0.7
0.0
-2.8
0.0
70449.5 82515.2
107707.8 125831.4
168350.1 182800.7
-1.9
0.4
-4.2
-3.1
0.6
-5.9
-0.6
-0.2
-1.2
-0.8
-6.1
-11.9
Notes:
a. In real 1990 prices, billions TL
b. Mining, electricity, gas and water
c. Aggregate annual wage payments in real 1990 prices, thousands TL.
d. For workers employed in industry and services.
e. Percentage changes over the "historical" simulation.
administration of an extensive scheme of production and export subsidies and current
transfers, and controlling the prices of state enterprises which strategically produce
mostly intermediate inputs in an attempt to generate cost-savings to the private
capital. Through this process, conducive conditions could have been generated for the
private capital to "absorb" the rapid increases in the labor remunerations.
As extensively discussed in Yeldan (1995), the fiscal deficit of the Turkish state
between 1990 and 1993 does not necessarily imply a problem of "bureaucratic mismanagement" in the abstract; but is a reflection of the administrative and socioeconomic policies on the part of the public sector, which were deemed necessary to
sustain the generation of economic surplus for the private capital. The state has used
its taxation-cum-subsidy policies and the prices (losses) of its production enterprises
as the strategic instruments of this historical maneuver, and financed its fiscal
deficits via forced savings by way of price inflation and increased foreign
indebtedness. In the following experiment, I take the issue of the effects of foreign
borrowing and of the inflows of short term foreign capital on the domestic economy.
111-2. Foreign Borrowing and Short Term Capital Inflows: Experiment E2
Turkey has liberalized its capital account and declared full convertibility of its
domestic currency, the Lira, in August 1989. This policy had significant repercussions
in the financial economy. For the monetary authority it basically meant the loss of
control over the equilibrium relation of the real rate of interest with the foreign
exchange rate, as these variables came under the direct scrutiny of the foreign markets,
responding to the arbitrage opportunities on an international scale.
As discussed
extensively in Uygur (1994) and Boratav (1994), for a small developing economy operating
under this regime, it becomes imperative that the domestic rate of real interest has a
return higher than the return on holding foreign exchange; as this is the only way to
prevent currency substitution and dollarization of the domestic economy.
Turkey, as well, faced this constraint in its financial sector, and beginning 1990,
foreign capital movements were observed to display sensitivity with respect to the
differentials on the rate of interest and foreign exchange. For instance according to
the calculations in Boratav, Tiirel & Yeldan (1994), in 1990 the rate of return of the
domestic interest relative to the foreign exchange was 25%. The foreign capital inflows
in 1990 amounted $3 billions. In 1991, the relative return of the interest rate fell to
-3.3%, and in the same year the economy witnessed a loss of $3.02 billions. After this
18
year, return on the interest rate successively exceeded the rate of depreciation of the
foreign exchange, and led to short term foreign capital inflows amounting to $1.4
billions in 1992, and to $3.8 billions in the first 7 months of 1993. According to the
balance of payments data of the same period in 1993, the aggregate amount of foreign
capital transferred into the domestic economy reached to $9.3 billions, or to 5.6% of
the GNP.
Thus, in this period the foreign capital inflows are observed to serve for the
dual function of covering the public sector deficits as well as of expanding the
import capacity of the domestic economy. The state was able to finance its deficits
through borrowing at high interest rates, which, in turn, stimulated the financial
(speculative) capital inflows.
Yet the costs of this fragile equilibrium were
reflected on the sectors producing the traded goods as a consequence of currency
appreciation and faltering export demand. As, a version of this "Dutch Disease"
phenomenon has spread, imports expanded rapidly, and the ratio of exports to imports
fell to 0.516 in 1993, from its 1989 value of 0.736.
I investigate the quantitative effects of these developments in the domestic
economy under experiment E2. Consequently, the purpose of this experiment can be
summarized as the quest to "what would the inflationary consequences and the macro
balances be, had the possibilities of foreign capital inflows were restricted in the
1990's?". To this end, the experiment imposes zero net foreign borrowing and foreign
transfers to the economy in the 1991-1993 period. All other factors which were regarded
exogenous under the historical base-simulation -such as the fiscal deficits, real wage
increases, and the assumed technological growth rates, etc.- are kept intact. The
analysis of this experiment is based on the reports in Tables 6, 7, and 8 above, and the
Figures 9 and 10.
The simulated solution path of the inflation rate under the experiment is portrayed
in Figure 9. Accordingly, the elimination of foreign capital transfers into the economy
has inflationary consequences, increasing the annual level of producer price index by 4
percentage points over its historical realization. In the meantime, as compared to the
1993 levels, the gross national product falls by 7.3%; the ratio of unemployed increases
by 3 index points to 13.1%; and the real disposable incomes fall in the public sector by
5.3%, and in the private sector by 7.7%. Thus, under the assumptions of experiment E2,
the domestic economy drifts into real contraction and price inflation.
