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A comparative analysis of export growth in Turkey and China through macroeconomic and institutional factors

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Abstract

The Turkish economy became more stable in the period of 2003–2011 compared with the period of 1985–2003, because the economic crisis that emerged in the 2000–2001 period forced the country to undertake institutional changes. Thus, it could reduce the severe inflation and the volatility of the lira. The Turkish economy gained relative stability. However, this performance is not sufficient for Turkey to become a strong competitive power, compared with the Chinese economy. China linked its wage growth to the productivity growth of non-tradable goods by following export-led growth strategies in the 1990s that contributed to its trade surplus, but Turkey kept wage growth at above the productivity growth of export goods, which reduced its competitive power and deepened its trade deficit. Therefore, Turkey must decrease its wage growth to the productivity growth of non-tradable goods and reduce overvaluation of the lira. To accomplish these goals, Turkey must undertake new institutional changes in its wage–labor relations repress on its wage growth and must transform the floating exchange rate system into the managed exchange rate system by considering policies for its undervalued currency. In other words, Turkey must restrain extensive labor rights related to unionization and collective bargaining and must control the exchange rate to support export-led growth.

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Notes

  1. In 2000, the productivity growth of export goods was −29.1 % (calculated according to the method in the “Appendix”).

  2. In Turkey, in the 2000s and 2010s, the inflation target was considered by productivity growth (non-tradable goods and export goods) to yield a fluctuation band limit for inflation between 3 and 7 % to support domestic consumption. In 2013, inflation was 7.5 % in the Turkish economy, according to the World Bank (inflation, consumer price).

  3. PPP is defined in Sect. 2. PPP = export price of the US/export price of Turkey. The export price consists of markup rate, unit labor cost (ULC) and imported material cost. This condition was considered by the unit labor cost parity (ULCP) approach regarding constant markup rates. The definitions for ULCP are natural exchange rate, real exchange rate or purchasing power parity (PPP). For PPP, see Cassel (1918) and Dornbusch (1985). PPP allows us to determine overvalued or undervalued currency in an economy. If PPP’s appreciation is greater than that of the exchange rate, it indicates that the national currency is undervalued. PPP based on ULC was used by Uni (2012) to define the exchange rate regimes of countries in East Asia. According to his research, the Chinese economy gained a competitive advantage through its fixed exchange rate regime under export-led growth.

  4. Source: the World Bank (GDP per capita).

  5. Source: WIOD’s database entitled “socio economic accounts”.

  6. The dependency on the IMF was caused because of its credits for the Turkish economy in a condition for following free market economic policies after the 2000–2001 economic crisis. However, Turkey does not have debt on the IMF to become purely dependent on its policies today.

  7. To compare Turkey with South Korea, it is important to examine 5-year plans of Turkey where the import substitution industrialization failed. South Korea is accepted as a developed country, which has important medium- and high-tech brands throughout the world, whereas Turkey and China are still developing their medium- and high-tech industries.

  8. Previous works have mostly been based on the analysis of tradable (export) and non-tradable goods to calculate productivity growth by dividing industries. Mihaljek and Klau (2004) and He et al. (2012). However, in our work, we distinguished them on commodity bases rather than dividing industries, as in previous works.

  9. For Turkey, we used 1985–2003. In these years, Turkey adopted neoliberal policies and changed its institutional forms during the 1980s. In 2002, the Justice and Development Party (AKP) was elected to lead the government, and political stability was provided with economic stability. Also, the reforms to address the crisis of 2000–2001 became clear, and the productivity growth of export goods increased significantly. For China, we considered 1990–2003 because China instituted structural reforms in the 1990s and joined the World Trade Organization (WTO) in the early 2000s, and China allowed its yuan to fluctuate by approximately 0.3 % in 2005. In addition, we considered peak-to-peak years for both countries to analyze the same tables between the same years. Therefore, 2003 was also an important year for the Chinese economy before it undertook new institutional changes to its exchange rate system.

