Egyptian Economy: Challenges and Future Prospects23-25 February 2013

Cairo/EGYPT

Performance and Applicability of Turkey’s Transition Experience

Prof. Dr. Erdal Türkkanerdalturkkan@hotmail.com

(Turkey's Economic Success Story: A Model for Egypt?)

Plan of the Presentation

1)Three Questions and Methodology2)Short background about the Turkish Economic History3)Economic Performance of 2002-2012 Period4)Factors affecting the performance of JDP Period5)Main targets of the transition process as a distinguishing feature of the Turkish model6)Applicability of the Turkish economic model: Policy Implications of nine important transition processes.

1)Three Questions

• a- Does Turkey have an economic success story?

• b-How we can define the Turkish economic model?

• c-May the Turkish model be a model for Egypt?

1)(Cont)Methodology• Here we must underline the importance of the

concept of transition:• Economic success can be evaluated by the nature,

speed and efficiency (benefit/cost) of the transition process and related policy performance.

• Economic Model may be defined by the nature and priorities of targeted transitions and policy constraints which determine policy choice and policy performance .

• Applicability of the model may be evaluated by the possibility of the realization of the policy implications of the same targeted transitions under different policy constraints.

2)Background: Periods of Success and Failure in the Turkish Economic History

• It is possible to adopt the following periods:• Ottoman Period(1299-1922) After XVIII. Century: Mostly

unsuccessful• The first years of the Republic (1923-1930): Mostly Successful• Statist Period (1933-1938): Mostly Successful• Second World War(1939-1945) and After War Period (1945-1950):

Mostly Unsuccessful• Period of Democratic Party(1950-1960):Partly successful• Planned Development Period(1963-1983):Partly successful• Open Economy and Liberalization Period(1980-1993): Part.S• Successive Crises Period(1994-2001):Unsuccessful• JDP or Ak Party and Economic Stabilization and Maturation

Period (2002-2012): Mostly successful

2)Background: Role of the crises in successful new orientations

• Up to the 1980’s Turkish economy may be considered as a closed mixed economy based on highly interventionist economic policies.

• After World Petroleum Crisis in 1970’s, Turkey has experienced a severe economic crisis which is considered as a result of inward looking policies.

• Since 1980’s we can identify several interrelated transition processes which represent different aspects of structural and political changes.

• During 2000-2001, Turkey has again experienced another severe economic crisis which is considered as a result of political instability and ended with the political victory of newly established Justice and Development Party (JDP) or Ak Party.

3)Performance Evaluation of JDP Period (2002-2012 )

• Successes:• Relatively low and decreasing inflation rates• Relatively high and steady growth rates• Relatively rapid increase of exports• Decreasing external and internal public borrowing• Relatively rapid amelioration of social welfare.• Increasing endurance against external and internal chocks and

increasing international credibility.• Weaknesses-Failures• Persistence of relatively high current account deficit• Persistence of relatively low saving rates• Persistence of relatively high unemployment rates • Persistence of relatively high external borrowing of private sector

3) (Cont.)General Performance IndicatorsYears Growth

Rates**Inflation**

Direct Foreign CapitalBillion$

Exports Billion $**

General Public Debt Stock as % of GDP T(EU Def.)

CreditRatingsFitch

Unemploy ment rates

Current Account DeficitBillion $

Domestic Savings/ GDP*

2001 -5,7 68,5 2,8 31,3 B 8,9 3,7 18,4

2002 6,2 29,7 0,9 36,0 73,2 B 10,8 -0,6 18,6

2003 5,3 18,4 1,2 47,2 67,4 B 11,0 -7,5 15,5

2004 9,4 9,4 2,8 63,1 59,2 B+ 10,8 -14,4 16,0

2005 8,4 7,7 10,0 73,4 52,3 BB- 10,6 -22,3 15,9

2006 6,9 9,7 20,2 85,5 46,1 BB- (P) 10,2 -32,2 16,6

2007 4,7 8,4 22,0 107,2 39,4 BB-(S) 10,3 -38,4 15,5

2008 0,7 10,1 19,5 132,0 39,5 BB-(S) 11,0 -41,5 16,8

2009 -4,8 6,5 8,4 102,1 45,5 BB+(S) 14,0 -13,4 13.2

2010 9,0 6,4 9,0 113,8 41,6 BB+(P) 11,9 -46,8 13,9

2011 8,5 10,5 15,9 134,5 39,2 BB+(S) 9,8 -77,2 13,3 F

2012 2,5* 6,2 20,0 151,9 36,6 BBB-(S)

9,1 F -48,5 12,7 F

*SPO Statistical Indicators ; **Turkstat; T Treasury; F:Forcast ; P:Positive Outlook ;S:Stable Outlook

4)Factors affecting the Performance of JDP Period: Policy Choices

• Adoption of medium and long-term project and program based approach (2023 Vision).

