China’s slowdown and Turkey’s window of opportunity
China is changing, and the world feels the shockwaves, far and wide. This process hurts the Turkish economy, but much less than other emerging economies. I hear lots of complaining in Ankara and Istanbul, but I think if Turkey plays its cards well, the benefits could outweigh the costs.
Here is the opportunity: The change is not only about the declining growth rate of the Chinese economy, but also about its shift away from low-cost manufacturing and exports. A qualitative shift is also happening, noted Nicholas Stern and Fergus Green of the London School of Economics this March. China’s energy demand is declining together with its demand for raw material imports. So the country is changing its industrialization strategy, and that has consequences: Crude oil? Iron ore? Soya? Their prices are dropping faster than a bad guy in a Bruce Lee flick - and are likely to stay down.
What does this mean for your country? It depends on how reliant you are on natural resource exports. It’s bad news for Brazil, South Africa and Russia, which are rich in natural resources. But it’s good for Turkey, which is poor in natural resources. So China’s slowdown is not that bad for Turkey in that sense. It is even be directly beneficial in the sense that Turkey is dependent on energy imports, so any price drop leads to a decline in Turkey’s current account deficit. There is also another indirect benefit, as Turkey is generally considered in the same group as Brazil, South Africa and Russia by portfolio investors. That also helps reduce Turkey’s current account deficit. So not only is the direct impact of the Chinese slowdown on the Turkish economy small, it also creates an environment in which Turkey is able to receive more international funding.
But Turks are complaining about the economy. Why? First, it is because of the relative slowdown in the Turkish economy. The economy is now growing at around 3 to 3.5 percent, which is lower than the average for the last few years. People feel this slowdown, especially because the managerial quality in Turkish private sector is – to say the least - highly questionable. Anyone can preside over growth, but it takes real skill to make cuts and focus an organization going through a slowdown. There is a World Bank study that compares the actual managerial performance of companies with the managerial competence that managers see in themselves. It is a cross-country study, and Turks lead the discrepancy between presumed and actual performance. We overestimate ourselves, thinking we are doing a good job while actually performing badly.
That is one of the reasons why I think that we are structurally ill-suited for economic slowdowns: We feel it more than other people.
Also, Turkey is about to form its third government in a year. Looking for a reason why Turks are complaining about economic prospects? Political uncertainty coupled with policy uncertainty will do that. Disequilibrium in politics will always make the private sector uneasy. This, of course, is excluding the wide-ranging economic impact of Aleppo-esque scenes in southeast Turkey, not to mention the restrictions on freedom of expression and its importance for innovation.
Turkey’s transition to a market economy remains unfinished. It still needs to complete a second generation of reforms to ground itself in a knowledge-based economy. China’s slowdown presents Turkey with an opportunity to get closer to that goal. If this opportunity presented itself about a decade ago when Turks were still enthusiastic about the country’s reform drive and the EU anchor was firmly in place, Turkey would have surely seized it. But nowadays Turkey lacks the joy and vigor necessary to complete its liberal transformation. We need the EU anchor once again to make the next jump.