Monday, November 23, 2009

Weekly Hurriyet Column: Cry, the beloved country

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Two weeks of non-cheesy titles were more than enough for me, so I returned with a vengeance: A movie reference that can double as a literary reference. As for the column, I was originally planning to devote the column solely to the two papers, but I was really disturbed by the lack of an intellectual debating platform, so I had to digress a bit and talk about broader issues. Besides, I wanted to wait for the complete papers to do a fair evaluation. Speaking of which, the Central Bank's only fault at this process was not to publish these papers on the day of the conference. I understand their concerns, but the critiques should understand that a CBT working paper should not bind CBT policy, the same way as an IMF working paper would not bind the Fund. The Fund has policy papers for that purpose, and the CBT has documents such as Inflation Reports or annual Monetary Policy Reports. These are the documents that tie CBT policy.

As for the papers, I already have one of the them, which I plan to read carefully in the next couple of days (mid-December). But from the presentations and reviewer comments, it seemed to me that they are far from perfect. For example, as Kamil Yilmaz of Koc University noted, the first paper could be showing scale economy-related specialization and high prevalence of intra-industry trade in developed countries. Or as Cevdet Akcay of Yapi Kredi Investment noted, lack of production of intermediate and investment goods should not lead us to dismiss price-related issues. After all, the reason those goods are not produced might be because they are simply too costly to do so. But then again, the exchange rate is only one of the many factors that affect production cost. I could go on and on. But the point is that the critiques do not mention these points, choosing instead to hide behind old hats such as the imaginary high interest-low exchange rate policy... Anyway, just read and decide for yourselves:

I would have never thought that a couple of working papers in a conference would steal the Economics agenda of a country for a good couple of days.

But when the country in question is Turkey, and the papers are by researchers from the Central Bank, the institution everyone loves to hate, on one of the most, if not most, polarized economic debates, explaining the country’s growing trade deficit, anything is possible. The conference, Structural Transformation in Foreign Trade: Global Dynamics and the Turkish Economy, consisted of presentations of two yet-unpublished Central Bank papers as well as a panel discussion on world trade and Turkish economy in the aftermath of the global crisis.

The first paper attempts to place the trade deficit in the context of global developments. By separating sectors into intermediate and final goods, the authors show that the increased import requirement of exports, deemed as the gangrene of Turkish industry, is not a development specific to Turkey at all. It seems that vertical integration and global supply chains have led firms in developing countries more dependent on imports of intermediate goods for exports. But this does not explain why Turkey has the highest intermediate goods imports for a unit of exports.

This is where the second paper comes in: Asking 145 firms why they import intermediate and investment goods, the authors stumble upon the surprising result that insufficient domestic production of these goods and the need for high-quality products come out at top. These results were unsurprisingly not well-received by exporters and the government, who have long been accusing the strong lira.

While it is difficult to do a complete evaluation without reading the papers, the need to move beyond the exchange rate towards more comprehensive discussions is clear. But even at a more basic level, I have yet to grasp why running a trade deficit is inherently evil. After all, as Martin Wolf noted during my interview with him for this paper at the IMF-World Bank Conference, capital should be flowing to where it has most use and help shift growth towards consumption.

Similarly, I do not understand why the benefits of a strong lira are not put to the table as well. For example, I have yet to see a discussion, with the possible exception of a couple of thoughtful pieces I referred to in my discussion of the structure of Turkish private savings last month, how much the exchange rate has contributed to what I deem, in homage to New York Times columnist Thomas Friedman, the democratization of consumption, by boosting the purchasing power of the country’s burgeoning middle class.

It is no coincidence that it is the labor-intensive sectors that are hurt most by the strong lira, according to the Central Bank survey, who do all the whining. This suits the government just fine, as putting the blame on the exchange rate sways attention from the real issues, the structural problems such as innovation, infrastructure, human capital, and the institutional set-up that the two papers are pointing to. To give just one example, Rauf Gonenc highlighted during the panel discussion that Turkey has the most rigid labor market among OECD countries.

But then again, we live in a country where the so-called experts criticize an imaginary high interest-low exchange rate policy and support the obsolete industrial policy of handpicking sectors by the government, arguments that surfaced not only in last week’s conference but also in the competitiveness conference I wrote about last week. If we cannot get the basic concepts right, what hope is there for scientific policy discussion?

All this leads to my own whining: Cry, the beloved country...

Monday, November 16, 2009

Weekly Hurriyet Column: Competitiveness for a way out

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Another week without a cheesy movie title... Other than that, I do not have much to add to this column, except that I somehow did not like this article. I have no idea what's wrong, and I think I hit a couple of important points, but they all somehow did not fir together well. Anyway, if you know what's wrong with this column, please let me know...

I have to renege on my promise to write on Turkey’s 2010 budget in favor of a convention I attended on Friday, which is much more relevant for Turkey’s long-run prospects.

