Tuesday, July 6, 2010

Some More Reader Appreciation

The reader who asked on Turkey's current account sent me the following email last week:
The reason I was asking for the current account deficit clarification was this. Up until April 2010 the global economy was on "the coordinated recovery" credo and thus the outlook was somewhat optimistic.
Then, news started to trickle such as this:


Re: Turkish economy the last news reported on the western press were something like this:


As you know the global markets reached a peak in April and have been sliding ever since. Even your friend Roubini now reports the danger of a "third" depression.

Consequently my thinking was as follows:

* Turkey made it o.k. during the first 2010 quarter but the gap on import-export deficit also grew considerably.
* If starting with May the global economy began to deteriorate, shouldn't it be a logical conclusion that the May -June Turkish export figures might have suffered as well? and what about imports? was Turkey able to curtail imports in tandem with a reduction in corresponding period exports? or is there some inertia in imports that is much more difficult to reduce unless some time elapses?
* Both Hurriyet and Zaman today had articles (based on percentage increases) showing that exports to neighboring countries to Turkey (this would include Greece) increased by an impressive percentage. There is a bit of confusion in understanding the significance of this because Turkish trade is reported as EU-related and non-EU related. Generally the reason I don't like percentages is because they mask the nominal change (for example if my production is 10 widgets and then in 2009 drops down to 1 widget and then in 2010 recovers to 2 widgets then my rate of increase is an impressive 100% over the 2009 figure - but still 20% off the original figure).
* If the global economy slows down during the second half of 2010, how does Turkey cope with this, especially after the fact that it has relied on 5-6% IMF projections of growth? What if such growth is only 2-3%?
* Turkey used to display (for foreign investment purposes) a very nice and useful tabulation showing GDP figures and deficits for the 2000 to 2015 time span. The last tabulation I saw was showing that it would take 5 years for Turkey to return back to the 2008 record figures for its GDP and trade deficit. I guess somebody decided that such figures were not that flattering and now the only thing you see on the site are % projections of growth (all pointing to a 6% consensus growth):


I am sure that once the new figures are available they will be spun to a positive message of some sorts. O.k. given an election year I can see the sensitivity to telling a convincing story. However, I am not a voter and simply try to understand how the Turkish economy works; its sensitivities and dependencies on global trade and its resilience for the region.

By no means I am asking you to write about this in the Turkish press; I already understand your predicament as a skeptic and false sympathizer of one partisan political group versus another. So please don't be tempted to offer yourself another fine essay to the crowd of the Hippodrome; we will probably both become victims of another "NIKA" revolt. I am just asking of your honest opinion. Is there cause to worry about the second half year performance for Turkey?
The reader has a lot of comments and questions, so I'd better answer them as numbered items:
  1. On Exports and Imports: Here, the key idea is that exports and imports respond to some similar factors, albeit in different directions (for example the exchange rate), but also different variables. For example, exports would be affected more from world demand (or more accurately, demand from your markets), although it is possible to hypothesize that a slowdown in domestic demand would induce firms to export more. On the other hand, imports would be expected to be affected more from domestic demand, but again a supply effect of the sort outlined above is also possible. So I will answer this question with the typical answer that would get you past the first round in an IMF job interview: It depends. BTW, to get past the second round, you'd have to say, It depends on the elasticity. As for the question on exports to Turkey's neighbors, the reader is right to note that the absolute numbers are minimal. But, as I argued in a recent post, there is evidence that some firms have been successfully export their (to neighboring countries) out of the crisis. And there are important regional differences. For example, there is actually quite a bit of anecdotal evidence that firms in the Southeast were the ones exporting to their neighbors (I have no idea who was exporting more to Greece). And a study last year actually found out that those regions had the least employment losses during the crisis. In sum, the reader is right that the huge percentage increases do not mean much for the overall economy, but they have made a difference for some parts of Turkey.
  2. On Selective Statistics Reporting: The reader is right that there is a lot of selective statistical show-off in politics. One example is with GDP: When I was teaching Econ. to Citi branch employees, I used to explain why the PM would always allude to the dollar GDP figure- with the USDTRY seemingly on its way to parity, the dollar numbers looked attractive. Lately, the opposite has been going on, as the same reader noted in a later email: There is an even bigger topic which you can examine through TurkStat numbers, namely, the Turkish GDP. Denominated in dollars it shrunk by almost 17% in 2009, yet the reported figures show a 4.7% increase when expressed in Turkish Liras. So, I guess the morale of the story here is "beware of the denominated currency, especially when the positive message sounds more like a gift" to paraphrase a Greek stereotype.
  3. Global Slowdown and Growth: Another example I always gave when teaching the same class was to compare the Turkish economy to the US and note the similarities in the expenditure composition of GDP. For one thing, both economies, spend more than save, running current account deficits as a result. Also, almost 2/3 of GDP comes from private consumption, so the name of the game in growth is domestic consumers. What this means that although a second dip/global slowdown will affect Turkey through the external demand channel (and somewhat through confidence, and we are already seeing signs of that in the leading indicators, as I note in my latest Hurriyet column), Turkey will not grow 2-3% simply because base effects. For example, even if industrial production stays constant, working days and seasonality-adjusted, on not only Thursday (the May figure is released that day, but the rest of the year, we will still get a growth figure of around 5%. The key question, I think, is not this year, but 2011, especially with respect to growth and inflation.
  4. Personal Stuff: As I have argued many times before, I am no partisan of any political or business group. In fact, I am not a member of any organization or even a sympathizer of anything other than Besiktas. And if you are no history buff, you can read about the Nika riots here.

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