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Mehmet

Yaln

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May 15

2012Evaluation of the 2008 Global Financial Crisis Effects on TurkishEconomy. Is it tangential? INTL.410Prof. Dr. Ziya ni


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Introduction

Turkey had experienced five major economic and fiscal policy changes which are

initiated after each crisis within the years 1929, 1958, 1978, 1994 and lastly 2001. 1929 crisis

as called Big Depression had damaged the Worlds best economies and also Turkey.

Turkey had passed from the stages of etatism which is followed by Democratic Party

governments liberalization period until 1960, then Turkey replaced liberalization period with

more controlled and protectionist one which is import substitution industrialization (ISI). This

period ended with 1978 crisis and with the Turgut Ozal Era Turkey liberalized rapidly. Until

2001 Turkey had experienced neo-liberal policies, but political environment and liquidation

problems created the 2001 crisis for Turkey. After this period we can see the Kemal Dervis

reforms effects n Turkisheconomy in line with European Union accessibility conditions. In

this period AKP (Justice and Development Party) took advantage of the Turkeys political

environment and formed the government after October 2002 elections. After this period

Turkey had continued the policies which are initiated by Kemal Dervi, economists call this

period as second neo-liberal era. (Alantar, 2008)

Between the years 2003 and 2007 Turkeys economy grew, but it did not create a

sufficient employment conditions. In 2000, unemployment rate was 6.5%, and after the 2001

crisis it became 10.3%. From that point on Turkeys GDP continue to rise and in real

economic terms, it was expanded by 30% however, unemployment rate could not be managed

well. Unemployment rate in the year 2007 was 9% which is not reflecting the economic

growth and still Turkeys unemployment rate is one of the highest one among the OECD

countries. (TUIK, 2012)

By the mid-2007, problems of the United States residential units market had been

expanded and gained a global importance. Many reasons were added to this problem like


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careless credit outflow because there was a surplus of liquidity. In addition, rating companies

were not active as they supposed to be when banks were answering the excessive credit

demands. Lack of transparency and lack of auditing discipline led to global financial crisis of

the 2008 which has created chain effect in other big economies.

Turkey had deeply affected from 2008 Global Financial Crisis (GFC) with major

sectors however; some parts were not affected like banking sector. In this way, it is really

optimistic to say Crisis was tangential as Turkeys Prime Minister R. Tayyip Erdoan said

just after the crisis revealed. In this paper, I will evaluate the effects of 2008 GFC over Turkey

by examining industry and service sector. Whats more, employment statistics will be covered

in the paper. As a mirror case, the BRIC countries will be compared with Turkeys

performance in terms of economic growth indicator with the results in the conclusion part.

Global Financial Crisis and Turkeys Sectorial Changes

Although political authorities tried to talk in an optimistic mood about 2008 GFC,

those speeches were not seem to have really strong foundations. Contraction of the exports led

to rising unemployment and as a result of it Foreign Direct investment (FDI) were decreased.

Those three elements are the main categories of the GFCs effect over Turkey. Decreasing

numbers in exports is caused by the European countries demands, because GFC was impacted

most of the Europe and demands were decreased. Half of the Turkeys exports were to Europe

by the end of 2008 and this is directly affecting Turkish economy. (WordPress, 2010)

Crisis had mostly affected production sector and it was contracted by 10.8 %,

construction sector and it was contracted by 13.4 %. Whats more overall trade was declined

by 15.4 % and transportation sector was contracted by 7.1 %. According to Turkish Statistics

Institution in June, 2009 export was declined by 32.8% compared to June, 2008. In the year


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2008 Turkey got 132.027 billion dollar export volume but in the following years it was

declined to 102.142 billion dollar as seen in the graph 1. (TUIK, 2012)

Another thing to consider is the change in Turkeys imports in the years 2008 and2009. There is a big contraction in import numbers the percentage of change was -30.2 %.

This is a really good example to explain the contraction of the demand in Turkey which is the

most import path that impacted Turkey. In the year 2008, mport was 201.963 billion dollar,

on the other hand in 2009; it was regressed to 140.928 billion dollar.

