Monday, October 19, 2009

Weekly Hurriyet Column: Saving private savings

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I thought I had lost my ability to come up with cheesy titles, so it is comforting to see that I am slowly getting back into shape- although it is definitely a good WWII movie, I think it is a bit overrated.

Although I love my editors at the paper, one thing we can not agree upon is referencing. I like to give full academic-style references to any papers I am referring to, while they do not like footnotes too much. Of course, I could reference the papers in the article, but then given that I only have 600 words or so space, I am reluctant to do that. So to make it easier for those who want to go ahead and read the papers, I have included hyperlinks to the papers.

In addition, I should tell that a conference call I had with analysts from Dr. Doom's aptly named Roubini Global Economics Monitor really helped me organize my ideas, so a "thanks" is due to them as well.

Just to give you a bit of a background, this savings discussion is not new: It started during the summer when internationally-known Turkish economist such as Dani Rodrik and Kemal Dervis highlighted that Turkey needed to increase its savings rate; Cevdet Akcay's response came at that time as a response to those arguments.

Finally, there is quite a bit of support for the reform argument in the latest Doing Business Report of the World Bank. In fact, one of the undersubscribed seminars at the Meetings was precisely on reforms. Although the official name of the Meetings is IMF-World Bank Annual Meetings, the World Bank part usually gets overlooked, and with the crisis and all that, this year would naturally be no exception. But I would have hoped that longer term issues in the Bank's sphere would not get as ignored. Anyway, a couple of newspapers/columnists did highlight recently Turkey's lackluster performance in these rankings in the past few years. I would not make too much out of the numbers per se, but anyone following the Turkish economy would agree that the government has been suffering from reform fatigue in the last two years.

'nough said; now to the column:

One of the big themes of the IMF-World Bank meetings was that global imbalances, widely seen as one of the underlying causes of the crisis, need to be corrected.

In fact, when you think about the great emerging market reserve buildup of the last decade, IMF’s efforts to broaden the flexible credit line and turn itself into a lender of last resort suddenly appear as a crucial part of this rebalancing act. A natural consequence of this process is that international capital flows will not reach the highs of the few years.

Such a transition and the new normal that is associated with it, which was outlined in an excellent article by bond investor Pimco’s Mohamed El-Erian at the end of last month, has important implications for the Turkish capital flows-induced growth model. Having opened its capital markets, secured customs union with the EU in 1996 and cleaned up its banks after the 2001 crisis, Turkey was in an excellent position to take advantage of the 2002-2007 liquidity glut.

Therefore, it was only natural that import dependency of exports rose considerably in the last decade, with 1996 and 2001 being inflection points. More surprising was the decline in the private savings rate, which Turkey’s demographics should have favored. Several notable economists I chatted with during the IMF-WB Meetings in Istanbul did indeed admit they were puzzled by the low savings.

Notwithstanding the fact that the theoretical relationship between demographics and savings is rather tricky, the impact of Turkey’s booming economy on its middle class has largely been ignored. YapiKredi economists Cevdet Akcay and Murat Can Aslak do show in a recent research note that the middle classes have been increasing their share of consumption in the past few years. A short drive around booming districts of Istanbul such as Umraniye and Gungoren, which have developed into buzzing consumption centers, confirm their findings.

Further evidence comes from a paper on the evolution and determinants of the savings rate by Murat Ucer and Caroline Van Rijckeghem. They relate the decline in savings to the post-crisis credit growth and housing price increases. While this means that the savings rate is expected to increase naturally in the next couple years, their detailed run-through of different policy options comes to the conclusion that there is no quick fix to the Turkish savings drought, especially in the short to medium-run.

Argentine economist Guillermo Calvo famously noted once that we do not know much more about Macroeconomics than accounting identities. In this case, the identity is the equality between the current account and the sum of the government and private sector savings-investment balances. If the global economy is indeed sailing to a new normal and increasing the savings rate will be a bit harder in practice than in academic papers, the onus of adjustment will have to be on the current account. This would mean less import dependency of exports, definitely much more easily said than done.

In the meantime, maybe we should also be questioning if the current Turkish growth model is really so undesirable or impossible to attain in the new normal. As Martin Wolf has been emphasizing, capital should be flowing to where it will have the most use. This is a point Cevdet Akcay has been making, as he questions export-led growth models.

But with a smaller pie, countries will scramble for scarcer capital by pushing ahead with reforms; at least, this was the impression I got from the IMF-WB meetings. In other words, it will be a world of survival of the fittest rather than party until dawn.

And those falling back on reforms may not find markets as forgiving as in the last decade.

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