• Tight budget policy and continuous austerity measures• Acceleration of privatizations• Rapid elimination of bottlenecks in physical and social infrastructure

(Transportation, communication, energy, irrigation, housing, health, education, justice)

• Generalization of social security and Medicare system• Priority given to informatization (E-State) and R&D in defense industry• Export promotion in new markets.• Encouragement of foreign capital entry • Encouragement of SME’s in underdeveloped areas• Harmonization of existing regulations with EU regulations.• Frequent use of opinion polls .

4)(Cont.)Factors affecting the Performance of JDP Period:Policy Performance

1)PrivatizationsThe table below shows the evolution of the volume of privatizations during 1985-2012.

Between 1985-2012 period, the amount of the privatizations was 46, 095 billion$. We observe that nearly 84% of privatizations has been realized after 2002 by JDP.

Years

1985-2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Millions $ 7517 536 187 1283 8222 8096 4259 6297 2275 3085 1353 3018

4)(Cont.)Factors affecting the Perceivable Performance of JDP Period: Policy Performance

2)Physical and Social Infrastructure: Perceivable Performance Indicators• Construction of 15.700 km divided highways• Number of air passengers : From 8,5 million to 120 million.• Initiation of High Speed Train• Construction of 160.000 Classrooms (1/3 of the total)• Assignment of 1/3 of the total teachers• Construction of 544.000 new housings by TOKI (Gov. Org)• Construction of 206 New Dams • Construction of 893 new sanitary installations

3) Generalized Medicare

4) Rapid increase of purchasing power of the population thanks to the reevaluation of the Turkish lira : GDP per capita has tripled in $ terms between 2002-2012

5)International contracting activities: 2nd Place in the World after China

4) (Cont.)Policy Performance: Recognition of Candidate Status

• 1999 : The candidate status was recognized for Turkey in Helsinki.

• The EU leaders agreed on 16 December 2004 to start accession negotiations with Turkey as of 3 October 2005. EU accession negotiations were officially launched.

• Realization of Screening Process, 2004-2005• 2005 – Opening of 6 chapters of the Acquis: Right of Establishment & Freedom to

Provide Services, Company Law, Financial Services, Information Society & Media, Statistics and Financial Control.

• 2006 – Chapter on Science & Research was opened and closed.• 2006 – Continued dispute over Cyprus prompts the EU to freeze talks on 8 chapters and state that no chapters

would be closed until a resolution is found. • 2007 – Chapter on Enterprise & Industrial Policy was opened. • 2007 – Chapter on Statistics & Financial Control was opened, but the opening of the chapter on Economic &

Monetary Policy was blocked by France.• 2007 – Chapters on Health & Consumer Protection and Trans-European Networks were opened.• 2008 – Chapters on Company Law and Intellectual Property Law were opened.• 2008 – Chapters on Free Movement of Capital and Information Society & Media were opened.• 2009 – Negotiations were opened on the chapter of Taxation.• 2009 – Chapter on Environment was opened.• 2010 – Chapter on Food Safety, Veterinary & Phytosanitary Policy was opened.