Source: TUIK (Turkey Statistical Institute)

Graph 1: Turkeys Export Volumes

From these data t can be concluded as diminishing trade deficit because the decreases

in imports were more than the decrease in exports. Therefore, it seems like trade deficit had

been decreased which is a positive indicator of the economy. The thing that should be

considered in this context is the contraction of the demand. When Aggregate demand was

decreased, it will create rising unemployment which will harm the overall economy.

20 000 000 40 000 000 60 000 000 80 000 000

100 000 000 120 000 000 140 000 000 160 000 000

'000$

Turkey's Exports


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After crisis revealed in the market, consumers expectations about futurebecame

negative, so their buying decisions were postponed for significant items. Therefore demand

was contracted and construction sector is the most affected sector from this point of view.

Construction sector is a really interconnected sector with many sub-sectors. Therefore there is

a big demand decrease in the market. Steel, iron and cement are directly affected by this

conditions and construction sector was shrinked by 19.9 % (SPO, 2012)

Construction sector is mainly using the domestic products so it is using the national

economy. In addition, construction sector is creating employments and having an

interconnected relation with other sectors. As explained, 19.9% decrease in construction

sector was created contraction in service sector and in the year 2008 it was decreased by

1.6%, in 2009 1.2%. To explain the importance of service sector in Turkey, Turkeys

proportion in the Europe can be shown. Turkey has 4.5% of the Europes service sector.

(Yazr, 2010)

Economic Growth and Turkey

After the 2001 domestic crisis Turkish government took some precautions to avoid

another major crisis. As a result of this precautions Turkey had experienced stable growth rate

with the average 7 % between the years 2003 and 2007. Whats more public debts ratio to

GDP was decreased from the level 74% to 42 % (SPO, 2012)

In the year 2008, GFC started to diffuse Turkish economy by international trade,

international fiscal operations and decreasing aggregate demand. As a result of those paths

Turkish economy were affected from its bases and Turkey had experienced contraction in its

economy with major European countries.


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GDP and Sectorial Changes*

(%)

2008 2009

1.Q 2. Q 3. Q 4. Q YearlyAgriculture 3.5 0.3 6.4 2.8Industry 1.1 -20.6 -10.9 -4.0Production 0.8 -21.8 -11.2 -3.9Services 0.4 -13.2 -8.1 -4.5Construction -8.2 -18.9 -21.4 -18.1

Trade -1.1 -26.3 -15.4 -7.2Transportation 1.3 -17.7 -12.2 -6.9

GDP 0.9 -14.7 -7.9 -3.3 6.0 -4.7

*Comparison with the same time period

Graph 2: GDP and Sectorial Changes Source: SPO (May, 2012)

Starting with the mid-2008, contraction of economy had damaged many of the Turkish

sectors. Day after day, construction sector with its subsectors continued to be narrow and it

reached to 18.1% narrowing. Agriculture is the only sector that contributed positively to

growth in the times of GFC.

This trend can be seen in the GDP of Turkey. In 2008 Turkish economy was growth

by 0.9 % which is quite low. In the following year, the economy had become smaller in first

three quarter as seen in the figure 2. The economy had been narrowed by 14.7% in the first

quarter, 7.9% in the second quarter and 3.3 % in the third quarter. The most important

variable is the industry and in lines with it the trade volume. Because of the contraction in

these two variables of the economy Turkish economy had been narrowed by 4.7% at the end

of the 2009, even though in the fourth quarter Turkey had growth by 6 %.

With the 2009 economical results, decrease in the growth, services and industry sector

had contracted by 8.6 % and 11.9%, respectively. Those results are belongs to the first nine


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months of the 2009. In the same year, agriculture sector was not became smaller in deed it

became bigger by 3.3 %.

In the year 2010, Turkish economy reached the 8.9% growth rate in real terms. This

growth was recognized as the success of AKP government, but it was based on 2009 levels

which was lower than 6 years average. Therefore to talk this issue as a success of AKP

government, there is a need to look at bigger picture which is whole actions of AKP.

