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Observations on Turkey’s Recent Economic Performance

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We establish that the Turkish economy underwent a remarkable transformation during the last decade. We identify the underpinnings of this successful transformation as well as the inadequate policies that enabled vulnerabilities to accumulate. Despite improvement in the economic fundamentals, volatility and dependence on external finance not only persisted, but actually increased during the last decade. We discuss the structural causes of the widening external deficit. Finally, we evaluate Turkey’s outstanding economic performance in the aftermath of the global financial crisis and the recent soft landing and rebalancing episode.

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  1. Population growth steadily declined throughout the 1980s and 1990s, along with metrics such as urbanisation and improved female education, with temporary reversals during the early 1980s and 2007–09.

  2. Data is obtained from Turkey Data Monitor (TDM) databank ( GDP per capita is calculated with annual GDP in TL (constant 1998 prices, chain indexed at base-year switches) and annual mid-year population. In general, except for international comparisons, domestic data sources are preferred when available.

  3. We ignore two dates of the 1980s (1985, 1982) that lie between 1980 and 2003.

  4. “GDP per capita, PPP (constant with 2005 prices in U.S. Dollars)” from World Development Indicators (WDI) ( The series starts at 1980.

  5. We prefer the term emerging market economy to developing economy in order to underline relatively advanced levels of integration with the world economy, namely, through trade and financial flows.

  6. Another puzzle? Argentina is among the few countries that outperformed Turkey in the last decade.

  7. Historical data are available from Turkstat: Statistical Indicators 1923–2010 ( We estimate 2012 data (September 2012).

  8. Data from Balance of Payments ( and Turkstat.

  9. Volatilities are simply calculated by standard deviations of real GDP growth of the corresponding periods. GDP data at 1998 constant prices are taken from Time-Division Multiplexing (TDM).

  10. Correctly called “premature liberalisation with incomplete stabilisation” by Rodrik (1992).

  11. Data from World Development Indicators (WDI); upper-middle-income countries are defined by the World Bank.

  12. Real GDP growth data from WDI; volatilities are measured as the standard deviations of the growth rate within the period.

  13. The link between economic growth and volatility is theoretically ambiguous (see Imbs, 2007). Ramey and Ramey (1995) present evidence to suggest that mean output growth rates are adversely affected by their volatility. These findings, however, are in contrast to earlier studies by Kormendi and Meguire (1985) and Grier and Tullock (1989). Imbs (2007) finds that growth and volatility correlate negatively across countries but positively across sectors.

  14. Turkstat: Foreign Terms of Trade data, 2003 = 100.

  15. The world economy slowed during 2001–02 after the bubble burst in the U.S., but picked up rapidly in 2003.

  16. Does the institutional framework matter during the catch-up period as much as some economists claim? There is evidence to the contrary. In the recent past, several countries successfully achieved export-led rapid growth during early and mid-stages of industrialisation, despite widespread corruption, nepotism, lack of rule of law, arbitrary state intervention, etc., simply by reducing real wages to levels offsetting the negative impact of wrong fundamentals. Notably, the implication is that for every level of institutional development there exists a real wage rate that allows for rapid catch-up.

  17. We must note another peculiarity of Turkey’s inflation experience: no indexation throughout the period. This context provides a technical explanation of why hyperinflation never occurred. The political economy of this intriguing event is obviously more complicated.

  18. Data from Turkstat; year-end consumer price index (CPI) change; chain-indexed at base-year switches.

  19. For an old interpretation, see Akat (2000).

  20. The majority of economists would agree that inflation has distortional effects on long-term economic growth if it reaches high levels. However, defining the high level is a matter of debate. In a frequently cited work, Bruno and Easterly (1998) showed that once the rate of inflation exceeds some critical level, which Bruno and Easterly estimated to be about 40 %, significant declines occur in the level of real activity. In a recent study, Kremer et al. (2012) estimated that threshold as low as 17 %.

  21. See Başçı (2012a). Barro (1995) suggested that a likely channel by which inflation decreases growth is through a reduction in the propensity to investment. His estimation shows that the impact of an increase in average inflation by 10 percentage points is a decrease in the ratio of investment to GDP by 0.4 to 0.6 percentage points and a reduction of the real per capita GDP growth by 0.2 to 0.3 percentage points (all annual).

  22. Private sector borrowers face balance-sheet constraints very rapidly; thus, the increase in money supply is limited well before hyperinflation is reached. The public sector, in turn, has no similarly tight balance-sheet constraint and has the ability (through the Central Bank) to monetise its deficits and debt.

  23. The data were kindly supplied to us by Caroline Van Rijckeghem based on her work. See Van Rijckeghem (2004). See also Emil et al. (2005).

  24. Our method was to inflate net public debt of the previous year by the current year GDP deflator; this corresponds to an unchanged level of real public debt and therefore, a balanced public sector (no deficit or surplus). The difference in the actual net public debt gives the actual public sector balance. This method bypasses the tedious calculations as in the previous period. Obviously, it includes all financial capital gains and losses of the public sector, seigniorage, exchange rate fluctuations, privatisations, etc., and, in this way, is a realistic estimate of net result of the public finances. Net public debt data is from Treasury; nominal GDP and GDP deflators (1998 series) are from Turkstat.

  25. In that sense, we believe that this period of Turkish Economy constitutes an example of expansionary austerity. See Guajardo et al. (2011).

  26. See Üçer and Van Rijckeghem (2005) for a detailed story of the crisis.

  27. Available at

  28. Usually, the two are interlinked (twin deficits). However, during the years prior to the crisis in 2001, Turkey did not exactly fit the twin deficit template; public deficits were much larger than the external deficit. These topics will be discussed later.

