Monday, August 30, 2010

Weekly Hurriyet Column: Foot massage in a Turkish bath

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. Nothing too creative about the title, I just took on the massage example.

As for the column, I would like to add that I feel the CBT is shooting itself in the foot by deliberately ignoring tax and administrative price hikes. While such a policy of not concentrating on prices it cannot control makes sense in a monetary policy framework, it is not Machiavellian at all: More emphasis on these prices could take some of the exporters' anger from the Bank.
In a similar sense, I don't appreciate that the Bank has chosen to stay quiet on the fiscal rule fiasco. Not only the Bank had given quite a bit of emphasis to the fiscal rule in reports and the Governor's speeches, the inflationary consequences of the price hikes, directly as well as indirectly by working their way through expectations, are sure to bring more useless exchange rate debate. 
Anyway, on to the column:

Since I watched the Bertolucci masterpiece The Last Emperor as a young boy, I have always wanted to visit China.

So think about my disappointment when I had to cancel my upcoming Chapan trip to get a foot massage and yet another eagle tattoo when I learned, through a Bloomberg article sent by a loyal reader, that foot massage prices had doubled in China.

Now, I don’t want to paok (sorry, I meant poke) my nose into economies I don’t know much about (and that covers most of the world, with the possible exception of Turkey), but after going through the article and some extra reading on the side, the Chinese story seemed to ring quite a few bells.

First, even though official yearly inflation is still a mere 3.3 percent in China, it reached a 21-month high in July. And there is a common belief, not just among ordinary people like the Chinese equivalent of Milliyet columnist Güngör Uras’ Ayşe Teyze, but also among economists, that real inflation is much higher than the official figures.

There does not need to be a deliberate effect on the part of the Chinese government to manipulate the numbers. Official inflation is equally likely to undershoot as overshoot real inflation because of the inherent nature of price indices. For example, if the representative consumption basket is not revised regularly, it would not take into consideration substitution effects, and there has been no major change in China’s since 2005.

Rising inflation would also have important implications on the never-ending currency manipulation debate between China and the U.S. China has long been accused of manipulating its currency, but regardless of the validity of the claims, a persisting positive inflation differential between China and its main trading partners would take some of the heat off the yuan by allowing the real exchange rate to appreciate.

Interestingly enough, a similar effect has been going on in Turkey, although it is largely ignored: While the Turkish Exporters’ Assembly, or TİM, loves to bash the Central Bank, or CBT, for the nominal exchange rate it sees as overvalued, the updated CBT real exchange rate indices tell a different story, especially compared to developing countries Turkey competes with for the EU market.
Even if the Turkish real exchange rate were overvalued (and it is to some degree, irrespective of the methodology you use), it could as well be due to inflation differentials between Turkey and its comparison countries. And a casual look at the numbers hints that the inflation differential has recently become much more important than the nominal exchange rate in driving the real exchange rate.

And once you dig a bit deeper (but not as deep as Bilica), the role of administrative and government-controlled prices becomes hard to overlook. But for some reason, TİM never even dares to question the government for the price hikes in items like electricity and water, which makes a significant part of exporters’ costs.

The government has indeed relied on knockoff fiscal measures such as tax and administrative goods price hikes quite a bit in the last couple of years. Given that the fiscal rule seems to be shelved to make room for pork-and-barrel spending before the elections, it is likely that the new government will lean on similar price hikes, as such knockoff measures are the most common temporary patches to the budget in Turkey. Too bad exporters’ costs would increase further. But you don’t see TİM criticize the government on the fiscal theatrics, either.

Instead, they are busy picking fights with thinks tanks trying to assist them get a footing in the Brave New World or a Central Bank helping keep their costs down by bringing inflation under control.

*Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at


Rower32 said...

Very good analysis as always. Actually i was more interested in the real fx rate side of the whole story but this is very interesting (re fiscal rule, CB and the exporters) Your blog is a must read for anyone who is interested in this stuff.

Emre Deliveli said...

Yes, that was the original idea (and I did mention it in one paragraph), but I noticed the similarities to Turkey and decided to use it as a springboard to talk about the Turkish case.

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