Turkey at the Crossroads From Crisis Resolution to EU Accession
Prepared by a team led by Reza Moghadam
INTERNATIONAL MONETARY FUND
Washington, D.C.
2005
© 2005 International Monetary Fund
Production: IMF Multimedia Services Division
Cataloging-in-Publication Data
Turkey at the crossroads : from crisis resolution to EU accession / prepared by a team led by Reza Moghadam—Washington, D.C. : International Monetary Fund, 2005
p. cm.—(Occasional paper) ; 242
Includes bibliographical references
ISBN 1-58906-386-4
1. Turkey—Economic conditions. 2. Turkey—Economic conditions—Statistics. 3. Inflation (Finance)—Turkey. 4. Debts, Public—Turkey. 5. Labor market—Turkey. I. Moghadam, Reza. II. Occasional paper (International Monetary Fund ; no. 242 HC492.T87 2005
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Contents
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Preface
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I Overview
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Mark Griffiths and Reza Moghadam
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II Economic Growth in Turkey, 1960–2000
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Ashoka Mody and Martin Schindler
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Recent Growth and Volatility Trends
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Correlates of Growth
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Cross-Country Regression Analysis
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Sources of Policy Volatility
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Conclusions
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III Turkey’s Inflation Process
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Oya Celasun and Donal McGettigan
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The Importance of Inflation Expectations
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What Determines Inflation Expectations?
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Conclusions and Challenges
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IV Balance Sheet Developments Since the Crisis
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Christian Keller and Chris Lane
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The Effect of Crisis and Recovery on External Assets and Liabilities
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Resolution of the Crisis and Recovery of Balance Sheets in Each Sector
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Main Links Between Sectoral Balance Sheets and Associated Risks
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Conclusions and Policy Implications
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V How Much Debt Is Too Much?
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Christoph Klingen
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Main Features of Turkey’s Public Debt
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Deterministic Debt Sustainability Exercise
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Stochastic Debt Sustainability Exercise
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Fiscal Track Record Approach
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Empirical Debt Sustainability
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Fiscal Dominance of Monetary Policy
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Other Considerations
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Conclusions
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VI Progress and Challenges in Public Debt Management
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Cheng Hoon Lim
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Improved Debt Structure
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Challenges Ahead for Debt Management
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VII Lessons from an Empirical Model of Fiscal Policy in Emerging Markets
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Xavier Debrun
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Debt Sustainability and the Primary Surplus
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The Empirical Model
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Key Results
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The Case of Turkey
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Conclusions
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VIII Sustainability of the Fiscal Adjustment
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Ernesto Ramirez Rigo
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Fiscal Adjustments
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Defining a “Successful” Adjustment Episode
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Conclusions
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IX Bank Restructuring and Financial Sector Reform
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Mats Josefsson and David Marston
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Crisis Outbreak and Containment
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Bank Restructuring Strategy
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Outcome of the Bank Rehabilitation Program
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Challenges Ahead
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Lessons Learned
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X Labor Market Developments
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Mathew Verghis
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Labor Supply
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Labor Demand
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Labor Market Regulation
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XI Conclusions
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Donal McGettigan and Reza Moghadam
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References
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Boxes
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9.1 Elements of the Bank Recapitalization Program
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9.2 The Imar Commission Report
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9.3 Priority Areas for Legal Reform
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Tables
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2.1 Real Per Capita GDP Growth, 1960–2000
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2.2 Growth Accounting, 1961–2000
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2.3 Summary Statistics, Selected Variables
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2.4 Cross-Country Growth Difference Regressions
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2.5 Additional Cross-Country Growth Difference Regressions
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2.6 Decomposition of Turkey’s 20-Year Growth Differential
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2.7 Decomposition of Turkey’s Decadal Growth Differentials
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2.8 Cross-Country Difference Regressions with Assorted Dependent Variables
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2.9 Cross-Country Fiscal Volatility Regressions
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3.1 Determinants of Inflationary Expectations
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4.1 Extent of Liability Dollarization in Turkey’s Economy, end-2003
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4.2 Foreign Currency Mismatch in the Banking Sector
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4.3 Gross Government Debt (consolidated budget debt stock)