19
[Insert Figure 9 approximately here]
Results displayed in Table 8 complement this picture, indicating large scale income
In comparison to end of 1993 values, urbanlosses for the private households.
capitalist incomes decline by %12; worker incomes by 6%, and the rural incomes by 0.8%.
Consequently, aggregate private consumption expenditures are reduced by 7.3%, and the
private savings by 9.4%.
Thus, given the hypotheses of rapid real wage increases, high fiscal deficits, and
the technical specifications of the growth and distribution parameters of the model, we
can summarize the findings of the current experiment as follows: inflows of foreign
capital, which are attracted by the arbitrage differential between the domestic rate of
interest and foreign exchange, have played an important role in sustaining both the
public and private disposable incomes in the Turkish economy in the 1990's. Given the
above mentioned developments of the period, foreign inflows enabled the domestic economy
to overcome the threat of a massive contraction with accelerating inflation.
Figure 10 portrays the path of one of the most crucial instruments of this process
-the nominal rate of foreign exchange- in comparison to both the historical run and the
simulations under experiments El and E2. Elimination of foreign capital inflows
(experiment E2) naturally leads to depreciation of the currency in order to equilibriate
the balance of payments accounts. Accordingly, the equilibrium nominal exchange rate
reaches to 16,450 TL/$ in 1993, as compared to its realized rate of 10,934 TL/$. Per
contra, under experiment El, reduction of the fiscal deficits results in deflation of
the price level and leads to appreciation of the currency. The El experiment suggests
that the 1993 rate of equilibrium foreign exchange be 7,190 TL/$.
[Insert Figure 10 approximately here]
Not surprisingly, the major consequence of currency appreciation of the post-1989
period was stagnation of the overall export performance, together with the massive
expansion of the import volume. As the simulation results of experiment E2 reveal, the
loss of export earnings reaches to 14.2%, while the increase in import demand amounts to
23.9% as compared to 1993 values. Thus the foreign liberalization and the consequent
capital inflows served to cover the large deficits of the public sector on the one hand,
and stimulated the consumption propensities of the private sector, on the other. Yet
this short-lived invigoration did not lead to a sustainable expansion of real
20
Figure 9. Domestic Inflation Rate: Experiment E2
450
Experiment E2
Historical
400
350
300
K
0,
'0
250
a. 200
150
100
50
0
1990
1991
1992
1993
Years
Figure 10. Foreign Exchange Rate: Experiments E1 & E2
Of~A fA
IOUUU
Experiment E2
16000
14000
12000
Historical
Co 10000
Ci
8000
Experiment E1
6000
4000
2000
0
1990
1991
1992
Years
1993
cate mechanism which was based
production, and was met h increased imports. This
on a fragile balance between the rates of domestic interest and the ioreign exchange
collapsed by the end of 1993, leading to financial chaos, and to a severe contraction of
the real GNP in the months to follow.
III-3. Wage Costs and the Oligopolistic Market Behavior: Experiments 3 & 4
In many popular writings, wage costs are regarded as the main source of price
inflation in the Turkish economy. However, technically speaking, the existing data -in
spite of its rudimentary nature- is far from providing support for this claim. For
instance, based on rough calculations derived from the manufacturing industry survey
statistics, manufacturing real wage rate has decreased by 1.8% between 1986 and 1987,
yet in the same year, the annual rate of consumer price changes has accelerated from
34.5% to 38.9%; and in 1988 jumped to the plateau of 75.4%. In contrast, in the same
The first
year, the wage rate continued to fall in real terms at a rate of 7.2%.
significant increase in the real wage rate is observed in 1989, with a rate of 25%.
However, in the same year, the annual change in the consumer price index loses 6
percentage points and tapers to 69.6%. In the post-1990 period, the inflation rate is
observed to "stabilize" at the rate of 60%, yet wage costs surge rapidly to reach in
1992, for example, to a level which is twice their level of 1989 in real values!
Thus, candid observations on the quantitative indicators do not seem to lay support
to the hypothesis that the main inflationary dynamics of Turkey are to be found with the
wage costs. To analyze this hypothesis in a more formal manner, we will study both the
cost-push and the demand-creation effects of wage increases in our general equilibrium
framework under experiment E3. Under this experiment, real wages are kept constant at
their 1990 level, and all other public sector variables are given at their previously
assumed levels. However, anticipating the expected cost savings on public employee wage
bill, I resort to change the public consumption expenditures item to an endogenous
entity along the experiment. With this technical change in the closure rule of the
model, I regard aggregate public employment in the public services sector as a given
constant; thereby decline in the wage costs reduce the public consumption expenditures
on a direct basis. In the previous simulations, the model regarded public consumption
expenditures as nominally fixed, and determined the level of employment in the public
services sector endogenously, given the wage rate. The question, whether it is the level
21
of public employment or the wage-fund (public consumption) that is prior determined in
the public services sector is a technical one open to empirical debate. Here, I propose
to follow the first route in an attempt to strengthen the possible links between wage
costs, public expenditures and price inflation.
The simulated inflation rate under these assumptions is displayed in Figure 11.
