Why do the Turks just not save?
What’s the main difference between Turkey and China? Simple. China is a high-growth country with high savings. Turkey is a high-growth country with low savings. The numbers are very clear on this issue. The result: China’s growth produces a high current account surplus. Turkey’s growth widens the current account deficit, currently at historic levels. The topic of a recent World Bank report on Turkey is just this: Why do the Turks just not save?
Let’s take a look at the figures. Turkey’s domestic saving rate declined from about 25 percent in the 1980s to 12 percent in 2010. So the domestic savings rate was halved in the last 30 years. But there is also a decline within the decline. The domestic savings rate first decreased from 25 percent in 1980 to 15 percent in 2003, and then took a sharper dive to 12 percent by 2010.
I presume that the first decline is a direct result of the European Union accession process. As in the accession processes of Greece, Portugal and Spain, the EU lifted Turkey’s borrowing constraint with the start of the accession process. The relative economic stability, as depicted by the decline in inflation figures from 80 percent to 8 percent between 2000 and 2003, as well as the decline in public sector borrowing requirements, are important contributing factors.
All these developments relaxed constraints to borrowing. Turks could now spend their future incomes. That was the first driver of the decline.
The further decline from 2003 to 2010 could be explained by policies enhancing domestic demand. There was a significant increase in budget expenditures to cope with the crisis of 2008. Despite the strong output recovery process in 2009, the level of budget expenditures stayed at the level to which it had previously increased. Why? Simple. The volume of frozen expenditures, like new public employment, was increased. There is the second decline. The fever had gone down, but the doctor kept prescribing medication.
Third, there is a structural element. Turks do save, but they save by buying homes. Spending money is saving money. Turks consider buying a home as an investment. Like buying bonds on the market. You buy it and wait for its value to appreciate and hope you’re not getting yourself into a bubble. Why is that so?
If you ask me, enhancing domestic savings, i.e., savings accumulated in financial markets, is directly related with urbanization policies in Turkey, specifically the zoning policies of municipalities that obsessively focus on unearned rent. The lack of coherent rules in zoning gives way to economic rents, turning housing expenditures into lucrative investment opportunities.
Role of internal migration
Appreciated value of housing investmnet can also be considered as a positive wealth effect that brings a search in domestic consumption.
Urbanization policy up until now has been designed to cope with internal migration. Its sole objective is enriching migrants to let them find their gold stash without equipping them with skills. That worked in the 1980s and 1990s, but it won’t anymore.
Now is the time for more consistent, modern zoning policies that will put an end to political patronage. We need livable cities where people can plan for their future without speculating on a rollercoaster housing market.
A stronger Turkish economy requires a stronger domestic savings base. A stronger domestic savings base, in turn, requires a coherent urbanization strategy.
Turkey is not like China. It is a high growth country with low savings. That is a big difference. China is not in the Mediterranean. Turkey is, just like Italy, Greece, Spain and Portugal. You cannot change your geography.