Turkey’s Growth Dilemma
Prof. Seyfettin Gürsel
Bahçeşehir University Center for Economic and Social Research (betam)
Director
Prepared for
Two Tests for Cyprus World Financial Crisis and Identity
4th Seminar 2008/2009 of the European Forum Cyprus
Organised in co-operation with Friedrich Ebert Stiftung
Nicosia, 12-14 June 2009
1
Presentation Plan
I.
II.
III.
IV.
Historical Perspective of Convergence
Growth and Unemployment in Turkey
Global Crisis and Unemployment
Growth Perspective
2
Historical Perspective of
Convergence
60%
Turkey
50%
Southern
Europe
40%
30%
China
20%
Korea
10%
04
20
01
20
98
19
95
19
92
19
89
19
86
19
83
19
80
19
77
19
74
19
71
19
68
19
65
19
62
19
59
19
56
19
53
19
19
50
0%
Source: Penn World Table 6.2 and betam
Graph 1. GDP per capita compared to Western Europe and USA (PPP Adjusted)
3
Historical Perspective of
Convergence
Two possible Models

Southern Europe (Democratic Model)

Asia (Autocratic Model)
4
Historical Perspective of
Convergence
Growth Potential of the Turkish Economy
• Total Investment: 20 % of GDP
Increase in the Capital Stock (per year): 7 % of GDP
Contribution to growth (per year): 3.5 % (  = 0.5)
• Non-farm Labor Force Increase (per year): 2 %
Contribution to growth (per year): 1 % (1 -  = 0.5)
• Increase in Total Factor Productivity

Contribution to growth: 0.5 % to 1 %
3.5 %
1%
0.5 % to 1 %
Growth
5 % - 5.5 %
5
Historical Perspective of
Convergence
GDP Growth
TR – EU(27) :
5.5 % - 2 % = 3.5 %
Population Growth
TR – EU(27) :
1%- 0%= 1%
Difference between GDP per Capital Growth
Actual GDP per Capita (Eurostat, 2007)
GDP per Capita Convergence in 10 Years
GDP per Capita in 10 Years

