[email protected]

November 25, 2012, Sunday

Rating syndrome: Farewell to savings in Turkey (II)

The role of national savings in the development of today's developed countries such as Japan, South Korea and Germany has been well exposed in the development literature.

However, theoretically speaking, it is argued that the need for local sources of finance has decreased since the rise of neo-liberal capitalism in the early 1980s.

Thanks to developments in transportation, communication and information technologies, the world has become more of what is called a “global village” and liberalization measures around the world decreased the significance of national economies. Mainstream economists argued that, depending on the overall capacity and capability of the developing countries, their development process would not be bounded by the availability of domestic resources of finance as capable countries could attracted global capital and therefore enhance the pool of loanable funds.

However, there are many well-known structural bottlenecks in many developing countries. Therefore, their chance of continuous procurement of foreign sources of finance is quite limited. The case of Turkey reveals such a case. Thanks to her major reform measures in the post-2001 economic crisis, a fostering global environment, strong political leadership and stability, Turkey has returned to fast-track growth since the onset of the global crisis in 2008.

Thanks to improvements in the overall macro prudential indicators, Turkey started attracting an increasing amount of foreign capital that had never been seen before in its history. The volume of annual foreign direct investment (FDI) almost reached the $18-20 billion threshold as of 2007 and 2008. This constituted a significant share of the global allocation of capital around the world. The share of Turkey in global capital reached almost 3.5 percent of its gross domestic product (GDP), and it became the 15th largest recipient country in the world in 2007. This was significantly well above the share of Turkey's GDP, approximately 1 percent, of the global economy. Moreover, in addition to the volume of capital inflows, its composition has also increased. The share of short-term capital inflows dramatically decreased during 2004-2008, while the share of long-term credits and FDI rose sharply.

However, what is interesting to observe is that Turkey's high growth performance, rapidly rising per capita GDP, improving predictability, etc. did not result in the rise of its national saving rates. To the contrary, the share of overall national savings has decreased from almost 23 percent of GDP in the early 2000s to a nearly 12-14 percent plateau since 2009. This means that Turkey's global exposure and increased overall economic performance has resulted in a paradoxical situation: Local savings were substituted by global resources and, therefore, the exponentially rising saving-investment gap that reached almost 10 percent of GDP as of 2011, created the same amount of current account deficit (CAD).

At this stage, what I would like to point out is that, unlike the 1990s, which were characterized by rising domestic deficits originating in the public sector, the 2000s have witnessed a similar process of external deficit -- however, this time triggered by the private sector. Obviously, both processes of deficit-financing are not sustainable as this process will eventually be reflected in the major financial indicators of the country.

In addition to the availability of a sound domestic macroeconomic environment, external conjuncture also creates increasing considerations in the rise of vulnerabilities in such a deficit-financing vicious circle. That is why because both domestic limits and global conjuncture has worsened, the high growth process in Turkey was cut off as of 2012, and it is expected that it will continue throughout 2013-2015. What I would like to underline is that in this loss of growth momentum, the major explanation lies more in domestic factors rather than external ones. In other words, even if the global environment is normalized, under current structural constraints and external deficit, it may not be possible for Turkey to re-return to its previously high growth that persisted in the period 2002-2011 with the exception of 2008-2009, the worst years of the global crisis.

At this stage several relevant questions need to be asked: Why have domestic saving rates been declining in Turkey so dramatically? Who is the right actor to carry out this saving obligation in Turkey? What kind of policy environment would trigger a reversal in the current stalemate in the national savings?

In order to find out the relevant answers to these questions, some country cases would provide some policy implications. I will continue from this point.