Monday, January 31, 2011

Weekly Hurriyet Column: Houses of BRIC and MIST

Below is  my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website. As for the title, another cheesy movie reference- House of Sand and Fog- I am quite pleased with my find...

You might have already seen the addendum, which was posted late Sunday night, so I can jump straight to the column:

 
 
As your friendly neighborhood economist, I find it my duty to respond not only to all readers’ questions, but also to requests from fellow journalists as well. So when Simon Roughneen, a freelance journalist doing a piece on the Turkish economy for The Guardian, contacted me with three well thought out questions, I had to respond.

While I address his other questions over at my blog, Simon’s main question on the Goldman Sachs’ new acronym definitely deserves some thought. To quote him, Jim O’Neill, chairman of Goldman Sachs Asset Management and formerly the bank’s Chief Economist, recently characterized Turkey as one of the four ‘MIST’ countries, his latest sound bite to describe the next big players, after the BRICs, among the world’s “emerging economies,” as he sees it.

Simon would like to know what I think of this as well as “the pluses and minuses inherent to the Turkish economy that could underpin or undermine O’Neill’s idea”. Before I go on, I should applaud him for correctly grasping the Goldman proposal: The Financial Times, as well as many other newspapers and all the Turkish media, wrongly thought that Goldman was expanding the BRIC group.

As O’Neill explains in his latest research note, that is not the case: Brazil, Russia, India and China “are in a league of their own within the changing world and, while there are more countries that should be regarded as Growth Markets, there are none that can be regarded to be as strong as them.”

Although I am all for cheesy titles paying homage to movies in my columns, I hate acronyms that result in generalized groupings, as they tend to ignore the differences between these countries. For example, it is often ignored that China is bigger than the other the BRIs combined, and that the BRIC success story is largely a China story.

It is also important to consider the great vampire squid’s motivations: I have always wondered how much of the relative outperformance of the BRICs after the coinage of the term by O’Neill was due to Goldman’s marketing efforts rather than to these countries’ sound fundamentals. But BRICs have been underperforming other emerging markets since the crisis, so Goldman may be thinking it is now time for a new idea.

But leaving these technicalities aside, it is worth considering whether Turkey could be the next big thing. That would require us to look beyond the monthly data flow to longer-term considerations. There are indeed many things working in Turkey’s favor. For one thing, it is a large economy, which is a necessary condition for making it into O’Neill’s list. It has a young, although poorly educated, population, and it is a domestic consumer-led economy.

But Turkey’s largest weakness is in the area of reform. The government could not capitalize on the global crisis the same way it did on the 2001 domestic crisis to enact the reform agenda. On the contrary, the feeble attempts at reform stalled after the 2008 crisis. As a result, while the country has sound macroeconomic fundamentals thanks to the earlier reforms, there are serious fault lines in the microeconomic, institutional and structural landscape.

In this sense, I am surprised at the inexistence of a sound analysis of the new Turkish Commercial Code. My feeble attempts at cracking it have hinted that it is bringing a huge facelift to mergers & acquisitions and the workings of capital markets, two areas in need of reform. Without such changes geared toward facilitating ease of doing business, I find it hard to buy the Turkey story.

But then again, it might be wiser to take the word of Jim O’Neill as an economist: After all, he once attempted to buy Manchester United, whereas I can barely afford my Beşiktaş season pass.

* Emre Deliveli is a freelance consultant and columnist for the Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at http://emredeliveli.blogspot.com.

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