  10. p e shows the export price, which was calculated from the UN data entitled “national accounts estimates of main aggregates”, the database for which is the United Nations Statistics Division (http://data.un.org/Explorer.aspx?d=SNA). Export price can be calculated from exports at current prices (national currency) divided by exports at constant prices (national currency). For China, the source for price levels is the World Bank. Between 1995 and 2011, wages and the number of persons engaged in production were derived from the WIOD’s database entitled “socio economic accounts” (http://www.wiod.org/new_site/database/seas.htm). Imported material costs were derived from the WIOD, the database is “national input–output tables” (http://www.wiod.org/new_site/database/niots.htm). See the appendix for v e (vertically integrated labor input coefficients in export goods). For 1985 and 1990, the sources and tables in the introduction were used to find the necessary data. For the USA, the Organisation for Economic Co-operation and Development (OECD)  input–output tables and the Bureau of Economic Analysis (BEA)’s  employment data were used. For China, employment and wages were derived from the International Labor Organization (ILO)  and the OECD using economic activity for 1990. For Turkey, TurkStat’s input–output tables and employment information were used for 1985. The links in the footnote were accessed on December 25, 2015.

  11. Hicks pointed out that a country chooses a key currency for trading, as has occurred in the past, such as with the pound sterling and today the dollar, which is the common currency for trading around the world. Greater exports of goods indicate more foreign reserves to maintain the currency in an expected rate. If a country has a trade deficit, it indicates that the competing country increased its productivity growth of export goods. This result can emerge in the form of an undervalued exchange rate in the competing country, which increases its trade surplus through rising demand from the other country (Hicks 1989: 121–131). Therefore, it is a possible method to devalue the national currency to a decided level in the country with the trade deficit problem.

  12. If appreciation in the exchange rate is higher than that of PPP, it shows the national currency is overvalued.

  13. Uni combined Hicks, Balassa-Samuelson and Pasinetti’s ideas to describe the exchange rate regimes of the countries in East Asia (Uni 2007, 2012). Thus, he concluded that the Chinese economy adopted Hicks’ growth model in the 1990s because China not only fixed the yuan’s value, but it also consistently kept wage growth comparatively less than the productivity growth of export goods by indexing to the productivity growth of non-tradable goods in the 1990s.

  14. Between 1980 and 2000, the Turkish economy had the managed exchange rate system to control large fluctuations in the lira because of high inflation. This policy caused inconsistency in the exchange rate system of Turkey and created an overvalued currency and a high interest rate. See Görmez and Yılmaz (2007) for additional information about exchange rate systems in Turkey.

  15. The index of dispersion indicates that we divided each industry’s ratio of exports to output by the mean value of the entire sum of the ratios in 17 industries. Thus, we could estimate the industries that are more specific in related countries.

  16. Medium- and high-tech industries include chemical and chemical products, machinery, electrical and optical equipment, and transport equipment. The remainder consists of low- and medium-tech industries. For the classification of low-, medium- and high-tech industries, see (http://www.oecd.org/sti/ind/48350231.pdf). The link in this footnote was accessed on December 25, 2015.

  17. Other than railways and tramways, vehicles’ share in total exports was 11.5 % in 2014 in the Turkish economy. For additional information, see the Investment Support and Promotion Agency (http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/InternationalTrade.aspx).

  18. For additional information about machinery investment, see the report of Investment Support and Promotion Agency (http://www.invest.gov.tr/en-US/infocenter/publications/Documents/MACHINERY.INDUSTRY.pdf). The link in the footnote was accessed on December 25, 2015.

  19. China’s data were utilized by the China Statistical Yearbook for 1999, 2000 and 2009, and the categories are investments in fixed asset and industry. In the yearbooks, we considered textile, textile wearing apparel, footwear and caps, and leather, fur, feather and related products for the textile and textile products and leather, and leather and footwear industries. For the machinery and transport equipment industries, we considered general purpose machinery, special purpose machinery, transport equipment, electrical machinery and equipment, and machinery for cultural activity and office work.

  20. Kenen (1996) pointed out that speculative attacks can be self-fulfilling, but they do not occur randomly because speculations are usually triggered by bad news about the government, combined with the effort of unskillful goverments to prevent these attacks.

