Greek lesson for Turkey
With eurozone leaders giving Greece until the end of the weekend to reach an agreement with its creditors or face leaving the euro, my blog’s host Nouriel Roubini feels that Sunday will be a “make-or-break moment for deal,” with rejection making Greece’s exit (Grexit) “a likely reality.”
Dr. Doom, as he is often called, is actually not the pessimist this time around: In a report published on July 8, investment bank Citi made Grexit their “base case”: They now believe that Greece’s eventual exit from the eurozone is the most likely outcome, arguing that a deal over the next few days, while eliminating short-term risk, will only be delaying the inevitable.
Not that it would change anything, but there is also a discussion on who is to blame for what has happened and who is right in the ongoing stalemate. The debate has become extremely polarized, with some putting all the blame on predatory lenders, exporters and investors and others blaming irresponsible Greeks. As I outlined in an earlier column, I am somewhere in the middle.
But regardless of the culprit, the Greek tragedy offers a very important lesson for other countries: You cannot live beyond your means. Actually this is a well-established fact for individuals. I am sure you are familiar with the phrase, “cut your coat according to your cloth.” The coat and cloth are replaced by “feet” and “quilt” in the Turkish version. I am sure every language has a similar expression.
What if enough individuals in a country have large coats or feet, or not enough cloth or quilt? Atif Mian and Amir Sufi, economics professors at Princeton and the University of Chicago respectively, show in their recent - aptly-titled book “House of Debt” - how the Great Recession and Great Depression, as well as the current economic malaise in Europe, particularly Greece, were caused by a surge in household debt followed by a plunge in household spending.
Although still much less than in these crisis-hit countries, household leverage has also surged in Turkey over the last decade. While methodological issues forced the Turkish Statistical Institute to discontinue the series, the ratio of household liabilities to disposable income had risen to 55.2 percent in 2013 from just 4.7 percent in 2002.
There is an even easier way to realize that Turkey is living beyond its means: The Turkish “growth miracle,” to which Finance Minister Mehmet “Nominal” Şimşek regularly alludes. While GDP per capita in dollar terms, which can be used as a proxy for income, did indeed triple from 2002 to 2011, real GDP per capita, an indicator of production, rose much more modestly.
This gap between income and production is not sustainable. In fact, dollar GDP per capita has been hovering at around $10,500 since then, raising fears that Turkey has gotten stuck in the middle-income trap. Whatever you want to call it, it is a different version of the Greek tragedy. Thanks to its flexible currency and the smaller size of the gap, Turkey will go through its adjustment relatively painlessly and smoothly.
In fact, the gap has already been closing, with most of the adjustment coming from falling income rather than rising production. While income will not plunge as in Greece, it will continue to creep down unless the country finds a way to boost its production. Unfortunately, this is all Greek to Turkish politicians and policymakers.