According to national income statistics, Turkish economy grew with the average of

4.6% under the AKP rules. This percentage is lower than the Turkish economysoverall

republic history (1923-2010). The percentage is 4.9 %. Whats more this growth rate which is

under the rule of AKP is under the IMFs (International Monetary Fund) expectations from

Turkey which is 5%. (Erdogdu, 2009) When the growth performance put in a context which

is starting from 1998, including coalition period, Kemal Dervis reforms, and AKP rules, as

called neo-liberal model, Turkeys growth rate performance is 3.6%.

Capacity usage of production industry and the changes in this indicator is an important

sign for understanding macro conditions of Turkish economy. Firstly, decrease in the

production and unused production facility is the worst thing to be happen. In 2008 capacity

usage rate decreased compared to 2007. It was decreased from %82.6 to %72.9. n other

words, it was decreased by 9.7 %. The most important reason for this situation is the

decreasing demand.


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Unemployment Rate of Turkey

Source: Turkish Treasury 2012.

Graph 3: Unemployment Rates in Turkey. (Starting from 1990-2010, 1 represents 1999)

Therefore it is easy to say that AKP government practiced low growth performance

with the neo-liberal policies. As a formal approach, it could be explained with the effect of

2008 GFC and decreasing demand in Europe. Actually, structural cause is the excessive

financial investments and increasing leverages.

When I evaluate Turkeysperformance after 2001 crisis, Turkey is expanding but, the

sufficient growth could not be achieved. Relation between the employment and growth is lost,

and Turkey became a country which can be called as growing country without creating

employment as seen in the graph 3. This can be concluded with the result of decreasing

growth rate with rising unemployment. In addition to that rising unemployment rate,

decreasing production and rising oil prices directly affected the overall economy.


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In order to see the issue from employment point, it is a useful tool to check long term

unemployment numbers. In 2008, unemployed people who are unemployed more than 6

months were 1.112.000, and this is the 42% of the overall unemployment. In 2010 it reached

to 49%.

Opening and closing of new firms are important indicators of real economy. In

November, 2007 there were 4126 new firm opened up, but in the years 2008 it was 3026. In

other words new firms number was decreased by 26.7%. obviously this is a result of

uncertainty after the GFC in Turkey.

Western countries were affected more than Turkey in terms of unemployment

numbers. Especially USA and European Union countries reached their highest unemployment

percentages. In 2007, USAs unemployment rate was 4.6 and it became 10.1 in 2010. In

addition, the strongest economy of the Europe, Germany, reached 10.7 % unemployment rate

after GFC. Rise in unemployment rate is one of the most crucial negative results of GFC,

because it is the strictest variable to recover after crisis.

External Chain Effect

Global Financial Crisis decreased the money inflows of Turkey. While stock money

supply was 107 billion dollar at the end of 2007, it was decreased to less than 100 billion

dollar. In line with the decreasing income level in western market, Turkey had experienced

GFC negatively. In Turkey, exports were decreased nearly 40 % and textile, durable goods

sectors etc. real sectors were driven to the hard time period. (Bacni, 2010) From this point of

view it can be said that, Turkey is affected from GFC because of its foreign dependency.

In recent years, Turkeys economic integration with the world especially with the

Middle East and Europe is rising. That could imply that Turkeys chance to face with global


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crisis is rising day after day. Any crisis in the Europe will have a chance to deeply affect

Turkey in terms of economy.

One of the reasons why foreign trade numbers were decreased in crisis time is

uncontrolled money flows and speculative capital movements. In crisis period speculative

capital movements were rose and dollar/TL ratio increased, but with the decreasing demand in

the Europe and the USA there were not enough exports. Imports were also decreased as a

result foreign trade volume had narrowed.

When Turkeys import structure is examined, there is a little proportion of investment

tools. Because 2009 is year of recession, when 2008 import structure is examined it has only

13.3% in overall imports which means there is not enough investments. Turkeys export good

are intermediary and raw material with the percentage of 76. If those intermediary goods were

processed in Turkey, it could help the unemployment problem and it could create more value

added products.