2.5 %
TR/EU(27): 40%
30%
TR/EU(27): 40% * 1.3 = 52 %
6
Growth and Unemployment in Turkey
GDP (at 1998 prices) annual % change
Private Consumption *
2000
8.1
2001
-5.5
2002
4.9
2003
9.2
2004
10.2
2005
7.5
2006
4.6
2007
3.9
2008
0.1
2006 I
7.9
2006 II +
2007 I
2.1
2007 II +
2008 I
4.3
2008
Q3
-1.6
2008
Q4
-4.0
Food, Beverages and Tobacco
0.7
1.3
-0.3
6.8
1.7
8.7
3.9
2.0
2.4
5.7
2.4
2.8
0.2
1.8
Clothing and Footwear
3.4
-5.1
8.9
4.2
5.2
-10.7
-3.9
-2.2
-6.4
1.2
-6.9
-1.8
-4.6
-14.3
Furnishing, Household Equipment and Routine
Maintenance of the House
5.1
1.1
3.4
4.7
4.6
5.3
4.6
3.3
3.4
4.8
4.0
3.5
3.0
2.5
Furnishing, Household Equipment and Routine
Maintenance of the House
Transport and Communication
Other **
7.4
16.0
17.2
-14.1
-21.3
-3.1
6.7
8.7
8.1
19.8
19.0
7.0
16.3
18.5
17.2
22.2
6.0
9.0
5.3
7.4
5.7
2.5
2.8
8.7
-7.3
0.9
1.1
12.3
16.2
6.7
1.5
-1.7
6.2
-0.4
10.5
5.9
-9.2
-0.3
-2.0
-16.3
-17.8
3.0
Gross Fixed Capital Formation of Private Sector
Makine teçhisat
Construction
Government Final Consumption Expenditure
Compensation of Employees
Other
17.5
31.3
-0.5
5.7
-0.7
16.6
-32.9
-41.8
-17.6
-1.1
3.7
-8.0
16.9
16.2
17.9
5.8
1.6
12.8
23.7
30.9
15.0
-2.6
1.1
-8.1
36.1
48.2
19.8
6.0
0.2
15.5
16.2
21.4
7.6
2.5
-0.8
7.1
15.0
12.2
20.3
8.4
0.4
19.0
5.3
4.7
6.2
6.5
1.1
12.6
-7.3
-4.4
-12.2
1.8
-0.4
4.0
18.4
17.6
20.1
11.7
0.4
33.2
7.8
3.6
15.6
8.0
0.8
16.6
4.4
8.7
-2.8
1.5
0.6
2.5
-8.9
-6.8
-12.5
1.2
-2.1
4.8
-23.5
-25.3
-20.4
6.1
0.6
10.1
Gross Fixed Capital Formation of Public Sector
17.5 -20.2 8.3 -15.1 -6.6 25.0
2.6
6.3
13.1
3.5
3.6
10.6
Exports of Goods and Services
16.0
3.9
6.9
6.9
11.2
7.9
6.6
7.3
2.6
7.5
8.4
6.0
(Less) Imports of Goods and Services
21.8 -24.8 20.9 23.5 20.8 12.2
6.9
10.7 -3.1
12.0
4.4
11.5
GDP
6.8
-5.7
6.2
5.3
9.4
8.4
6.9
4.7
1.1
7.9
5.9
4.3
Source : TURKSTAT, CBRT
* Final Consumption Expenditure of Resident and Non-Resident Households on the Economic Territory
** Other Goods and Services: Health, Recreation and Culture, Education,Restaurants and Hotels, Miscellaneous Goods and Services
5.4
3.6
-2.8
1.2
15.9
-8.2
-23.0
-6.2
Source: TURKSTAT
7
Growth and Unemployment in Turkey
Turkish economy started to follow a low growth path before the global crisis
2010m01
2009m07
2009m01
2008m07
2008m01
2007m07
2007m01
2006m07
2006m01
2005m07
2005m01
2004m07
2004m01
2003m07
2003m01
2002m07
2002m01
2001m07
2001m01
2000m07
2000m01
1999m07
1999m01
1998m07
1998m01
1997m07
1997m01
120
115
110
105
100
95
90
85
80
75
70
industrial production index*
* 6 month moving average (seasonally adjusted and working-day corrected)
Source: TURKSTAT and betam
Graph 2. Industrial Production Index
8
Crisis and Unemployment
Simple Algebra of Unemployment in Turkey
Annual increase of the non-farm labor force
3 % (550,000)
Necessary increase of the non-farm employment
to keep the number of unemployed constant
550,000
Growth – Employment Elasticity
0.5
Necessary annual non-farm growth rate
6%
Necessary growth rate
5.5 %
Effect of the global crisis: Labor force continues to increase
9
Crisis and Unemployment
Non Farm Employment
Non Farm
Unemployment (%)
Non Farm Labor Force
Non Farm Unemployed
2000
12961
9.30%
14294
1333
2001
12607
12.40%
14392
1785
2002
13040
14.50%
15251
2211
2003
13121
13.80%
15221
2101
2004
13505
14.30%
15758
2253
2005
14595
13.60%
16892
2297
2006
15241
12.60%
17439
2197
2007
15588
12.60%
17835
2247
2008
15918
13.50%
18392
2474
2009 *
* betam estimation
Source: TURKSTAT and betam
16.80%
10
3800
17%
3600
16%
3400
15%
3200
14%
3000
13%
2800
12%
2600
Unemployed, in thousand
18%
Ja
n
M - 05
ar
M -0
ay 5
Ju - 05
Se l-05
p
No -05
v
Ja -05
n
M - 06
ar
M -0
ay 6
Ju - 06
Se l-06
p
No -06
v
Ja -06
n
M - 07
ar
M -0
ay 7
Ju - 07
Se l-07
p
No -07
v
Ja -07
n
M - 08
ar
M -0
ay 8
Ju - 08
Se l-08
p
No -08
v
Ja -08
n09
