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The Great Recession and Developing Countries
The impact on growth was severe. Year-on-year, gross domestic product (GDP) contracted by 7.0 percent in the last quarter of 2008, 14.5 percent in the first quarter of 2009, and 4.7 percent for the whole year. While government policies have helped mitigate the damage— especially quick central bank action to maintain liquidity of and confidence in banks, a moderate fiscal stimulus, and tax cuts—the crisis will have lasting effects on Turkey: the public debt ratio will take some time to return to precrisis levels, the fall in export demand will persist to some extent, and less foreign financing is likely to be available for investment. The potential growth rate over the medium term will therefore be lower than before the crisis. In this chapter, we will consider the growth dynamics of the Turkish economy, emphasizing the 2002–06 boom period and the subsequent slowdown prior to the global crisis. We will then look at the impact of the crisis on the Turkish economy and the government’s responses. We will then provide medium-term growth scenarios and assess the impact of the global crisis on potential growth.
Growth Dynamics Until 2008 Turkish economic growth has historically been volatile, as evidenced by a currency crisis in 1994, the contagion effects of the East Asian and Russian crises, the Marmara earthquake in 1999, and Turkey’s own banking crisis in 2001. These contractions have all been followed by rapid expansions (figure 11.1, table 11.1). During the recoveries, the contribution of external demand (net exports) to growth was mostly negative, widening the current account deficit, which was financed in part through foreign-currency-denominated debt. And “sectoral transformation” (the shift to relatively capital-intensive technologies)—while fueling investment, total factor productivity (TFP) gains, and growth— appears to have limited employment gains associated with the upswing after the 2001 crisis, more specifically during the 2002–05 period. After liberalizing its economy in the 1980s, Turkey experienced economic and political instability in the 1990s. Average GDP growth was volatile and below potential while inflation remained high (figure 11.1). High public sector borrowing requirements (nearly 10 percent of GDP) raised the cost of domestic funds in a shallow domestic financial market.