Another important thing is the rising dollar rates. In the November, 2008 Turkish Lira

(TL) had depreciated over US Dollar by 41% and over Euro 15.5%, but these market

conditions did not created big losses for Turkish banking sector. (Topba, 2009)The reason

was the Turkeys experiences with the crises. After the 2001 Turkish domestic crisis,

government strictly regulated banking sector and Turkey does not have that much risky

financial instruments as US have. Financial market did not experienced high volatility like

after 2001 crisis, dollar ratio recovered with a long rally.

Turkish Banking Sector

Financial sector is functioning as a brain for operations in the market. Existence of a

developed and sustainable financial system is the main elements of the good economy. In this

context, strong economy can be real with the expanding financial system.


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In Turkey banks are the bases of financial system because most of the financial

resources are supplied by banks. In order to explain Turkish financial market, it can be

compared with other countries financial assets. Turkish financial assets divided by GDP

equals to 146.4 %, and in the USA it is 957.3% in the year 2007. This ratio is 1178.8 in Japan

and 761.1 in Germany. Therefore it is visible that Turkey does not have that much financial

asset as in developed countries. (Economist Intelligence Unit, 2010)

In Turkey Financial sector capacity is small, it can be said that it is in the development

process. There are some reasons of it like the high inflation rates over the long years. Because

of low income level there is a low saving ratio in Turkey. In addition to those, there is a high

tax over financial services.

Because this conditions GFC did not deeply affected banking sector in Turkey. Whats

more precautions that are taken after 2001 crisis have big importance. In the times of crisis

strong base of Turkish banking sector supported the economic environment with its

confidence.

At the end of 2010, Turkish financial market worth 1.303.8 billion TL. Sector is not

balanced with different sectors but overloaded in banking sector. Today its 78% is holding by

banking sector excluding Turkish Central Bank assets. (TCMB, 2010)

Income Distribution Changes

To identify the income distribution Gini Coefficient is the most useful tool at all. The

number which is changed between zero (0) and one (1) reflects the income gap between

people. If it is close to zero, it will mean that there is a little gap between people. If not there

is a big gap.


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As World Bank announced the Worlds average is compiled between 0.25 and 0.50.

Because of Gini coefficient is reflecting the governments performance from the perspective

of voters, in Turkey it was not conducted until 2002 by TUIK (Turkey Statistical Institute).

After 2002 it was started to conduct by TUIK and after 2007 its size and volume had

expanded to gather significant data.

According to TUIKs 2008 report Turkeys Gini coefficient is 0.41 which represents

the unequal income distribution. In North European countries where income distribution is

equal, that coefficient is close to 0.25 like in Finland, Norway and Sweden. The most

important thing from the side of Turkey is that, Turkey lost its momentum which was started

from 2001, just after the crisis.

In the graph 4, there are Gini scores of Turkey after 2001. After the crisis it reached to

0.44 and then it started to be positive direction until 2002 and at the top it reached 0.38 in

2005. Recovery process happened because in the times of crisis economy damaged really hard

and economy tend to return on average. After 2008 GFC same effect of 2001 happened in

terms of income distribution.

Years Gini Coefficient


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Global Financial Crisis and Turkey Stock Market with Firrms Performance

Global economy was in a crisis after major banks and mortgage firms were

bankrupted. ISE (Istanbul Stock Exchange) was also highly affected from the global

environment. Some authorities arguing that it was the biggest crisis of the capitalist world

after 1929, because crisis was initiated by the complex tools of finance industry which are

competing with each other. While it was 100 billion dollar in 1990, in 2008 it was reached to

595 trillion dollar. (BIS, 2008) As an aspect of this process, many people got credits even they

do not have enough credit scores in the USA. As a result of it most of the creditors could not

pay their debts, so credit firms were bankrupted.

In this environment, ISE was deeply affected by global variables. Because of the low

expectations and recession in the economy ISE decreased by 54% in November 2008

compared to 2007. As seen in the graph 5, in 2007 it was 55.338 point and in 2008 it was

25.715.