Maintaining the real wage rate at its 1990 level results in a reduction of the 1993
value of the producer price index from 415 points, to 318 index points, lowering the
annual rate of price inflation by 13 percentage points to 47%. It has to be reminded
that the current variant of the experiment entails an upper bound on the possible
inflation savings, as wage cost reductions are directly matched by expenditure savings
in the public sector accounts. Thus, under the other possible extreme (which I do not
report here because of space constraints) where the original closure rule of the model
was kept intact, and the public services sector had to accommodate the wage reductions
by increased public employment (no savings on public consumption expenditures), the
experiment led to a decline of only 6 percentage points in the annual inflation rate.
[Insert Figure 11 approximately here]
Another important issue that needs closer analysis in this respect is related to
the role of "returns to the capital-owner" in setting cost dynamics.
On discussions
about the "cost-push" aspects of price inflation, current debates have generally focused
solely on wage-costs of labor, ignoring the pressures emanating form the profit/rent
recipients. Yet, the pricing processes based on the imposition of independent mark-ups
over average variable costs seem to be a widely-resorted strategy in the Turkish
manufacturing. Through this mechanism, the classical trade-off between the wage-profit
frontier is effectively surmised as the economic returns to the capitalist are protected
by way of mark-ups, with increases in costs being reflected onto the final consumers via
price adjustments.
Mark-up induced pricing behavior in the Turkish manufacturing industry is studied
at length in Sahinkaya (1993), Boratav et. al. (1994), Boratav (1991), Karaaslan (1989),
and Ozmucur (1986).
Kaytaz at. al. (1993), on the other hand, analyze the noncompetitive structures in the manufacturing sectors directly via measures of
"concentration". Further, data on "concentration of the manufacturing industry" has now
become part of the Turkish "official" statistics, and is being routinely published by
the SIS. (See SIS, 1994b). A general synthesis that emerged from these studies is that,
22
Figure 11. Domestic Inflation:
Wage Costs and Oligopolistic Pricing
450
Historical
400
350
Experiment E3
300
Experiment E4
a) 250
-J
a)
U,
h.
200
0.
150
100
50
0
1990
1992
1991
1993
Years
Figure 12. Wage Costs and Oligopolistic Profits:
Manufacturing Industry
160
Olinnoolistic
ffits
140
Wages
120
npetitive
'rofits
100
Q*
C
80
60
40
20
0
1990
1991
1992
Years
1993
there exists a fairly stable relationship between the wage share and the mark-up rates
in the manufacturing sectors. Boratav et. al. (1994) examine the behavior of industrial
mark-ups in the post-1980 trade liberalization era, and conclude that the removal of
trade restrictions and foreign liberalization have not yet brought forth the
expectations of the theory, prognasticating a fall in the mark-ups. To the contrary,
the producers seem to have alleviated the pressures of foreign competition via
intensified rent-seeking on various other aspects of macro policy making, as the average
mark-up rate in industry is observed to rise secularly after 1985, to reach the plateau
of 40% in 1990. (See Boratav et. al., Table IV.3). Kaytaz et. al. (1993) and Yeldan
(1995) also suggest disaggregated data supporting those conclusions.
Furthermore, it has to be noted that the above arguments pertain mostly to
aggregate manufacturing where about a third of value added is produced within the public
It is a widely accepted fact that public pricing administration is
enterprise system.
more often a politically regulated process; and the behavior of mark-ups should be
regarded to be mostly under the influence of the private directives.
Such oligopolistic pressures on the price dynamics are analyzed through the
simulation of experiment E4, and are further to be contrasted with the results obtained
under E3. Formally, experiment E4 extends the assumptions of E3 by the additional
hypothesis of competitive, marginal-cost pricing behavior throughout the whole economy.
These two experiments are discussed jointly through the rest of this section.
Figure 11 discloses that under the competitive pricing configuration, the implemented
cost savings on real wages generate a further reduction of 6 percentage points in the
annual rate of inflation, dampening the rate of growth of producer prices to 41%. In
other words, the experiment E4 suggests that the mark-up based oligopolistic pricing
strategy in the manufacturing sector has contributed as much as 6 percentage points to
Confronted with rising wage-costs,
the overall inflation in the Turkish economy.
industrialists could have sustained their profits by inflating the final prices of the
products they supply and led to a process which I will refer under "profit/rent
inflation".
This technical analysis is further portrayed in Figure 12, where the evolution of
the profit income against the real wage movements is contrasted under the (historical)
The figure
oligopolistic versus the (hypothetical) competitive pricing environments.
plots the historically realized wage rate changes, admitting jumps of 30% and 7.6% per
annum in real terms during the post-1990 period. The historical simulation path on
profits reveals that "oligopolistic profits" follow the real wage path, maintaining the
23
real rate of return to capital. Per contra, had the cap
i:ncreases under a competitive configuration, the profit rz
consequent price inflation would be lower.