Non farm unemployment rate
Crisis and Unemployment
Non farm unemployment rate (seasonally adjusted)
Non farm unemployed (seasonally adjusted)
Source: TURKSTAT and betam
Graph 3. Crises and Unemployment (2005 – 2009)
11
Crisis and Unemployment
16%
12%
10%
8%
6%
4%
2%
-4%
Men
Se
p08
No
v08
Ja
n09
-0
8
Ju
l
ay
-0
8
M
ar
-0
8
M
Se
p07
No
v07
Ja
n08
-0
7
Ju
l
M
-2%
ay
-0
7
0%
Ja
n07
M
ar
-0
7
Labor force participation (%)
14%
Women
Total
Female labor force participation rate is increasing.
Source: TURKSTAT and betam
Graph 4. Labor force and Added Worker Effect
12
Crisis and Unemployment
10%
8%
6%
4%
2%
0%
8
-0
n
Ja
-2%
8
-0
b
Fe
M
8
-0
ar
Male
r-0
Ap
8
M
-0
ay
Female
8
8
-0
n
Ju
8
l-0
u
J
08
gAu
08
pSe
O
-0
ct
08
8
N
ov
08
D
ec
9
-0
n
Ja
9
-0
b
Fe
Total
-4%
Female employment increases.
Source: TURKSTAT and betam
Graph 5. Recession – Employment Dynamics
Male employment decreases.
13
Crisis and Unemployment
2009 Jan
2010 Jan
2011 Jan
2012 Jan
Unemployment rate (%)
15,5
18,0
18,0
18,6
Non-farm unemplyment rate (%)
19,0
22,1
22,0
22,6
1,1
-3,6
3,3
4,5
-
40
50
50
-1,2
-1,4
1,7
2,3
15 531
15 307
15 560
15 910
5,3
2,5
1,5
3,0
19 174
19 653
19 948
20 547
259
100
0
-50
4 342
4 442
4 442
4 392
Total labor force
23 523
24 095
24 390
24 939
Total employment
19 873
19 749
20 002
20 302
Total Unemployed
3 650
4 346
4 388
4 637
Non-farm unemployed
3 643
4 339
4 381
4 630
51 323
52 227
53 146
54 082
45,8
46,1
45,9
46,1
GDP growth (year, %)
GDP / Non-farm employment elasticity (%)
Non-farm employment growth (%)
Non-farm employment
Non-farm labor force growth (%)
Non-farm labor force
Increase in agricultural employment
Agricultural employment
Population (15+)
Participation rate to labor force (%)
Source: TURKSTAT and betam
14
Future of Unemployment
Annual Unemployment Estimations
Source: PAEP and betam
betam
SPO
2009
16.8
13.5
2010
16.6
13.9
2011
16.9
13.9
15
Growth Perspective
Structural Current Account Deficit
Current Account Balance (Seasonally Adjusted, Monthly, Million $)
5 05 6
6 06 7
7 07 8
8 08 9
6 06 6
7 07 7
8 08 8
9
5
-0 p-0 v - n- 0 ar-0 ay- l-0 p-0 v - n- 0 ar-0 ay- l-0 p-0 v - n- 0 ar-0 ay- l-0 p-0 v - n- 0 ar-0
l
Ju Se No Ja M M Ju Se No Ja M M Ju Se No Ja M M Ju Se No Ja M
1000
0
-1000
-2000
-3000
-4000
-5000
-6000
Source: TURKSTAT and betam
Graph 6. Current Account Balance
16
Growth Perspective
100%
80%
60%
40%
20%
20
09
(1
)
20
08
(4
)
20
08
(3
)
20
08
(2
)
20
08
(1
)
20
07
(4
)
20
07
(3
)
20
07
(2
)
20
07
(1
)
-20%
20
06
(4
)
20
06
(3
)
0%
-40%
-60%
-80%
-100%
F DI
P ortfolio inv
Source: TURKSTAT and betam
L ong term c redits
S hort term c redits
17
01
03 .03
05 .03
07 .03
09 .03
11 .03
01 .03
03 .04
05 .04
07 .04
09 .04
11 .04
01 .04
03 .05
05 .05
07 .05
09 .05
11 .05
01 .05
03 .06
05 .06
07 .06
09 .06
11 .06
01 .06
03 .07
05 .07
07 .07
09 .07
11 .07
01 .07
03 .08
05 .08
07 .08
09 .08
11 .08
01 .08
03 .09
.0
9
Real Effective Exchange Rate
(CPI based)
195
185
175
165
155
145
135
125
115
18
Growth Perspective
Dilemma of Turkish Economy
1. Keeping a sustainable current account deficit
Smooth transition to Southern Europe Model
2. Zero current account deficit
Abrubt transition to Asian Model
19
Growth Perspective
Southern Europe Model





Less room for exchange rate policy
Manageable current account deficit
Current account deficit financed mainly by FDI
Reforms aim to increase competitiveness
(Labor market, education, transaction costs)
Compensated partially by social policy compromises
and partially by defense expenditures (peace
dividend)
Turkey’s EU membership is a must !
20
Growth Perspective
Asian Model


Zero current account deficit
Competitiveness
 Competitive exchange rate (How to achieve low inflation
rate?)
 Low labor market costs (Political constraints)

Social policy not a priority
Requires autocratic regime
21