Can Turkey Limit Effects of Another Financial Crisis in Europe?
Although the Turkish Economy has been sending out positive signals the business world (as well as the government certainly) is concerned another likely crisis in Europe could hit the economy badly.
In below interview an expert answers the questions in this regard.
Business Turkey Today
Analyst Gürsel says Turkey can limit effects of another likely financial crisis in Europe
Europe, currently under the strain of a worsening government-debt crisis, is likely to experience another economic crisis; Turkey, which is subject to the effects of foreign crises, can weather the effects of that possible crisis based on its economic strengths, according to analyst Seyfettin Gürsel. “We are not in the eurozone like Poland, and we can limit the effects of the crisis like they did. Turkey has a large area within which to maneuver when we think about its economic strengths,” said Gürsel, an expert in economics, speaking to us for Monday Talk.
“We should not forget about the strengths of the Turkish economy. One of those strengths is its banking system, which has not been shaken by the crisis. Secondly, Turkey did not enter the crisis with high public debt,” he said in reference to the international economic crisis that started in September 2008.
However, Gürsel noted that despite the positive aspects of the Turkish economy, it contracted for various reasons.
Answering our questions, Gürsel elaborated on those reasons and what needs to be done to keep the Turkish economy on a sustainable growth rate.
It has been said that the international economic crisis, which was devastating to most world economies and which started in September 2008, touched Turkey only slightly and passed without any real effects. Do you think that time has proven that view right or not?
This reminds me of the prime minister’s words that the crisis had only touched Turkey tangentially. Of course Turkey did not experience the economic crisis in the same way as Western countries, but the picture was not all that rosy. In the second quarter of 2008, Turkish industry started to stagnate. We clearly see that when we look at some of the industrial production outputs regardless of the seasonal trends. Of course, the bankruptcy of Lehman Brothers in September created a shock to world economies, including the Turkish economy, which was in a recession in the autumn of 2008, and the recession deepened in the first three months of 2009 when we saw a 4.8 percent annual economic shrinkage for 2009. Even looking at a few indicators like that shows us that the effect of the international economic crisis was not “tangential” to the Turkish economic system as the prime minister said. In that period, there were other countries that performed better than Turkey; I am not talking about some of the countries of Asia – like China, Taiwan, Indonesia, Malaysia and Korea — where positive growth rates have been achieved with limited slow downs. I don’t want to compare Turkey with those Asian countries. Turkey can be compared with Poland.
Would you explain why?
Poland has a relatively large population, about 40 million. Its economic structures are similar to the economic structures of Turkey; it is outside the eurozone. The Polish economy experienced a decrease in the GDP [gross domestic product] of only a quarter of a percent. Therefore, when we speak about a country in Europe where the economic crisis was only tangential, it is Poland. But we should not forget about the strengths of the Turkish economy. One of those strengths is in its banking system, which has not been shaken by the crisis. Secondly, Turkey did not enter the crisis with high public debt. Despite these two positive points in the Turkish economy, it contracted.
‘Euro a shackle on heavily indebted countries’
Why do you think this contraction happened in 2009?
The answer to that question is very important. First of all, investments decreased. Secondly, businesses had to seriously decrease their inventories. In the Turkish case, panicky behavior in the markets is common in response to an international economic crisis. This is most probably the main reason for the shrinkage in the economy despite its strengths. We also experienced a diminished demand for durable consumer goods in 2009 even though this shouldn’t have been expected. Later in 2010, there was a magnificent 8.9 percent growth in the economy as a result of the optimism coming after the extreme pessimism of 2009. When we look at the reasons behind growth in 2010, we see the start of investments again and the building up of stock.
Do you expect another financial crisis in Europe, which has not fully recovered from the one of 2008?