The Competitiveness Congress, organized jointly by the Federation of Industrial Associations, or SEDEFED and the TUSIAD-Sabanci University Competitiveness Forum, or REF, has been held annually since 2005. This year’s conference, titled Way out the Crisis: Competitiveness, consisted of the presentation of a report on Turkey’s position in the latest World Economic Forum, or WEF, Global Competitiveness Report and introduction of a new database to compare the country’s competitiveness with 48 peers using standard international trade competitiveness indices, in addition to a couple of panels.

The authors of The WEF Global Competitiveness Report 2009-2010: An Evaluation for Turkey have to be commended for undertaking the tedious task of looking at almost all the possible combinations of Turkey’s rankings in different competitiveness indicators and benchmark countries. The result is a comprehensive laundry list of Turkey’s comparative strengths and weaknesses, but not much more.

The problem with such lists is that they give no sense of binding constraints. In other words, given that the government needs to prioritize with its limited resources, it should know where it will get the biggest bang for the buck in the shortest time. Luckily, Fusun Ulengin, the principal author of the report, did mention where she thinks the binding constraints lie: Human capital, especially education & women’s participation, and innovation were also highlighted in the panel discussion following her presentation.

Incidentally, both areas have already been underlined in recent World Bank labor market and education reports as well as the Bank’s Investment Climate Assessment, which precisely tried to identify the private sector’s binding constraints. While it might be self-assuring to reinvent the wheel now and then, we have to go a step further with policy recommendations. Without a prescription, you’ll just have to cross your fingers that the binding constraints just disappear by themselves.

But even then, I would doubt that the government would be willing to swallow the pills, as it is anything but a hypochondriac. Or at least, that’s the impression I got from Competition Board’s chief advisor Erdal Turkkan during his question-cloaked criticism of the report. His putting the blame for Turkey’s mediocre competitiveness to lack of perfect competition, while not supported by WEF data, could be deemed valid to a certain degree. It could also be forgiven as a reflection of the institution he is affiliated with.

It is also easy, at least as an economist, to sympathize, and even concur, with his criticism of panelist recommendations that the government should support certain sectors- the so-called Asian model, which was applauded and studied as a role model, until the Asian crisis exposed the inefficiencies of such managed industrial policy. It is therefore a twist of fate that another crisis has put the Asian framework back in vogue globally, and the panelists have just been following this international fad.

On the other hand, Turkkan’s criticism that such rankings look at the macro environment without considering sectors and firms is definitely valid. In response, Fusun Ulengin has dislosed that they are holding discussions to measure competitiveness at the sectoral level, which I am looking forward to.

But Turkkan is missing the subtle point of these rankings: Once governments provide the cultivating ground for competitiveness with the right environment and incentives, competitiveness will flourish.

Monday, November 9, 2009

Weekly Hurriyet Column: Jobless and joyless recovery

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. For a change, there is no cheesy movie reference this time around. As for the column, the unemployment data that were disclosed a week after my column revealed that I had in fact been too optimistic on the timing of the turnaround in unemployment, which did not wait for year-end to get started...

The debate on the shape of global recovery has been going on unabated for some time, with everyone choosing their favorite letter, leading some to declare, more than three decades after the Fab 4, that all you need is LUV.

This scenario of an L-shaped recovery for Europe, U for the United States, and V for emerging markets is definitely plausible. But more importantly, recent data, while definitely not strong enough to justify markets’ performance, have made it less likely for a W-play. In fact, last week’s October Purchasing Managers Indices, or PMIs, are suggesting a gradual recovery in major developed countries irrespective of the shape of recovery.

While markets tend to give much more weight to PMIs as a leading indicator than proven by empirics, if they’ll be taken at face value, the only country defying trend is Turkey, where the index has been slowly creeping down after registering sharp rises in the second quarter, hinting that the recovery has been losing pace. Unfortunately, the Turkish PMI has been not only consistent with the Central Bank’s own real sector confidence index, but also confirmed by actual data.

However, a glimmer of hope has come recently from trade statistics. Not only there is a considerable increase in imports of consumption goods in the September figures, preliminary October data from Turkish Exporters Association has shown the first yearly post-Lehman rise in exports. Even more importantly, imports contracted less than exports for the first time since trade dried up after the Lehman collapse, a strong indicator that things are going back to normal.

But these positive signs should not lead to overjubilation: For one thing, the increase in consumption imports is mainly in autos, as consumers scrambled to take advantage of the expiring tax reductions. As for the improvement in preliminary exports, the rise looks less impressive once you notice the low base. In this sense, this week’s data releases will help to clear up the picture a lot.

Friday’s September trade indices will provide a better indicator on the normalization in trade, whereas today’s September industrial production and Wednesday’s October capacity utilization figures will show if the stir in imports has spilled over to domestic production. Tuesday’s CNBC-e consumption indices for October, on the other hand, will reveal the health of the consumer.