4) (Cont)Constraints Affecting the Performance of the Transition

• Constraints of past achievements and existing human resources• Legal Constraints: Existing constitutional order and legal system• Energy dependency and natural endowment constraint• Past policy constraint ( Positive impact of crisis in the radical changes in past

government policies)• Importance of democratic constraints :Requirements of free elections• Importance of globalization and external competition constraint in strategic

orientations• Constraints created by the Customs Union and full-membership perspective with

the EU• Economic political and social stability constraint required by credit rating• Efficiency constraints: Importance of simultaneous policy requirements• Social constraints related to governance and public opinion support in important

political changes• Technical constraints related to interrelations and dependencies between

different targeted transition processes• Technical constraints related to spontaneous and induced structural changes

5)Main Targets of transition process as a performance indicator and as a distinguishing

feature of the Turkish model• Transition from a statist (mixed economy) to a free market

economy.• Transition from a closed to an open economy• Transition from a non-stable to a stable economy• Transition to an integrated economy: EU membership Transition from a socially unstable economy to socially balanced

economy.• Transition from a traditional agricultural economy to a modern

agricultural sector. • Transition from a non- competitive industrial sector to a

competitive industry • Transition to an efficient service sector • Transition from a geographically polarized economy to a

depolarized economy

5)Main Characteristics of the Turkish Model

• Turkish model may not be considered as a country specific model. It is mostly a variety of well defined, open, competitive and stable free market economy model based on economic freedoms.

• Turkish model is based on the optimal extension of economic freedoms under the constraints imposed by legal order, parliamentary democratic system, natural endowments, past achievements, membership to the European Union ; international competition and conjuncture and other technical constraints related to the efficiency of the transition process.

• Each constraint creates some threat as well as some opportunity for the realization of political changes.

• The logic of the model is the equalization of Marginal economic, social and political benefits and Marginal economic social and political costs.

• Absolute level of economic freedoms and desired structural efficiency have not yet reached targeted levels: The transition process is not yet completed.

6)Applicability of the Turkish Economic Model: Policy Implications of Nine Important Transition Processes

• Economic and political benefits of targeted transitions are similar and comparable for developing countries facing similar constraints.

• International conjuncture which determines the benefits and costs of the transition is mostly the same for each developing country.

• Technical constraints related to interrelations and dependencies between different transition processes are the same for each developing country.

• Policy implications of transitions are similar for each developing country.

• Differences in the past achievements might change priorities and the speed of the transition.

• Economic, political and social feasibility of political transformations and costs of the transition may differ from one country to another.

Transition from statist (mixed economy) to a free market economy:Background

• Statist regime was effective in Turkey between 1930-1980 period, which covers: First Statist Period (1931-1938); Second World War (1939 -1945) and After War Period (1945-1950); Democratic Party Period (1950-1960); Planned Economy Period 1960-1980.

• During 1930-1980 period we observe not only a rapid development of the statism but also a progressive development of the market economy.

• We observe also a variation in the nature of statism during 1930-1980 period. For example 1950-1960 period might be considered as a market economy implementation with some statist variation.

Policy Requirement of Statism and Free Market Economy

• Statism• Semi-compulsory bureaucratic central planning• Government priority is industrial production

• Nationalizations and creation of new SEEs• Non neutral incentive system (officially determined

priority sectors and projects)• Systematic interventions to the price system• Governmentally regulated natural and legal

monopolies

• Lack of competition policy

• Existence of bureaucratic entry barriers

• Highly regulated, controlled and rigid capital markets

• Highly regulated, controlled and rigid labor markets• Prohibitive and rigid exchange regime• Protectionism and import substitution policy

• Free Market Economy• Indicative and coordinative planning• Government priority is physical and social

infrastructure• Privatizations• Neutral incentive system

• Determination of prices in the market• Establishment of independent regulatory

bodies for natural monopolies • Establishment of an independent competition

authority (anti- monopoly agency).• Elimination of bureaucratic entry barriers

• Liberalization of capital markets

• Liberalization of labor markets• Liberalization of the exchange regime• Liberalization of imports

Transition from a closed to an open economy: Policy Implications

• Closed Economy• Statist, socialist or country specific economic

system• Import restrictions (protectionism) and import

substitution policy• Controlled and fixed exchange regime

• Controlled foreign capital entry• Multi-functional Central Bank and more

flexible monetary policy • Country specific regulation

• State Regulations for specific markets

• State aids based on country specific rules• Medium or adapted technology transfer policy• Limited R&D activities• Limited infrastructure • Low quality labor training policy

• Open Economy• Workable competitive market economy• Liberalization of imports

• Liberal exchange regime and convertibility

• Liberalized foreign capital entry• Independent Central bank and tight

monetary policy• Universal and foreseeable regulations

and regulatory competition• Independent regulatory bodies for

market regulation• State aids based on universal rules • Transfer of advanced technologies

• Extended R&D activities• Developed infrastructure• High quality labor training policy

Transition from an unstable to a stable economy: Background

• Turkey has experienced high (double and triple digit) and persistent inflation after the second half of the 1970’s despite successive IMF backed stabilization programs and austerity measures. Annual inflation rate was around 29,7 percent in 2002.