Yes indeed. Following the debt crisis in Greece, I looked at the IMF-EU agreement signed with Greece, and the growth rates predicted in the agreement were not convincing at all. Without growth it is impossible to solve the debt crisis. Then Ireland and Portugal went to the EU and IMF. Now, mostly European resources are used to deal with those countries’ debts. The crisis in the eurozone is characterized by individual countries having expenditures that are much bigger than their revenues. Confirmed by leading institutions in the world, it is clear now that it will not be easy for Europe to bail some countries out this time. The expenditures of those countries are no longer sustainable in the short, medium and long term.
The euro has been a shackle on these heavily indebted countries because growth needs exports, and exports need improved competitiveness. Exiting the eurozone for a return to national currencies would offer greater flexibility for these economies to lower the value of their currency, but they also think that the economic fallout from abandoning the euro is too great for European economic planners to contemplate. Since the European Union powers, Germany and France, are hesitant about which way to go, investors will not have full confidence in the European economy, and a new crisis is possible.
France and Germany unveiled far-reaching plans last week for closer eurozone integration, but they disappointed investors by declaring that any thoughts of issuing a common euro bond would have to wait. What do you think of their decision?
Merkel clearly explained and Sarkozy agreed with the German chancellor that it is too early for a euro bond policy as the debt crisis is not under control yet. I think that the transfer of some national bonds with a high risk of default would make it riskier for euro bonds as well; so, finally Germans will be obliged to pay higher interest rates for their own bonds.
‘Turkish economy has serious productivity problem’
How do you think Turkey, subject to the effects of foreign crises, could be affected by a new financial crisis in Europe?
Ali Babacan has been repeating that the European crisis has not been managed well, and he has been proven right. There are weak coalition governments, or even if there are no coalitions, some European governments have been weakened and losing voters’ support. They can’t take radical steps. I had stolen a headline from Le Monde for one of my articles that said, “Europe is governed by rookies.” Another possible economic crisis in Europe would affect Turkey’s exports to Europe. Moreover, as I said before, the psychology of the Turkish markets is critical in the face of a crisis – even a foreign one. Panicky behavior in the markets is a common response to an external economic crisis. We are not in the eurozone like Poland, and we can limit the effects of the crisis like they did. That’s why leaders like Tayyip Erdoğan, who said that this time the crisis will not even be tangential to Turkey, are making statements to assuage people. Turkey has a large area within which to maneuver when we think about its economic strengths. Leaving Greece aside, Germany, France and the United States have much bigger debt rates than Turkey. Therefore, there is no need to panic or have pessimistic views about the Turkish economy. There may be even some positive events for Turkey.
Like what? Would you elaborate?
When global markets become stagnant, oil prices tend to come down. And this is good for Turkey, which largely depends on external resources for its energy needs. We should expect only a limited influence on Turkey from the expected crisis in Europe, but we still should not forget that even a limited affect could seriously reduce Turkish economic growth.
Recently, Ali Babacan disclosed a plan to address structural problems in the Turkish economy that have been playing an important role in driving the current account deficit up. What do you think of the plan?
The Turkish economy has a serious productivity problem. Turkey’s workforce is not well-educated; women’s employment is low; we don’t have many global firms; research and development is insufficiently supported; and there is no great diversification in exported products. Therefore, it is not surprising to see rising current account deficits. Even if there is less domestic consumption and more savings, you can’t reduce the current account deficit because you need to export what you do not consume. To be able to export those goods, you either need to have high quality products or lower prices. However, labor costs are relatively high. As a result, Turkey’s competitiveness at a global level is not very good. In that case, the Turkish growth rate depends on domestic demand. Turkey needs to base its growth less on domestic demand and more on exports. Now, we have to realize that high growth rates are over, and we will see that when second quarter growth rates are disclosed on Sept. 12.
‘Turkey has to have good growth rates’
What do you expect on Sept. 12 as far as the growth rate goes?
