Sunday, July 5, 2009

Special Hurriyet Column: Local boys shine among giants

I write for the Daily News regularly Mondays. But I do a special column from time to time, on request. The Economics editors at the Daily News asked me if I could do a news piece on the conference I had blogged live from last week. I told them it would be really difficult for me to write anything without giving my own opinion, so I offered to do an opinion piece instead, which they accepted. The column below ran in my usual spot in the second page on the weekend edition, but somehow did not make it to the web. As for the star kid (see below), the Daily News ran an interview with him in the weekend edition, where he elaborated on his thoughts on the savings rate and capital flows I had summarized in my column. I am not sure if the Econ. editors did that on purpose (I submitted the article on Thursday, so they had a lot of time to plan ahead), but in any case, it is a nice supplement to my article (or vice versa). As for banking, a picture is worth more than a thousand words:

It is not often that you see two Economics Nobel winners in one room, outside the University of Chicago, let alone giving speeches one after the other. Bahcesehir & Koc universities and the Central Bank of Turkey, therefore, deserve all the kudos for getting Robert Lucas and Edward Prescott to speak at the conference “Post-crisis Global Economic Order and the Turkish Economy”.

I should say I was a bit disappointed by Prescott’s presentation, where he chose to apply his recent research on the relationship between taxes and labor supply to Turkey. With its large informal sector and agricultural employment, I would expect the country not to fit into his framework, and my beloved country did not disappoint, standing out as a big outlier in his charts. In fact, it is Prescott’s earlier research that has the biggest implications for the Turkish economy. In an elegant paper more than three decades ago, he and his coauthor Finn Kydland showed that discretionary policy suffers from time inconsistency in the sense that the policymaker’s preferences change over time. In the Turkish context, the IMF saga and the regular tax amnesties are the most obvious implications of this work.

Although it was a bit ironic that I was listening to one of the most prominent members of the Chicago school while the crisis was shocking the very fundamentals of the neoclassical Economics the university founded, Lucas’ speech was extremely illuminating. In one simple equation known to anyone who has taken a single Economics class in college, he showed how the Great Depression and the current crisis both involved a reluctance to part with dear liquidity, whether it be deposits in the 1930s or short-term lending today. However, Lucas could have offered valuable advice for Turkish policymakers as well. As Ayse Imrohoroglu noted while introducing him, Lucas is renowned for showing that governments cannot fool people. I hope the right people heard her.

Despite the economic giants, it was the local boys who stole the show. From the Central Bank, while President Durmus Yilmaz did not offer anything new, Vice President Erdem Basci noted, by comparing real interest rates, that there was still room for rate cuts. While a detailed discussion of this claim is not proper here, I should note that a comparison that ignores country risk, liquidity premium, currency substitution and the like could be misleading. In any case, my spider senses are telling me the Bank is preparing markets for another cut this month, and when seen in that context, Basci’s remarks stand out as good expectations management and effective communication.

Basci’s comments on the recent unresponsiveness of market rates to policy rates were also noteworthy. In response to a question by academic and columnist Seyfettin Gursel, Basci said that he saw the recent developments as a natural steepening of the yield curve. While I am not sure I buy the argument, I found his partition of market rates into maturity and credit risk an extremely useful way of thinking. As for government bonds, the credit risk translates into a sound fiscal framework, as Basci stressed. This was another very clear message from the Central Bank.

To me, the real star was Yapi Kredi chief economist Cevdet Akcay, who questioned some of the current dogmas of Turkish economic thinking. Specifically, Akcay noted the unrealism of adopting the Asian export-led growth model to Turkey and increasing the savings rate in the short-run. The latter view was especially timely, as hiking savings is being billed as the new haute couture of Turkish economic thinking. As Akcay underlined, with corporates not financially very strong and the rising middle-class just starting to consume, there isn’t really anyone in Turkey to increase the savings rate in the near term.

Akcay also struck a chord or two when he questioned Ziraat Bank CEO Can Akin Caglar’s claims that the state banks had taken up the slack from private banks’ tightening credit and made decent profits out of it. While a definite conclusion was not reached on the issue, the recent gap in lending practices of state and private banks, as evidenced from the rise of loans to deposits ratio of the former and the fall of the latter, is a phenomenon begging to be scrutinized further.

In short, the local boys made us proud in a well-run meeting.

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