Friday, 27 March 2009
The global financial crisis has been transforming state–market relations all around the world. The conventional neoliberal wisdom, which has dominated the economic policy recipes for approximately three decades, is now being severely criticized by a large political spectrum from right to left. Opposite to the neoliberal mantra, “the best state is the minimal state”; we are all Keynesian now! Even the most recalcitrant supporters of the “governments bad; deregulated markets good” approach, like Alan Greenspan, found themselves “in a state of shocked disbelief.”[i]
The increasing protectionist tendencies especially in developed countries are evident in huge government bail-outs, matrushka type recovery plans, and “made in” campaigns. There remains perhaps no significant country that does not take its guard vis-a-vis the global financial crisis in one way or another.
Actually, the Turkish government can be regarded as one of the exceptions in this regard up until recent days. Turkish Prime Minister Recep Tayyip Erdogan has long argued that the crisis has merely touched upon the Turkish economy. He also challenged businessmen’s concerns by accusing them of being “crisis promoters.”
Does the Global Financial Crisis Hit the Turkish Economy?
As a result of his conviction that the Turkish economy is resilient enough to cope with the global turmoil, his government refused to work on a comprehensive recovery plan. The Erdogan government sufficed to make incremental improvements regarding small and medium enterprises and industrial production costs. Yet, the recent developments in the Turkish economy seem to have changed the attitudes of the members of the government and the Prime Minister, inter alia.
Among the newly announced data, the dramatic decline in the rate of capacity utilization can be regarded as one of the most important heralds of the incoming tough days. As it is tabulated below, the capacity utilization rate in the manufacturing industry has declined from more than 80% to less than 64% in one year’s time due to the contracting demand and credit difficulties.
In fact, the Central Bank of the Republic of Turkey is one of the institutions that foresaw the incoming effects of global financial crisis, and positioned itself vis-a-vis this expectation. Since the possible dry up in the internal and international credit channels is regarded as one of the bothersome problems for the economy, it tries to keep the credit mechanisms open and accessible on the one hand; and tries to avoid the excessive volatility in the FX markets on the other. Taking the congenial environment for inflationary pressures into consideration, the Bank has reduced interest rates consecutively. In a four-month period it cut interest rates from 16.25% to 10.5%.
Actually, the availability of capital is one of the crucial aspects of the Turkish economy. Since the savings fall short of investments, keeping financial channels open and attracting foreign capital is sine qua non for oiling the wheels of Turkish industry. Not surprisingly, the Institute for International Finance forecasts net private sector capital flows to emerging markets will be no more than $165bn (€125bn, £116bn) this year, less than half the $466bn inflow in 2008, and only one fifth of the amount sent in the peak year of 2007.[ii]
Another one of the most important heralds of the incoming tough days is the unemployment figures. As the manufacturing industry started to be influenced by the decline in domestic and international demand thanks to the recessions in the US and mainly European economies, the businessmen in Turkey go on to ‘downsize’ their companies and/or reduce their production capacity. What in turn occurs is sky-rocketing unemployment. As the Turkish Statistical Institute recently publicized, the unemployment rate has climbed into the 13.6% plateau.
The Government’s Response to the Crisis: “Turkey is Keynesian, too!”
Facing the bewildering economic figures, it was understood by the government representatives that the crisis did not just touch upon Turkey. On the contrary, the winds of the global turmoil considerably influenced the Turkish economy. Ultimately, the government declared a comprehensive stimulus package including tax cuts in the housing and automotive sectors (the value added tax in the housing sector decreased from 18% to 8%, and the private consumption tax in white goods and automobiles was reduced temporarily, for 3 months), financial support to small and medium enterprises, and export credits to stimulate the sluggish export rates in Turkey. The approximate value of the package is declared to be 2.7 billion Turkish liras. The package also foresees further subsidization of farmers and decreasing production costs in the manufacturing industry.
In addition to the already declared package, Nazim Ekren, the Deputy Prime Minister, signalled the incoming new packages by saying, "If we reach targeted outcomes, we will extend the time and continue." Parallel to Nazim Ekren, a new tax cut on a wider range of products at an amount of 2 billion Turkish liras was declared on March 25. [iii] In a similar vein, the establishment of a credit guarantee fund to overcome the financial bottlenecks is on the agenda of the government. Most probably, a new stimulus plan at an amount of 2-3 billion Turkish liras will be declared in the following days.[iv]
The ultimate effects of these measures on the economy remain to be seen. Yet, the government seems to have understood the gravity of the problem. In the final analysis one thing is obvious: the success of the packages depends on two important factors. On the international front, if the world economy starts to recover in 2010 and 2011, it would of course help the recovering Turkish economy. Yet, Turkey should also concentrate on the domestic side of the coin. If the government convinces the economic actors on the ground that it is aware of the incoming obstacles and successfully establishes ‘confidence’[v], it would be possible to contain the economic crisis and mitigate its effects.
Mustafa Kutlay
USAK Center for European Studies
mkutlay@usak.org.tr
Footnotes:
[i] Mark Felsenthal, “Greenspan "shocked" at credit system breakdown”, Reuters, October 23, 2008.
[ii] Peter Thal Larsen, “Capital flows to developing world at risk of collapse”, Financial Times, January 28, 2009.
[iii] “Erdogan’dan Besinci Paket”, Referans Gazetesi, 26 Mart 2009, s.10.
[iv] Erdal Saglam, “Hukumetten 2,5 milyar liralik kredi garanti fonu”, Referans Gazetesi, 19 Mart 2009, s.9.
[v] The boom in automotive sales after the tax cuts is a good example, in this regard. The consumers have overwhelmingly bought with cash, which means that stimulated consumption and confidence building measures would encourage people to spend their money.
Is Turkey Drifting Away from the West? An Economic Interpretation (1/2)