-owner faced the real wage
would have fallen and the
[Insert Figure 12 approximately here]
This process is displayed at the sectoral level in Table 9. Under the "historical"
column by 1993, against the the real wage index increases of 139.8, the average
manufacturing profit index reaches to 152.4 points. Thus, the model solutions suggest
that, under the "historical" simulation, assuming a value of 1.0 in 1990, the
profit/wage ratio increases to 1.314 in 1993. Under the oligopolistic conditions of E3,
elimination of real wage increases leads the aggregate profit index to reach 158.9
points. However, under the competitive setting of experiment E4, one could expect the
index of (competitive) profits to be 138.5, and that the price index be pulled down to
287 index points.
[Insert Table 9 approximately here]
The macro consequences of the experiments E3 and E4 are displayed in Table 10, and
the sectoral production and income generation results are listed in Table 11. One of
the most interesting observations of the experiment E3 is that elimination of real wage
increases brings forth a 1.3% decline of GNP as compared to its 1993 historical level.
Per contra, under the same wage assumptions, but with a competitive pricing environment
of E4, gross national product is observed to increase by 1.5% over its 1993 value.
Hence, comparison of E3 and E4 suggest that the economic costs of oligopolistic pricing
behavior in the Turkish manufacturing are not restricted to profit/rent induced price
This outcome is the result two
inflation, but entail real output losses, as well.
factors: first it is due to the lower capacity utilization rates realized under the
oligopolistic environment (See Table 12); second, its lower employment capacity
generates lower private incomes as compared to the competitive setting, causing
aggregate expenditures to falter.
[Insert Tables 10, 11, and 12 approximately here]
This process has also significant implications for the public sector disposable
24
Table 9. Real Wages, Profits and Prices in the Manufacturing Industry, Experiments E3 & E4
Real Wages
Real Profits
Food Processing
Textiles
Forestry Products (a)
Chemicals
Petroleum Products
Soil Products
Metals
Machinery
Profit/Wage Ratio (b)
Domestic Price Level
1990
100.0
Historical
1991
1993
130.7
139.7
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1.000
100.0
121.4
121.9
79.9
121.7
128.8
107.9
113.9
110.9
1.284
158.1
Experiment E3
1991
1993
100.0
100.0
138.4
139.7
99.2
137.2
150.2
124.6
133.0
133.1
1.314
415.6
Experiment E4
1991
1993
100.0
100.0
141.6
148.9
114.3
137.9
160.4
128.2
138.4
136.3
1.241
318.5
123.5
127.1
85.2
121.7
133.9
111.4
116.9
111.0
1.176
118.9
116.5
149.5
126.9
87.0
329.6
123.7
147.8
77.7
1.215
287.0
105.8
128.6
90.3
74.7
121.0
59.8
79.1
30.2
0.902
113.2
Notes:
a. Competitive pricing is assumed under this sector,
b. Ratio of aggregate profits to aggregate wage costs.
Table 10. Macro Economic Indicators: Experiments E3 & E4
(Percentage Changes over the Historical Solution Values)
GNP
Foreign Deficit
Public Disp Income
Private Disp Income
Aggregate Consumption
Public
Private
Domestic Savings
Public
Private
Aggregate Investment
Public
Private
Exports
Imports
Experiment E3
1991
1992
1993
-0.9
-1.2
-1.4
-4.2
6.2
7.1
-9.5
-12.5
-18.1
0.4
0.4
0.6
-9.8
-0.4
-11.6
-0.6
-13.9
-0.3
-0.9
3.3
1.2
4.2
1.4
4.1
32.9
-22.0
2.6
1.5
24.7
-17.8
3.7
2.2
30.5
-6.5
3.9
2.2
Experiment E4
1991
1992
0.2
-0.6
-13.2
10.2
-7.8
-10.1
1.6
0.8
-8.2
1.1
-9.4
0.0
0.2
3.6
0.6
4.0
39.6
-27.3
7.3
4.2
51.4
-23.1
6.5
3.8
1993
1.5
13
-14.4
3.3
-10.4
2.3
-1.4
6.9
44.7
-8.2
8.7
4.6
Table 11. Production, Employment and Private Incomes: Experiments E3 & E4
(Percentage Changes over the Historical Solution Values)
Experiment E3
1992
1993
19911
Real Output
Agriculture
Energy
Consumer manufacturin
Producer manufacturing
Construction
Services
Unemployment rate (%)
Real Wages
Rural
Urban
Private Disposable Income
Rural
Urban-Worker
Urban-Capitalist
0.(0
7.;2
4.1
1
4.43
10.(3
1
-0.1
7.f3
0.0
11.0
5.6
6.2
13.8
7.5
5.9
0.1
Experiment E4
1991
1992
5.5
6.3
12.5
0.2
10.5
11.1
15.0
16.2
11.8
1.1
12.8
10.8
1993
8.0
14.6
11.5
15.1
11.9
18.8
2.0
4.0
1.8
1.0
4.7
6.9
18.9
1.6
5.4
1. 3
-30.U7
2.4
-7.6
2.6
1.0
7.5
-30.7
4.9
-7.6
6.6
1.0
5
2.%r
-13.13
8.f5
3.3
-17.3
3.5
-15.9
10.6
8.4
-11.8
7.4
5.7
-16.0
10.0
6.0
-13.6
13.7
11.1
Table 12. Capacity Utilization in the Manufacturing Industries (%)
Food Processing
Textiles, Clothing
Forestry Products (*)
Chemicals
Petroleum Products
Soil Products
Metals
Machinery
Man Industry Average
Historical
1991
1993
89.7
95.4
90.6
87.9
100.0
100.0
90.3
89.8
95.6
99.4
85.9
83.1
89.3
92.3
86.1
88.9
91.7
91.3
Experiment
1991
95.3
91.7
100.0
89.8
94.7
85.9
90.6
88.0
92.0
El
1993
89.8
91.5
100.0
88.6
98.3
93.3
95.6
92.7
93.7
Experiment
1991
95.6
91.5
100.0
89.3
95.4
82.5
90.6
86.1
91.3
E2
1993
91.1
100.0
100.0
84.4
90.7
77.4
86.4
79.8
88.7
Experiment
1991
93.3
92.1
100.0
90.8
98.0
85.4
90.2
86.0
91.9
Note:
* Due to the high share of public ownership with administered price controls, the forestry products sector
is not subjected to mark-up pricing.