  21. Opponents against reforms attempted to stop the reformation process, which could increase the competitiveness and efficiency in the Turkish economy. Deyo (2012, pp. 165–170) indicated that, in the 1990s, the Thai government could not continue privatization and liberalization, and it placed new restrictions on foreign investment in public industries and moved to protect major non-tradable banks and industrial firms from bankruptcy, ignoring the reforms that had been negotiated with the IMF and the former government because of pressure from non-tradable business, labor, academics and social movements. A similar situation emerged in the Turkish economy in the 1980s and 1990s.

  22. According to TurkStat (foreign trade statistics), between 1985 and 2003, the average trade deficit was −11.9 billion dollars, and between 2003 and 2011 it was −64.3 billion dollars. Turkey’s trade deficit was a serious problem. See Fig. 2.

  23. The main reforms were implemented in the period of Özal’s government by the Motherland Party, which was elected in 1983. Thus, by the hand of the government, the import substitution industrialization lost its significance and was replaced by export growth strategies.

  24. The target has been between 3 and 7 %.

  25. In addition, to regulate banks and credits, the Banking Regulation and Supervision Agency (BRSA) was established in 2000 and it has become an important institution to control banks and credit against inflation.

  26. In 2002, the government debt to GDP was 74.0 %. However, in 2012, it was 36.2 %. Source: IMF database; the country category is emerging and developing Europe, and the category of statistics is government finance (http://www.imf.org/external/pubs/ft/weo/2014/01/weodata/weoselgr.aspx). The link was accessed on December 25, 2015.

  27. In November 2001, new legislations prohibited the CBRT from financing public industries. In addition, between 2002 and 2005, the CBRT used implicit inflation targeting system, and since 2006 an open economy inflation targeting system has been used.

  28. For 2013–2015, the targeted inflation rate of the CBRT is 5 %.

  29. To eliminate the overemployment problem, the unemployment rate increased in Turkey significantly according to the World Bank data, and in 1996 and 2000 the unemployment rates were 6.6 and 6.5 %, respectively. However, in 2010, it was 11.9 and the number of unemployed people dramatically rose. Although Turkey increased its economic development, it could not produce employment in the country because the main policies were against overemployment and high wage growth. See Yeldan and Ercan (2011), who pointed out that, after 2001, joblessness became a part of the Turkish economy.

  30. Source: Central Bank of the Republic of Turkey (CBRT): “Strengthening the Turkish Economy: Turkey’s Transition Program” (http://www.tcmb.gov.tr/), accessed on December 25, 2015.

  31. Source: the State Council of the People’s Republic of China, “China issues guideline to deepen SOE reforms” (http://english.gov.cn/), accessed on February 20, 2016.

  32. Author’s calculations. Data were derived from China Statistical Yearbook 2013. In 2011, state-owned enterprises had 6704 employed persons, but private enterprises had 6912 employed persons (10.000 persons).

  33. See Frankel and Wei (2007) for additional information about the Chinese exchange rate system.

  34. Turkey had many elections because of coalition governments with conflicts in parliament. Thus, the Turkish economy could not have a central power to implement necessary institutional changes, compared to the Chinese economy. However, in the 2000s, deregulation policies could be implemented effectively in the Turkish economy under the only government between 2002 and 2015.

  35. China usually sets its inflation target at between 3 and 4 %.

  36. See additional information for China’s agricultural reforms (Arrighi 2009, pp. 361–362). In the 1990s, the price system planned by the government was removed on most products (Guo 2010, pp. 89–92). According to the OECD, the registered unemployment rate was 1.8 % in 1985, but increased from 1990 to 2010 in general. By open economy policies, China attracted labor power from rural areas to cities, which changed the social condition of China (Harvey 2011, pp. 119–120; Naughton 2007, p. 7). Turkey experienced a similar situation in the 1980s, when Turkey transformed into an open economy and the cities attracted labor from rural areas.

  37. Source: China Labour Statistical Yearbook (2013) for labor disputes. China passed a Trade Union Law in 1992 and a Labor Law in 1994 to regulate collective bargaining and labor disputes. However, collective bargaining was not effective and workers did not have the right to unionize or conduct effective demonstrations. For additional information about labor disputes, see (Lee 2009, pp. 2–3; Shen 2007, pp. 45–47).

