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...

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