[I expect that] the quarter-to-quarter growth rate for the second quarter to be close to zero percent, and the annual growth to be limited to approximately 4 percent by the last quarter of the year, if of course, a second dip after the 2008-09 global financial crisis does not occur in Western economies. This is not going to be enough for Turkey because we can’t solve the unemployment problem with these low growth rates. Then the only way to increase growth is to be more competitive and to have a more productive, efficient economy. How do we do that? With reforms in various sectors: labor force markets, the tax system, research and development, etc. Of course there will be winners and losers when you implement reforms in those areas. We will all be winners in the long run, but since there will be losers in the short run, they will be disturbed. And at this point, it becomes a political problem.
Who is likely to be disturbed most?
Take the case of severance payment reform for example. People who are a privileged minority — fully registered wage earners — will be disturbed. For example, unions will be disturbed in the public sector. In addition, well-educated wage earners are likely to be disturbed. In sum, out of the country’s 14 million wage earners, only 1 million people are receiving full benefits out from their salaries, whereas the remaining 13 million always receive fewer benefits than they deserve. Reforms would disturb the privileged.
If we go back to the government’s plan for structural reforms, which ones are well addressed?
The government’s strategy for the privatization of the energy sector was wrong. The government has adopted a strategy to increase its revenues in that regard and select companies that give the highest price for electrical distribution. However, public offers should have been designed in such a way that competition would be possible with regard to electricity prices for industry. The winner should have been the firm that promises the lowest price for electricity. Another problem is in the area of education. The education of the labor force should be increased at least to the levels of education in South European countries. This requires major educational reform. The positive thing is that the government is well aware of the fact that sustainable economic growth that is based on domestic demand is not possible. The government’s economic affairs team is also well aware of the fact that Turkey needs to export more for sustainable economic growth, and for that it needs long and short-term structural reforms.
‘Turkey should move toward decentralization’
Would you elaborate on the short-term reforms?
For example, as I mentioned before severance pay should be reduced, and an individual retirement fund system to be managed by private investment firms should be established. Austria, Italy and Chile, for example, have adopted those kinds of systems. Moreover, unemployment payments should be increased. In addition, the government should have the courage to introduce region-specific minimum wages. In that case, in 26 regions of Turkey, local NGOs, which I would call social partners, can define the minimum wage under the coordination of regional development agencies. While you need to have TL 800 as a minimum wage to support an individual in some of the regions in the western part of the country, you might need only half of that amount in some areas in the eastern part of the country. Turkey should move toward a decentralized system.
‘Structural reforms needed for higher growth in Turkish economy’
What would you say about the most successful financial policies of the AK Party?
They have successfully adhered to a policy of fiscal discipline. The single-party regime has provided fiscal discipline since 2003, reducing debts and real interest rates. As a result, there have been resources to allocate to public services like improving roads, better health services and more social protection. As there has been more financial confidence, investments increased and good growth rates have been achieved. But this growth regime did not require immediate structural reforms. Domestic demand led growth, sustained by the greater availability of international liquidity, allowing the AK Party [Justice and Development Party] to stay in power with strong voter support. But now this risky growth regime is over, and the Turkish economy is now facing what I call a “low growth regime.” For higher growth, structural reforms are needed, but a political price will have to be paid — at least in the short run.
When do you think is the best time to implement structural reforms?
Structural reforms are not likely to be implemented close to elections in 2015.
Short-term reforms should be implemented in the next six months, while long-term reforms can be implemented starting in 2012. When it comes to long-term reforms, we have a big problem concerning the quality of education. Teachers need to be better qualified. Plus, our defense industry should be developed further as it will eventually stimulate growth in non-defense domestic production.
Would you like to touch on the political obstacles facing the government in attempting to realize these reforms – including the Kurdish problem?
The AK Party government is facing a very serious political challenge. It should be able to make a new constitution aiming at providing space for more democracy and more freedoms, while conducting a war against the PKK [Kurdistan Workers’ Party]. This challenge can capture the whole energy of the government, obliging it to postpone economic reforms. This is a serious danger.
21 August 2011
SOURCE: TODAYS ZAMAN