  38. For some idea, from 1994 to 2005, China had a managed exchange rate system (Yi 2013). However, our idea is that China kept its exchange rate at the same level strictly by institutional changes until 2005, so we prefer to describe it as a fixed exchange rate system.

  39. International pressure for the fixed exchange rate in China increased after it became a member of the WTO. Against external factors, such as the 2008 crisis, China increased its wage growth slightly to contribute to domestic consumption.

  40. Although new labor reforms emerged to improve employment conditions in 2008, they did not bring independent unionizations for strikes.

  41. For additional information, see Yan (2014), who pointed out that the social security system is one of the important concepts to support domestic consumption that was underpinned by concerns about income policies and health insurance.

  42. Source: China Statistical Yearbook 2013.

  43. However, China still has potential labor supply in agriculture areas, and recently it changed its one-child policy upon foreseeing possible labor shortage problems. China changed its one-child policy in the mid-2010s. Now, an only child can have two children.

  44. Author’s calculations. Calculations were made as described in Table 2 using the OECD input–output tables; see the appendix.

  45. Source: the World Bank (consumer price, inflation).

  46. Source: Author’s calculations. Data were derived from chinadataonline.org (foreign trade and economic coorperation).

  47. See Uni (2007).

  48. Minimum wage is negotiated by with the government, the employer union and the trade union in Turkey. Minimum wage growth in Turkey was 9.7 between 2003 and 2011. Source: Ministry of Labor and Social Security (daily and monthly minimum wages), (yıllar itibarıyla günlük ve aylık asgari ücret) in Turkish, (http://www.csgb.gov.tr/csgbPortal/csgb.portal?page=asgariucret), accessed December 25, 2015. The minimum wage has been directly under the control of the government, but it was not linked to the productivity growth of non-tradable goods in the economy. The minimum wage occupies a large part of the industries that employ low-skilled workers. Therefore, this condition increases pressure on the government because of political parties, trade unions and social movements. In addition, collective bargaining between trade unions and industries is not flexible, securing at most 3 year agreements without considering productivity growth or possible external and internal shocks.

  49. Source: the World Bank (gross domestic savings, percent of GDP).

  50. For instance, in 2013, the interest rate was 11.2 %, inflation was 7.5 %. Source: for interest rate the IMF (discount rate), and for the inflation the World Bank (consumer price, inflation).

  51. Mundell–Flaming model points out that fixed exchange rate, free capital movement and independent monetary policy cannot exist together.

  52. Because of the recent interest policy of the USA, the lira faced large devaluations that made it one of the top currencies to lose its value.

  53. Turkey completed its credit debt to the IMF, so this organization does not influence the Turkish economy policies compared with the period of economic crisis in 2000–2001.

  54. The managed exchange rate system is not the same as the managed fixed exchange rate system, but it includes policies for the undervalued currency for managing the floating exchange rate system. This system does not cause a loss of independent monetary policies; instead, it creates a coordination between the government policies and the CBRT to eliminate conflicts for institutional complementarity.

  55. Source: author’s calculations. Calculations were made as described in Table 2.

  56. The announcement of the People’s Bank of China is on July 14, 2014.

  57. ERM II indicates the framework to manage the exchange rates between EU currencies to provide stability. For additional information about some EU countries and their band limits before adopting the euro, see (http://ec.europa.eu/economy_finance/euro/adoption/erm2/index_en.htm), accessed on February 24, 2016.

  58. According to the OECD, the average ratio of the current account balance in terms of GDP was −9.8 % in Greece, −9.3 % in Portugal and −6.2 % in Spain between 2003 and 2011. In Turkey, it was −5.0 % in the same years.

  59. Yan (2014) mentioned that China has the flexibility in its labor market, but does not have a developed employment security system that prevents institutional complementarity.

  60. For additional information about the statistical indicators of TurkStat from 1923 to 2011, see (http://www.tuik.gov.tr/Kitap.do?metod=KitapDetay&KT_ID=0&KITAP_ID=158), accessed December 14, 2015.

  61. Source: the BEA database of national income and products account tables, and statistics for full-time and part-time employees (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1), accessed December 14, 2015.