E3
1993
88.4
92.1
100.0
91.9
100.0
91.2
95.9
91.9
93.9
income generation. With real wage increases eliminated, worker incomes are reduced,
thereby reducing the tax revenue base of the state. In the meantime, reduced wage
incomes mean reduced aggregate expenditures, causing a further fall on the state's
sources of excise taxes. Consequently, compared to 1993, public disposable income falls
by 18.1% under experiment E3, and by 14.4% under E4. This result reveals one important
attribute of wage-labor: even though it is a cost item on the production side, wage is
also a "revenue" item on the expenditure side. The model solutions underscore the
importance of this latter function of wage earnings in sustaining aggregate demand in
the economy, and further maintain that, under conditions of oligopolistic markets, its
effectiveness is limited.
IV. Summary and Conclusions
In this study I have investigated the post-1990 evolution of the Turkish economy
within a structuralist Walrasian macro-economic model which emphasizes the underlying
processes of production - income distribution - consumption and foreign trade in a
general equilibrium framework. The model is first used to simulate the historically
realized growth path of the Turkish economy over the period 1990-1993; and then it is
utilized as a "social laboratory" to analyze a series of "counter-factual" policy
environments so as to dis-integrate the underlying mechanisms behind the 1994 crisis.
The counter-factual policy simulations of the model reveal the importance of the
public sector fiscal deficits as a major factor generating inflationary dynamics in the
Turkish economy in the analyzed period. Accordingly, under the parametric assumptions
which bring the fiscal balances of the state to their 1980's average -with more modest
expenditure patterns and lower PSBR to GNP ratios- the model solutions suggest the
annual rate of inflation to fall from 61%, to 35%; and that the real national product to
increase by 3.1% over its 1993 value.
However, the issue of whether the foregoing technical assumptions of the model
could have been realized in the Turkish economic setting of the 1990's remains a dubious
question, open to debate.
For, in this regard the model solutions underscore the
crucial function of the state in sustaining and re-distributing capitalist incomes in
response to the intensified conflicting claims on national income through the 1990's,
which culminated into rapid real increases in remunerations of the wage labor, and
25
At the micro level, the state is
faltering output production and declining exports.
observed to interfere the domestic output markets through an extensive scheme of
production and export subsidies and current transfers; and through effective price
controls on the state enterprises which strategically produce mostly intermediate inputs
in an attempt to generate cost-savings to the private capital. Through this process,
conducive conditions could have been generated for the private capital to "absorb" the
rapid increases in labor costs. However, this mechanism meant significant losses for
the public sector and generated strong stagflationary pressures for the domestic
economy, raising the domestic price inflation from its possible annual rate of 35% to
60%, and leading to a loss of aggregate investment growth rate of 17.8%, and export
revenues of 3.8%.
The role of foreign capital inflows was the second issue analyzed with the aid of
With full capital account liberalization in 1989, Turkey received
the model.
significant foreign inflows of short term capital, which were attracted by the arbitrage
differential between high domestic real interest rates and the revalued foreign exchange
rate. Under the experiment in which this process was reversed and the foreign borrowing
was set to zero in net terms, the domestic economy was observed to suffer real
contraction, with an accelerating inflation rate. GNP declined by 7.3%, and the urbancapitalist and worker incomes fell by 12% and 6%, respectively. Inflation rate rose by
additional 4 percentage points per annum.
Hence, in retrospect it can be argued that, the short term foreign capital inflows
served to postpone the evolving economic crisis by providing timely financial resources
to the public sector to (partially) cover its growing deficits, and by stimulating the
private consumption demand, it generated short term sparks in the growth rate of the
economy which meant mini boom and bust cycles over the period. Yet, the fragile balance
upon which this mechanism rested was clearly not sustainable, and its collapse in the
end of 1993 meant a severe contraction in output and financial chaos.
The experiment which analyzes the effects of real wage increases on the price
inflation reveal that by keeping the real wages at their 1990 level, the reduction in
the inflation rate can be expected to lie between 6% and 13%.