Even if all of these data confirm the Turkish recovery, a jobless recovery is bound to be joyless. In fact, I see the recent employment statistics, which have been showing seasonally-adjusted unemployment falling for two consecutive periods, as misleading. For one thing, the decrease in unemployment is partly due to the decrease in the rate of extra workers entering the labor force.

This added-worker effect, which was boosting unemployment earlier in the year, is likely to stay unemployment-friendly in the next release on November 16 and even for a couple of months more, after when it could reverse without strong growth. A shift out of agriculture, which has been seeing bloated employment figures for the past year due to the crisis, will only add insult to injury.

Interestingly enough, the employment side of the Turkish crisis has got little attention from the government so far. Despite having the highest unemployment rate in the G-20, Turkey is one of the eight countries in the group that does not have any labor measures in its 2009 fiscal stimulus program, according to a recent report from the IMF. With elections looming, I wonder how long this can go on.

In fact, the unemployment picture is yet another reason why the 2010 budget looks detached from reality. This is where I will pick up next week.

Monday, November 2, 2009

Weekly Hurriyet Column: My Minority Report’s collateral damage

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. And not one but two cheesy movie references squeezed into the title this time around. And I managed to make a reference to the word collateral, which I use in the second part of the column. As for the column itself, here are a few extra notes:

First, a small game: Replace the word capital with IMF in the article (hint: there are two) and you'll see why I favor an IMF deal. As for the CBT's need for collateral, as I was doing my weekend reading of favorite Econ. columnists Sunday afternoon, I found a really good article by Ugur Gurses explaining in painful detail why the CBT did not need bonds as collateral or any collateral at all. Most of the points he is making were already relayed to me by my friends from the CBT, but since I am no CBT expert, I definitely could not have written them that clear myself. Finally, I am now realizing I have once again been too harsh. Governor Yilmaz noted that the full details of the bond-buying deal will be given out at the press briefing for the 2010 monetary policy strategy on December. I will therefore be waiting for this annual strategy document on monetary policy and be on the lookout for any developments before then. Maybe, I will be pleasantly surprised at that time, but the fact remains that the Bank has taken a really awkward first step in a very delicate matter. Anyway, on to the column:

The Central Bank, or CBT, released its latest Inflation Report on Tuesday. With analyst reports having gone into all the nitty-gritty details, I will only briefly summarize the Report’s salient features before jumping to my own minority report.

First, the Central Bank’s inflation outlook is, if anything, slightly more optimistic than before: Despite higher commodity prices, the Bank has only marginally revised its end-2010 forecast. The CBT also notes that inflation will creep up during the remainder of the year and the first half of next year due to base-year effects, unwinding of tax cuts and administrative price hikes, but sees inflation continuing with its downward move afterwards.

This trajectory is fully in line with your humble neighborhood economist’s own projections as well, although I see inflation edging up higher than the Bank envisages and being more resistant on the way down. While this is partly due to my higher oil price expectations, I guess I am also penciling in a higher exchange rate pass-through. In any case, even if my well-above-consensus October forecast of 2.3 percent is realized, yearly inflation will still be below 5 percent, a level we are unlikely to see again at least for a year.

While its inflation outlook may be more dovish, the Bank’s assessment of risks to this outlook is actually less so, as the Bank has taken a more balanced approach than before, highlighting upward risks to global inflation such as growing developed country budget deficits and exit strategies. However, domestic risks barely get any mention in the Report. It seems that the CBT has opted to take as given the government’s fiscal outlook as outlined in the budget and the Medium-term Program, which are, lo and behold, consistent with each other, but totally inconsistent with reality.

Without a weaker-than-expected global recovery and appreciation pressures on the lira driven by capital flows, the CBT is set to pause after limited cuts in the near-term, and the seemingly contradictory views of the report are simply efforts by the Bank to position itself against tail risks in both directions. All in all, I would have said the Bank did a pretty god job with communication this time around, only if this bond-buying business had not come up.

At first sight, it looks innocent enough: Governor Yilmaz highlighted that all the Bank will be doing is to replace the maturing Treasury debt in its balance sheets from the 2001 crisis bank bailout, as the CBT needs collateral for its operations in the Istanbul Stock Exchange and the reverse repo market.

Now, this raises question marks. After all, as I confirmed with conversations with ex-Central Bankers, not only the Bank has many other means to obtain collateral, it could also conduct its operations without collateral as well. Moreover, someone has yet to explain to me why the CBT would need to coordinate this with the Treasury, unless of course it would like markets to perceive this as fiscal accommodation or debt monetization.

A better explanation would be the need to respond to the financial market liquidity squeeze, which the Treasury’s high borrowing requirements have finally managed to make permanent. Unless the CBT increases FX purchases, which it is unlikely to do without significant capital inflows, all the onus of funding the markets would be on open markets operations, which is only a temporary fix. In this environment, the 9 billion the Treasury would have to pay to the CBT would be a major drain from the market if it were to borrow this amount from the markets.

I wonder why the CBT has not put it this way rather than resort to the collateral argument, risking serious collateral damage.