• One digit inflation performance has been reached after the second half of 2000’s.

• Inflation rate was down to 6,4 percent in 2010, the lowest rate since 1969.• At least a one-digit inflation is a necessary condition:

*For the well-functioning of the free market economy *For an open economy *Low level of inflation is also a necessary condition for full-membership to the EU*At the same time economic stability is a necessary condition of the democratization of the economy

Transition from an unstable to a stable economy: Policy Implications

Non Stable Economy • Large PSBR and over-borrowing due to:

*Big size of budget deficits of central and local administrations*Actuarial disequilibrium of Social Security System*Large and deficient public sector (SEEs)*Irrational agricultural price support and encouragement policies

• Insufficient level of savings and insufficient deepness of capital markets

• Importance of infrastructural investments with long realization and gestation period

• Low level of independence of Central Bank• Lack of effective monopoly regulation• Large informal economy• Short term and incomplete stabilization programs

due to:*Lack of a social consensus and dialogue mechanism *Political uncertainty and populist attitudes

Stable Economy Limited PSBR and borrowing due to:• Administrative reform , public expenditure

reform and tax reform accompanied by tight budget policy and continuous primary budget surplus.

• Social security reform and improvement of the actuarial equilibrium of SSI (Social Security Instritution)

• Resource generating privatization policy• Rationalization of encouragement system• Attraction of more foreign capital • Extension of Built Operate and Transfer

method for infrastructural investments• Independence of Central Bank• Effective anti-monopoly regulation• Limitation of informal economy• Implementation of medium-term and

effective stabilization programs and austerity measures thanks to political stability

Transition to an integrated economy: EU Membership

• Open Economy • Workable democracy

• Workable competitive market economy

• Liberalization of imports

• Liberalized foreign capital entry• Liberalization of labor markets• Independent Central Bank and tight monetary

policy and fiscal policy• Universal regulations • Independent regulatory bodies for market

regulation

• State aids based on universal rules • National Policies for the transfer of advanced

technologies and R&D activities• Developed infrastructure • Macro-economic stability policy

• Economy Integrated to the EU• Advanced democracy (Copenhagen Criteria) and full

respect to Human Rights• Functioning competitive market economy (Copenhagen

Criteria)• Customs Union, Free Circulation of goods and services

and Common Customs System• Free Circulation of Capital• Free Circulation of Labor• Adoption of Copenhagen Criteria

• Common regulations and harmonization of regulations

• Harmonization of regulations of independent regulatory bodies

• State aids conformity to European Rules • Adoption of common technology policies

• Adoption of common infrastructure policies• Adoption of Copenhagen Criteria in macro-economic

stability

Transition from Traditional and Dualistic Agricultural Economy to a Modern Agricultural Sector

• Dualistic Agriculture• Large discrepancy between share of agricultural

population in total population and share of agricultural production in total production

• Co-existence of traditional (self sufficient) and market oriented, modern (privately and publicly owned) production units

• Dominance of non-optimally sized production units• Low and inefficient level of mechanization, irrigation and

fertilization• Dominance of collective or common and legally disputed

or unregistered ( illegal) property regime and dispersed land property

• Poor physical, social and agricultural infrastructure (irrigation)

• Limited external marketing and competition• Limited input-output relation with local industry• Irrational and ineffective government intervention in the

resource allocation process• Obligatory restructuration and redistribution of lands• High share of fallow in cropped area• Dominance of usurious credit system• Limited R&D and formation activities

• Modern Agriculture• Convergence and diminution of the share of

agricultural population and agricultural production

• Dominance of market oriented, modern, privately owned production units

• Dominance of optimally sized production units • High and efficient level of mechanization, irrigation

and fertilization• Dominance of legal, private and well registered

property regime and aggregated land property

• Developed physical, social and agricultural infrastructure

• Large external marketing and competition• Important input-output relation with local industry• More rational and effective government

interventions in the resource allocation process• Voluntary restructuration of lands• Low share of fallow in cropped area• Dominance of banking credits system• Extended R&D and formation activities

Transition from Non Competitive Industrial Sector to a Competitive Industry

• Non-Competitive • Statist and interventionist policies • Inward oriented protectionist policies• Inward looking national service sector

policies• Inward looking non-competitive agricultural

policies• Cheapest technology transfer policy and

limited protection of industrial property rights

• Bottlenecks in social and physical infrastructure

• Limited economies of scale and scope• Localization in unorganized or isolated

industrial sites and lack of clusters.

