EMRE DELİVELİ >Dazed and Confused about the Current Account

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Thepanel discussion “The Relationship Between Industrial Policy and the CurrentAccount Deficit”, organized last Wednesday by the Turkish Industry & BusinessAssociation and Competitiveness Forum,illustrated just how much we are confused about both topics. 

Forstarters, the subject matter might have been too ambitious. As Kamil Yılmaz ofKoç University, one of the seven panelists, noted, industrial policy will notbe sufficient to lower the current account deficit by itself, as it addressesjust one cause - that we have to import a significant amount of intermediate inputs.But we also have a current account deficit because we borrowed to consume andtherefore import. That’s why the Central Bank was trying to curb credit growthlast year. And of course we have a current account deficit because wedon’t save much.


AsMurat Üçer of Turkey Data Monitor,another panelist, summarized, having a current account deficit simply meansthat we are spending more than we are producing. It is in fact normal for anenergy importer with a young population to run current account deficits. Butwhat would be the sustainable deficit for Turkey? Recent studies point to afigure in the range of 3-5 percent of GDP, much lower than the current level of10 percent.


Wealso continue to treat the deficit as a structural issue, but part of it is reallythe result of deliberate policy choices. The Central Bank’s unorthodoxpolicy mix did not manage to curb demand last year, and procyclicalfiscal policy did not help, either. The economy grew 9.2 and 8.5 percent in2010 and 2011, during which time 3 million jobs were created, so no one - leastof all the government - would complain about this performance. According toeconomists, there is no free lunch. Current account deficit and inflation werethe consequences of this surge in demand.


Thelatter might have even played a role in the so-called structural deficit. Weargue that Turkey needs to be competitive, but we could have improvedcompetitiveness just by bringing inflation under control. Movements in the realexchange rate, a simple measure of competitiveness, are equal to changes inthe nominal exchange rate plus inflation differentials between the rest of theworld and your country. With inflation constantly 5-6 percentage points abovepeers, Turkish goods have been becoming more expensive even without a nominal exchangerate appreciation.


Evenfor tackling the structural deficit, I agree with Üçer that there are easierfixes than aconvoluted incentive scheme that tries to lower the deficit by identifying sectorshighly dependent on intermediate input imports. For example, aseminar early in the month, organized by the Economic Research Forum, hadseveral suggestions for a more effective tax system.

Atan even more basic level, as panelist Ercan Tezer, General Secretary of AutomotiveManufacturers Association, observed, the government’s efforts at lowering thecurrent account deficit seem to be more about curbing imports than increasingexports, even though government officials emphasize that their policies are nota form of importsubstitution

AndI haven’t even started with industrial policy.


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