  29. Data from WDI: “Current account balance (% of GDP)”

  30. Data from WDI: “Exports of goods and services (BoP, current U.S. Dollars)”; “Imports of goods and services (BoP, current U.S. Dollars)”.

  31. Data from CBRT; old series, discontinued since June 2010 and replaced by a new series (2003 = 100).

  32. “Big Mac exchange rates”, calculated by The Economist, list TL among the overvalued currencies, usually by a small margin. More sophisticated estimates by Cline and Williamson (2011) put TL among the most overvalued currencies.

  33. This is a truism: Governor Erdem Başçı pointed to it in a presentation to the cabinet while comparing Turkey to Greece, Spain, and Portugal (Başçı 2012b). Slide 13 in his presentation demonstrates domestic demand overtaking GDP from 2003 onwards. The difference (theoretically equal to external deficit) widens until 2008, then somewhat falls only to reach a peak in 2011. We excluded a similar graph due to space limits.

  34. Data: one-month maturity nominal interest rates for TL and US$ deposits and share of TL deposits in total from TDM; monthly average nominal US$ exchange rate from CBRT and monthly CPI from Turkstat (chain indexed to 1995 series for the period before 2003). Use of one-month maturity allows the calculation of ex-post real TL interest rates correctly on an annual basis.

  35. Deposit holders pay withholding tax and their nominal and real return is lower.

  36. Since the global crisis, the weaknesses of the inflation-targeting framework and the unique role it attributes to the interest rates have lost their appeal, and central banks moved on to macroprudential policy tools. Our analysis confirms the need for other indicators (beside interest rates) for a correct evaluation of monetary policy: balance sheet of the CB, credit ratios, monetary base, etc. See Borio (2011) and Goodhart (2012) for a discussion of these issues.

  37. Similar to the natural resource curse or the Dutch syndrome; fiscal correction (financial and price stability) replacing the discovery of oil.

  38. Broner and Rigobón (2006) showed that capital flows to emerging markets are more volatile than those to developed countries.

  39. For annual figures, we use TDM (GDP growth and GDP in US$) and CBRT (capital account) as our data source. Capital account represents financial flows, including FDI, but excludes CBRT reserve accumulation and net errors and omissions. The GDP figures in U.S. Dollars are obtained by using the nominal GDP and period average US$/TL exchange rates.

  40. Using quarterly data, we estimated a bivariate VAR(4) among output growth and the share of capital flows in output. The (generalised) forecast error variance decompositions derived from this VAR suggested that up to 38 % of variations in output can be explained by the capital flows. While this percentage is equal to 24 in the very short term, it quickly increases and reaches to 38 in 8 quarters. When we include the real exchange rate as a third variable into the VAR, this percentage of capital flows reduces to 36 only, but the real exchange rate gets 39 %. The results are available upon request.

  41. See Collins (2007), who argues that capital flow indicators are likely to be endogenous in growth regressions, making it difficult to identify causal effects. In the econometric analysis mentioned in the previous footnote, we test for Granger-causality between the capital flows and growth and find evidence on bivariate causality.

  42. The references to the IMF, the World Bank, and the Ministry of Development are above.

  43. The only official data on domestic, public and private savings are published as part of “General Equilibrium of the Economy” by the State Planning Organization (today part of the Ministry of Development, Below, we touch upon some of the shortcomings of the saving data.

  44. The Ricardian equivalence hypothesis comes to mind. The decline in domestic savings shows that it is not one to one; private savings fall much more than the increase in public savings.

  45. Other explanations include demographics such as a high young dependency ratio and educational characteristics. See the above references for a complete list.

  46. Although the corporate savings estimated by the World Bank and Ministry of Development of Turkey (2011) using firm level survey data do not seem support our hypothesis, Yükseler (2011) indicate that the capacity of firms producing value added by main activities dropped significantly from 2002 to 2008 in industry, manufacturing and services sectors (see also Özlale 2012). Özmen et al. (2012) asserts that the savings of nonfinancial firms as a percent of net sales are lower than those of nonfinancial firms in major developing countries.

  47. Obviously, since capital inflows are associated with appreciations, this observed relation is also consistent with the hypothesis that the drop in savings is due to easy credits and mostly resulted from the behaviour of households.

  48. Günay and Kılınç (2011) find that non-tradable sector is financially more constrained than tradable sector and, with non-tradable sector being more constrained, credit movements become an important determinant of boom-bust cycles.

  49. GDP was contracting (yoy) by −7 % in 2008Q4 and −14.7 % 20009Q01.

  50. Interestingly, while the current account deficit reached 10 % of GDP in 2011 (6.4 % in 2010), its stock counterpart, net investment position (NIP) fell from 49.6 % of GDP to 42 % according to IMF estimates. Because NIP estimates require complex corrections for valuation changes of existing assets, data is not entirely reliable.

  51. The quality of financial flows has weakened in the period after the 2008 crisis. In the period 2003–2008, Turkey received significant inflows in the form of foreign direct investment and long-term borrowing.

  52. See Kara (2012), Başçı and Kara (2011) and several presentations of Governor Erdem Başçı and his deputy governors (available at See also Özatay (2012), Akkaya and Gürkaynak (2012), and Akçay and Ocakverdi (2012).

  53. However, not uneventfully; there were many skirmishes with the financial markets, which had difficulties in digesting the newly found self-confidence and assertiveness of the monetary authority.

  54. Data from Turkstat; columns measure the contribution to yoy growth of GDP for each demand category. Inventory change is included in yoy GDP growth rate (line).

  55. Capital Controls, such as Tobin tax, may support the monetary policy in determining the required depreciation given the current environment ample international liquidity.


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Correspondence to Asaf Savaş Akat.

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Akat, A.S., Yazgan, E. Observations on Turkey’s Recent Economic Performance. Atl Econ J 41, 1–27 (2013).

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