This would depend on
whether wage reductions will have direct cost savings on the public expenditures.
However, these abstract results of the experiment do not take account of the pressures
emanating
from
the oligopolistic pricing
manufacturing industry.
behavior argued
to be prevalent
in the
Complementing the assumption of wage reductions with the
competitive marginal cost pricing behavior, the model solutions suggest that the costs
26
of mark-up induced profit/rent inflation in the Turkish economy entail additional price
inflation of 6% per annum, and a loss of 1.5% in the real gross national product. Thus,
oligopolistic pricing power in manufacturing has both inflationary price and also
contractionary output consequences for the aggregate domestic economy.
In conclusion, based on the political economy perspective of class conflict and
political pressure, the current model underscores that conflicting claims of various
social classes on national output have to be regarded as important sources of
disequilibria in the domestic economy; and that the erosion of fiscal balances of the
public sector is but a mere reflection of the state's intervention in the factor and the
product markets in an attempt to resolve the distributional conflict in favor of
capital, during a period of real wage increases and faltering production and trade
performance.
27
Notes
1) For further detailed descriptive analysis of the evolution of the crisis, see Yeldan
(1995), Boratav, Tiirel & Yeldan (1994) and/or Uygur (1994).
2) For modeling exercises which link the financial and the real spheres of the macro
economy in the CGE context, see Yeldan (forthcoming), and Sak & Yeldan (1993).
Taylor (1991) also documents a series of financial-linked CGE models in the
structuralist tradition.
3)
In the absence of a full fledged financial system recognized by the model, I
-namely
foreign borrowing and
had to regard these last two magnitudes
short term capital inflows- as exogenously given at their historical realizations
in the simulation experiments. However, their effects on the exchange rate remain
non-neutral through the balance of payments constraint.
4) In this part of the historical validation exercise, the major difficulty was to
overcome the discrepancy between the two officially reported GNP series for the
Turkish economy. Recently, the State of statistics changed its method of estimation
of the GNP from the "production" side, and has re-created a "new" serie which
exceeded the aggregate GNP serie reported by the State Planning Organization (SPO) by
as much 25% on the average. The SPO's serie is calculated from the "expenditure"
side, and has the advantage of reporting the macro expenditures on national product.
In the popular Turkish press the SIS serie is referred to as the "new GNP", whereas
the SPO's is known as the "old serie".
The data utilized in the model reflects the SIS's GNP values calculated from the
production side. To arrive at the macro composition of expenditures, the SPO's
ratios are imposed on the SIS's GNP aggregates. Thus, the observed divergences on
certain expenditure items in Table 2 are mostly reflections of the shortcomings
related with this calculation.
This approach is obviously not all too satisfactory,
but until the "new" serie is complemented by further data on the macro expenditure
side, there does not seem to be any other alternative.
28
ferences
Boratav, K. 1994. "Iktisadi Kriz Uzerine Bazi Gozlemler" Iktisat, Isletme ve Finans,
9(100), Temmuz: 22-30.
_.
Gercek Yay.
1991. 1980'li Yillarda Turkiye'de Sosyal Smiflar ve Bliisiim. Istanbul:
_., O. Tiirel & E. Yeldan (1994) "The Turkish Economy Towards the Next
Milennium: A Balance Sheet, Problems and Prospects" Project Report prepared for
UNU/Wider, mimeo.
Bourguignon, F., de Melo, J. & A. Suwa (1991) "Modeling the Effects of Adjustment
Programs on Income Distribution" World Development, 19(11): 1527-1544.
Celasun, M. 1986. "A General Equilibrium Model Of The Turkish Economy, SIMLOG-1"
METU Studies in Development, 13 (1,2):29-64.
Dervis K., J. de Melo & S. Robinson. 1982. General Equilibrium Models for Development
Policy, London: Cambridge U. Press
Istanbul Chamber of Industry (ISO).
Istanbul.
1993. 150 Biiyiik Ozel Isletme, Yay. No.1993/3,
Karaaslan, M.
1989. "Pricing in the Turkish Non-Agricultural Sector" Journal of
Contemporary Management, No.3, March:42-57
Kaytaz, M., S. Altm & M. Gines. 1993. "Tiirkiye Imalat Sanayinde Yogunlasma:
1990" TMMOB,1993 Sanayi Kongresi Bildiriler Kitabi, 1. Cilt, Yay. No.160.
Kose, A. & A. E. Yeldan (1994) "Cok Sekt6rlii Hesaplanabilir Genel Denge Modellerinin
Veri Tabani Uzerine Notlar: Tiirkiye 1990 Sosyal Muhasebe Matrisi", Ankara, mimeo.
_1991b. "Prices and Income Distribution" Bogazigi University Research
Papers, No. ISS/Ec 91-17.
Sak, G. & E. Yeldan (1993) "Reflections on Asset-Backed Securitization in Turkey:
Results of a Financial CGE Model" METU Studies in Development, 2o(3): 325-356.