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4.4 Currency and Interest Rate Composition of Central Government Debt
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4.5 Foreign Currency Position of the Government Sector
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4.6 Foreign Currency Position of the Real Sector (corporations and households)
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4.7 Foreign Currency Position of the Corporate Sector
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4.8 Selected Financial Ratios of the Corporate Sector
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4.9 Selected Profitability Ratios of the Corporate Sector
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4.10 Main Domestic Foreign Currency Assets and Liabilities of the Banking Sector, end-2003
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5.1 Main Features of Turkey’s Debt
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6.1 Currency and Interest Composition of Domestic Central Government Debt
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6.2 Maturity of Debt
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6.3 Outstanding Total Debt of Central Government by Lender
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7.1 Panel Estimates of the Fiscal Policy Equation
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7.2 Alternative Measures of Feasible Primary Surpluses
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8.1 Summary of Primary Surpluses
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8.2 Central Government Operations and Composition of Adjustment
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8.3 Estimate of Composition of Adjustment
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9.1 Precrisis Vulnerabilities in the Banking System, December 2000
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9.2 Operational Restructuring of Ziraat and Halk
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9.3 Structure of the Banking System
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9.4 Financial Indicators for Private Banks
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9.5 Loans Restructured Under the Istanbul Approach, as of April 2004
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9.6 Assets and Liabilities of Ziraat and Halk
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10.1 International Competitiveness
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10.2 Population Growth and Shares by Decade
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10.3 Educational Attainment
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10.4 Labor Force Participation and Employment in 2003
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10.5 Output, Employment, and Productivity Growth
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Figures
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2.1 Real Per Capita GDP
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2.2 Real Per Capita GDP Growth
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2.3 Per Capita GDP Growth Volatility
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2.4 External Trade
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2.5 M2/GDP Ratio
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2.6 Fiscal Discretionary Volatility
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2.7 Inflation
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2.8 External Debt
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2.9 Partial Scatter Plots of the Growth Differential Against Differentials in Selected Variables
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3.1 Inflation: The Long View
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3.2 Recursive Coefficients of Equation (1)
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3.3 Additional Recursive Coefficients of Equation (1)
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3.4 Determinants of Inflationary Expectations: Recursive Coefficients
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4.1 International Investment Position by Sector
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4.2 Short-Term International Investment Position by Sector
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4.3 Foreign Currency Share in Total Debt, end-2002
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4.4 Deposits in the Banking Sector
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4.5 Average Maturity of Deposits
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4.6 Liquid Assets (including reserves) as a Share of Deposits
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4.7 Government Securities as a Share of the Banking Sector’s Total Loan and Security Portfolio
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4.8 Operating and Net Profits of Corporations
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4.9 Domestic Banking Sector’s Claims on Public Sector Assets
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7.1 Fixed Effects and Total Government Revenues
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7.2 Revenue Ratios and Effective Tax Rates in Selected Emerging Market Economies
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7.3 Successful Fiscal Adjustments in Emerging Market Economies
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7.4 Probability Distribution of Fiscal Adjustment in Emerging Market Economies
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8.1 Fiscal Policy Stance
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9.1 Offshore Loans as a Share of Total Bank Assets
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10.1 Adult Population, Labor Force, and Employment
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10.2 Productivity and Real Wages in Private Manufacturing
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10.3 Gross Fixed Private Investment
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Preface
This Occasional Paper analyzes the transformation of Turkey’s economic performance under its reform program supported by the International Monetary Fund, and sets out guideposts for the reform agenda that lies ahead. The paper was prepared by a team led by Reza Moghadam. The authors—Oya Celasun, Xavier Debrun, Mark Griffiths, Mats Josefsson, Christian Keller, Christoph Klingen, Chris Lane, Cheng Hoon Lim, David Marston, Donal McGettigan, Ashoka Mody, Ernesto Ramirez Rigo, Martin Schindler, and Mathew Verghis—include staff who have worked closely on the IMF program in Turkey, together with members of a number of the IMF’s functional departments, in particular the Research Department, as well as World Bank staff.
The analysis is based on data available as of July 2004. However, more recent data do not alter the thrust of the analysis.
The authors would like to thank Michael Deppler, Susan Schadler, and Odd Per Brekk for their guidance and advice on these studies, and also for deepening our understanding of the economic issues facing Turkey more generally. We are also grateful to the Turkish authorities and to participants in seminars held in Ankara and Istanbul for discussions and comments, which have improved the papers. Chanpheng Dara provided excellent research assistance throughout, while Julie Burton, Connie Strayer, and Alimata Kini Kabore ably assisted in preparing the manuscript. The External Relations Department edited the manuscript and coordinated production of the publication.
The opinions expressed in this paper are solely those of its authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the Turkish authorities.