  62. See Uni (2012) and Pasinetti (1993) for vertical integration.

  63. We derived and calculated deflators from the UN database in “national accounts estimates of main aggregates” and “GDP by type of expenditure” categories for Turkey. World Bank database was used for China. v e deflator is calculated from exports at current prices (dollars) divided by exports at constant prices (dollars). v n deflator is calculated from domestic demand at current prices (dollars) divided by domestic demand at constant prices (dollars). Domestic demand = GDP – export + import.

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Acknowledgments

The author would like to thank Prof. Dr. Hiroyuki Uni for his helpful comments and suggestions.

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  1. Graduate School of Economics, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto, 606–8501, Japan

    Emre Ünal

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Appendix

Appendix

1.1 A1. Detailed sources of input–output tables and employment

Two sources for the input–output analysis of Turkey were utilized in this paper. For 1973 and 1985, TurkStat input–output tables, which include 64 industries, and the statistical indicators of the employment data of TurkStat were utilized, and for 1995 and 2011,Footnote 60 we used the World Input Output Database (WIOD) tables. For China, we used the Asian international input–output (AIO) tables and employment data from the International Labor Organization (ILO) for 1990 and from the WIOD tables for 1995 and 2011. Finally, for the USA, we used the Organisation for Economic Co-operation and Development (OECD)’s input–output tables for 1985 and 1990 and the data of number of persons engaged in production derived from the bureau of economic analysis (BEA),Footnote 61 and the WIOD’s tables were utilized from 1995 to 2011. We summarize the sources of data in Table 6.

Table 6 Input–output tables and employment sources
Full size table

1.2 A2. Methods of productivity

Through input–output tables, the productivity growth of non-tradable and export goods was calculated and PPP was estimated via these calculations:

$$Ax \, + \, y \, = \, x .$$
(6)

In this equation, A is the technological coefficients’ matrix, y represents the vector of final demand and x is a vector that indicates the level of output. This form can be written using I unit matrix as follows:

$$\begin{aligned} y \, = \, x \, {-} \, Ax, \hfill \\ x \, = \, \left( {I \, - \, A} \right)^{ - 1} y . \hfill \\ \end{aligned}$$
(7)

Thus, we can see in the equation the Leontief inverse matrix (I−A)−1 used to calculate the labor that is required to produce directly and indirectly one unit of each commodity. To measure the productivity growth of non-tradable and export goods, we use the equation described below:

$$\begin{aligned} y \, = \, \left( {I \, - \, A} \right) \, x, \hfill \\ \, {\phi} x \, = \, L. \hfill \\ \end{aligned}$$
(8)

In Eq. (8), furthermore, \(\phi\) is a row vector that shows the amount of labor that is directly used to produce one unit of output in each industry. Finally, L is a scalar that shows the total labor on the input–output table.

$${\phi} \, \left( {I \, {-} \, A} \right)^{ - 1} = \, v,$$
(9)

where v is a row vector that shows the amount of labor that is required directly and indirectly to produce one physical unit of each commodity,

$$vy \, = \, v\left( {N \, + \, E} \right) \, = \, L.$$
(10)

The amount of total domestic final demand is indicated by N, and the amount of total exports is indicated by E. Furthermore, the shares of each commodity in this total are indicated as column vectors n and e, respectively:

$$v_{n} = \, \sum\limits_{k = 1} {v_{k} n_{k} } \;\quad {\text{and}}\quad v_{e} = \, \sum\limits_{k = 1} {v_{k} e_{k} } .$$
(11)

In Eq. (11), v n and v e are the vertically integrated labor input coefficients of non-tradable and export goods, respectively. Labor productivity is calculated by means of vertically integrated input labor coefficients in each factor in both non-tradable and export goods.Footnote 62 We multiply these coefficients with price deflators if the coefficients decrease the productivity growth of non-tradable and export goods increase.Footnote 63

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Ünal, E. A comparative analysis of export growth in Turkey and China through macroeconomic and institutional factors. Evolut Inst Econ Rev 13, 57–91 (2016). https://doi.org/10.1007/s40844-016-0036-3

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