Sahinkaya, S. 1993. "Imalat Sanayiinde Sekt6rel Isgiicii Verimliligi, Reel Ucretler ve
Gayn Safi Karlar veya Mark-up Oranlan" Toplum ve Bilim, No.4, Nisan:27-51.
State Institute of Statistics (SIS) Statistical Bulletin, Turkey, various years, Ankara.
_____________________
Ankara.
Manufacturing Industry Surveys, various years,
29
Ecoo____my_______(1994a) Input-Output Structure
Economy, 1990. Ankara.
of the Turkish
Ind_____________(1994b) Concentration of the Turkish Manufacturing
Industry, 1985-1989. Ankara.
Taylor, L. (1981) Structuralist Macroeconomics, NewYork: Basic Books
Taylor, L. 1991. Socially Relevant Policy Analysis: Structuralist CGE Models for the
Developing World, Massachusettes: MIT Press.
Uygur, E. 1994. "Tiirkiye'de Ekonomik Kriz: Olusumu, Seyri ve Gelecegi" Iktisat, Isletme
ve Finans, 9(100):42-54.
Yeldan, A. E. (forthcoming) "Financial Liberalization and Fiscal Repression in Turkey:
Results of a Financial CGE Model" Journal of Policy Modeling.
. (1995) "Surplus Creation and Extraction under Structural Adjustment:
Turkey, 1980-1992" Review of Radical Political Economics, in press.
30
Appendix: Documentation of the CGE Model
This Table gives a formal presentation of the CGE model used in the paper. The
documentation adheres to the following legend: upper case letters without a bar are
endogenous variables; those with a bar denote variables that are treated exogenous.
Lower case and Greek letters refer to policy variables or structural parameters.
Subscripts i and j refer to sectors, k refers to labor types and h to household
categories. Nonlinear relations are not explicitly spelled out, as their forms are part
of the traditional CGE folklore. The C(.) and d(.) refers to the composite and CET
functions; and f(.) refers to CES production functions.
Prices
PM. = PWMI.-(1 + tm.)*ER
PE = PWE..(1 + te.)-ER
PC. = PDi-(DCi/CCi) + PMi (Mi/CC i)
PX. = PD.* (DC./XS.) + PE. (Ei/CCi)
PVA. = PX
(1 - tn)S.
a.ji -PC
J
PK = TPC-b..
SJ
PLEV = E
PC.
1
1i
31
endogenous variables
PM. : domestic price of import good
PE : domestic price of export good
PC. : composite good price
PX. :producer price
PVA : value added (net) price
PK. : capital good price
PD. : domestic good price
PLEV : aggregate price level
ER : exchange rate (TL/US $)
exogenous variables and parameters
tm. : tariff rate on imports
te. : export subsidy rate
tn : indirect tax rate
a. : Leontieff input-output coefficient
: capital composition coefficient
b.
(i : price index weights
PWM. : world price of import
PWE. : world price of export
Output supply and the Factor markets
PX. = (1 +
i =
Ti)-AVC i
XS i = U.ifi(K, Lk)
) = Wik
PVA.*i (aXSi/aL
i
k
UNEMPk =E
-
L k
32
manufacturing sectors
RP.i = PVA-XS
i
AVC. i=
L
W kLLD
k
ik
ik
W-LD
+ .a.PC.XS
Wik
ik
j
k
j
endogenous variables
XS.
output supply
Ui
capacity utilization rate (i= manufacturing)
D
L ik
labor demand
UNEMPk : unemployed labor
RP
: aggregate sectoral profits
AVC.1
: average variable costs
Exogenous variables and parameters
Ti
:price mark-up
(i= manufacturing)
K
: capital stock
nominal wage rate
Wik
Ek : labor supply
Income generation and saving-investment balance
Y"R = PVA -XS
A
A
+ RR -I
YH = W
W. LD + (1-
-ERE+ TR
A
-].ER
MR) + TR
i
Y" =
RP. - FKTRYG + TR
i
i>A
K
33
GREV = TARIFE + DOLVER + HHVER + KAPVER + FKTRYG + GBOR-ER - EXSUI
TARIFE = t tm.I -PWM. *MER
I I
DOLVER =
HHVER =
KAPVER =
tn.1Ii PX.-iXS
l
l
Lj
htx h hYh
ctx -
RPi
i>A
FKTRYG = rfg*GDP
EXSUB =
te.*PWE.*E. ER
GREV
GSAV +
GREV = GSAV + GDTOT
HHSAV =
h
GSAV =
h Y.H (1 -htxh)h
h h
-YGDP
GSIDEF = GIF - GSAV = HHSAV - PRINV + FSAV-ER
34
endogenous variables
: private household incomes
: public disposable income
GREV
TARIFE : aggregate import tariff revenue
DOLVER: aggregate indirect tax revenue
HHVER : aggregate income tax revenue
KAPVER: corporate income tax revenue
YH
R,W,K
FKTRYG : net factor income of the public sector
EXSUB
HHSAV
GSAV
GSIDEF
PRINV
GDP
: aggregate export subsidies paid
: aggregate private savings
: aggregate oublic savings
: public sector saving-investment deficit
: aggregate private investment
, gross domestic product
exogenous variables and parameters
MR
: share of rural household in workers' remittance inflows
htxh : income tax rate
rh : private household saving rate
: public saving rate
: public investment rate
M : workers' remittances
TRh : current transfers
GDTOT: aggregate public consumption exoenditures
GIF : aggregate public investments
GBOR : net public borrowing from abroad
ctx : corporate income tax rate
rfg : ratio of public sector net factor income to the GDP
FSAV : foreign savings (deficit)
35
Final demand and product market equilibrium
I
I I
XD. = di(DCi,E)
CC. = c.(DCiM) = CD.+ GD.+ V.+ ID
min P i M. + P? DC
i
1
subject to CC i = c(DC,M)
i
i
max PE iE + P? Dc
1
i
subject to XD. = d.(DC,E.)