• Unorganized or unflexible labor markets• Unflexible shallow capital market

• Competitive• Free market liberal policies • Outward oriented open economy policies• Modern service sector

• Outward looking competitive agricultural policies

• High technology transfer and R&D policiesand effective protection of industrial property rights

• Effective social and physical infrastructure• Extended economies of scale and scope• Localization in organized industrial sites

and formation of clusters• Well-organized and well-regulated

flexible labor markets• Well-regulated deep capital markets

Transition to an efficient Service Sector • Inefficient• Existence of State Monopolies

(Telecommunication, air and rail transport, radio-TV, energy)

• Vertical integration of network industries (communication , energy, railways)

• Centralized public services (healthcare, education)

• Dominance of retail trade• Limited outsourcing of services in industry

• Limited franchising activities• Limited social and private insurance system• Existence of entry barriers for foreign capital

• Limited informatization• Bureaucratic regulation of network industries

• Efficient• Privatization of State Monopolies and or

abolition of entry barriers

• Separation of production, transportation and production in network industries

• Decentralized public services

• Dominance of hyper and supermarkets• Generalized outsourcing of services in

industry• Developed franchising activities• Extended insurance system• Elimination of entry barriers for foreign

capital• Extended informatization• Regulation of network industries and

sensible sectors (Banking –Insurance ) by independent regulatory bodies

Transition from a Socially Unstable Economy to Socially Balanced Economy

• Socially Unstable• Increasing deterioration of income distribution• Increasing unemployment and unsustainable

growth rates• High immigration and urbanization rates and high

housing deficit• Underdeveloped social infrastructure *Low education level *Deficient sanitary services *Partial social security system• Inefficient and inadequate justice system• Lack of generalized social security system• Centralized authoritarian public administration

and political system• Agriculture highly dependent on climatic

conditions• Poor Non-Governmental Organizations• Highly heterogeneous cultural , religious and

ethnic structure of the population and lack of common values

• Socially Stable• Decreasing deterioration of income

distribution• Decreasing or stable unemployment and

steady sustainable growth• Optimal immigration and urbanization

• Developed social infrastructure *High education level *Efficient sanitary services *Generalized social security system• Efficient and independent justice system• Decentralized democratic public

administration and political system• Modern agriculture

• Developed Non-Governmental Organizations• Pluralistic society based on common values.

Transition from a Geographically Polarized Economy to a Depolarized Economy

• Polarized• Non saturated spontaneous

polarization level• Limited economic relations with

neighboring countries• Unequal and inefficient

geographic distribution of physical and social infrastructure

• Centralized public services• Positive discrimination for

developed regions in the distribution of public aids

(Encouragements)

• Depolarized• Saturated spontaneous

polarization level• Important economic relations

with neighboring countries• More equal and efficient

distribution of physical and social infrastructure

• Decentralized public services • Positive discrimination for

underdeveloped regions in the distribution of public aids (Encouragements)

Conclusion• We can say that the overall performance of the Turkish economy during

the JDP government is relatively satisfactory. But if the increasing votes obtained by JDP in three successive elections(2002,2007,2011) may be considered as an indicator of economic success, JDP’s perceived economic performance may be considered as an outstanding success.

• Turkish economic model may be defined as a model targeting transition to an open, competitive and stable free market economy based on economic freedoms under the constraints imposed by the parliamentary democratic system, natural endowments, past achievements, the European Union and international competition and conjuncture etc.

• Turkish model of transition is applicable to other developing countries including Egypt. But each country faces different legal, political, social, economic and international constraints.

• The differences of constraints may increase or decrease social costs and benefits of the different policies.

Thank You