Graph 5: Turkey Stock Market (ISE)


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levels was a singularly important development. One has to recognize that inflation is a

regressive tax with negative income distributional consequences. High and chronic rates of

inflation, the type that Turkey experienced during the 1980s and the 1990s, typically penalize

the poor. A low inflation environment was clearly advantageous from the point of view of the

AKPs electoral fortunes. It helped the party to enlarge its electoral coalition by including

wider segments of middle and lower income groups. Low inflation also rendered the growth

environment more robust and sustainable.(ni, 2012)

Conclusion

World economy experienced a big crisis which is the biggest crisis after 1929 big

depression that initiated with the bankruptcies of mortgage firms and banks in the USA. Its

effects were damaged the global economy from different sectors as in Turkey. Turkey mostly

affected by production industry so exports were declined in that period. Construction sector is

another part of the economy which was damage directly with its subsectors.

Whats more there can be traced the volatility of the income distributionin Turkish

economy starting from 2001 crisis. As a positive effect of 2001 crisis over Turkey, Turkey

had practiced deep crisis environment and had knowledge about dealing with crisis. Whats

more policies about banking sector are really crucial in the period of GFC to avoid any

bankruptcy that not a single Turkish bank bankrupted in crisis process.

Economic growth was damaged sharply just after the effects of the crisis experienced

in Turkish economy. Overall Turkish economic growth was declined by 4.7% in 2009,

compared to BRIC countries Turkish performance seems inefficient because at the same years

Brazil growth rate was -0.2%, in Russia -7.9 %, in India 7.4% and in China it was 9.1%. (CIA

World Factbook, 2011) When we look at those cases Turkey had performed only better than


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the Russia. Therefore it is clear to say that Turkey influenced deeply by Global Financial

Crisis.

ISE, Istanbul Stock Exchange, was damaged and stock performances of the firms were

directly affected from the crisis. In ISE, shares of the foreign investors are more than the

domestic investors, so the uncertainty about the future of the economy created bad conditions

for ISE. Firmsperformances also declined in the foreign investments, and Turkish outward

FDI declined significantly.

In conclusion, Turkey with the AKP government tried to manage the crisis

environment by pumping confidence to the market as in the most famous quote by R. Tayyip

Erdoan Crisis will be tangential however, it did not experienced as politicians argued. Of

course, the comparison point is really important; when Turkish situation is compared with

Greece and Spain it could be seen well but as an overall result Turkeys economy was

contracted. It is too unrealistic to say that Turkey could not recover the conditions of Global

Financial Crisis, because in the following years after 2009 Turkey continued to grow in terms

of economy.


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References

Bacni, Zeynep. Global Mali Kriz Srecinde Kriz Ynetimi ve Yeniden Yapilandirmalar.

Diss. Kadir Has University, 2010. Istanbul: Kadir Has University Social SciencesInstitute, 2010. Print

BIS, Table 19. Amounts outstanding of over-the-counter (OTC) derivatives by riskcategory and instrument

http://www.bis.org/statistics/otcder/dt1920a.pdf (15Kasm2008)

Doan Alantar, Kresel Finansal Kriz: Nedenleri ve Sonular zerinde Bir

Deerlendirme,Maliye Finans Yazlar, Cilt.22, Say.81 (Ekim 2008), s. 75-85.Economist Intelligence Group, "Turkey: Key Developments." Economist. 2010. Web. 5 May

2012.

Erdogdu, S. (2009) Kresel Mali ve Ekonomik Krizin Trkiye Ekonomisi ve Trkiye

alsma Yasamna Etkileri, ILO iin hazrlanms alsma.

Neslihan Topba, FinansalKriz Ortamnda Bankalarn Muhasebe Sistemlerinde

Geree Uygun Deerleme Ynteminin Etkileri, Bankaclar Dergisi. Say. 68,

2009, http://www.tbb.org.tr/Dosyalar/Dergiler/Dokumanlar/68.pdf (10 Mart

2010), s. 62.

ni, Ziya. "The Triumph of Conservative Globalism: The Political Economy of the AKP

Era." Turkish Studies (2012): 1-22. Print.

SPO, State Planning Organization, Accessed in 5 May, 2012.

The USA. CIA. By CIA World Factbook. 2011. Web. 2012.

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WordPress. "GLOBAL EKONOMK KRZN IKII VE NEDENLER." Web log

comment. Wordpress. 25 Feb. 2010. Web. 6 May 2012.

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