PWEOi
II
E-EOi( PWEi
V. =
aij XS
J
CD = (cdi/PCi) [ Y-(
1
- htxh)l
(
)
h
GD = (gdi/PCi) GDTOT
GD
pserv
= W
ur
(i r public services)
LD
pserv
DKP = (kp./PK.) PRINV
36
DKG = (kg./PK) GIF
ID. =
b.. (DKP + DKG)
XS I = XD.I
CC = CD.+ GD.+ V.+ ID
PW• i-M =
1
1
I
1
1
PWEi.E
i + RM + GEOR + FSAV
endogenous variables
DC. : domestic good
E
: Sectoral exports
M.
Sectoral imports
CC. : Armingtongan composite good
CDi : Sectoral private consumption
GD. : Sectoral public consumption
V
intermediate input demand
DKP. : private investment demand by destination
DKG. public investment demand by destination
ID. : aggregate investment demand
XD. : aggregate domestic demand
PWE : world price of export good
exogenous
cd.
gd.
kpi
kg.
variables and parameters
: private consumption shares
: public consumption shares
: private investment by destination share
: public investment by destination share
PWEO.: world price of competitive exports
?. •:export demand elasticity
37
4- C
00
.2
o
0
NM
CnD
Sct
0.
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RECENT BULLETINS
89-5
McGuire, Mark F. and Vernon W. Ruttan, "Lost Directions: U.S. Foreign Assistance Policy Since New
Directions," August.
89-6
Coggins, Jay, "On the Welfare Consequences of Political Activity, "August.
89-7
Ramaswami, Bharat and Terry Roe, "Incompleteness in Insurance: An Analysis of the Multiplicative
Case," September.
89-8
Rosenzweig, Mark and Kenneth Wolpin, "Credit Market Constraints, Consumption Smoothing
and the Accumulation of Durable Production Assets in Low-Income Countries: Investments in
Bullocks in India," September.
89-9
Pitt, Mark and Mark Rosenzweig, "The Selectivity of Fertility and the Determinants of Human Capital
Investments: Parametric and Semi-Parametric Estimates," October.
89-10
Ruttan, Vernon, "What Happened to Political Development," November.
90-1
Falconi, Cesar and Terry Roe, "Economics of Food Safety: Risk, Information, and the Demand and
Supply of Health," July.
90-2
Roe, Terry and Theodore Graham-Tomasi, "Competition Among Rent Seeking Groups in General
Equilibrium," September.
91-1
Mohtadi, Hamid and Terry Roe, "Political Economy of Endogenous Growth," January.
91-2
Ruttan, Vernon W., "The Future of U.S. Foreign Economic Assistance," February.
92-1
Kim, Sunwoong and Hamid Mohtadi, "Education, Job Signaling, and Dual Labor Markets in IDedig
Countries," January.
92-2
Mohtadi, Hamid and Sunwoong Kim, "Labor Specialization and Endogenous Growth," January.
92-3
Roe, Terry, "Political Economy of Structural Adjustment: A General Equilibrium - Interest Group
Perspective." April 1992.
92-4
Mohtadi, Hamid and Terry Roe, "Endogenous Growth, Health and the Environment." July 1992.
93-1
Hayami, Yujiro and Vernon W. Ruttan, "Induced Technical and Institutional Change Evaluation and
Reassessment." February 1993.
93-2
Guyomard, Hervd and Louis Pascal Mahe, "Producer Behaviour Under Strict Rationing and QuasiFixed Factors." September 1993.
94-1
Tsur, Yacov and Amos Zemel, "Endangered Species and Natural Resource Exploitation: Extinction Vs.
Coexistence." May 1994.
94-2
Smale, Melinda and Vernon W. Ruttan, "Cultural Endowments, Institutional Renovation and Technical
Innovation: The Groupements Naam of Yatenga, Burkina Faso." July 1994
94-3
Roumasset, James, "Explaining Diversity in Agricultural Organization: An Agency Perspective." August
1994.
95-1
Elbasha, Elamin H. and Terry L. Roe, "On Endogenous Growth: The Implications of Environmental
Externalities." February 1995.
95-2
Roe, Terry and Xinshen Diao, "The Strategic Interdependence of a Shared Water Aquifer: A General
Equilibrium Analysis." March 1995