It’s the domestic demand, stupid

There are two types of countries in the world when it comes to experience in growth: Ones in which internal demand drives the economy, and others, where external demand does the job. Turkey is in the former category while China is in the latter. High domestic savings in countries like China allow for an exportable surplus to be generated, while in countries like Turkey, the domestic savings rate declines to nil and the exportable surplus shrinks. High growth means a high current account deficit in this category. That is the source of Turkey’s addiction to foreign fund inflows. Is that a bad thing? Definitely, because it makes the country more vulnerable.

The current account surplus in China and current account deficit in the United States are considered to be causing the global imbalance, leading to the flow of funds from surplus to deficit countries. Turkey is also part of the global imbalance problem. We have had a structural current account deficit problem in this country for as long as I can remember. Current account surpluses in Turkey are rarities, reserved for crisis years only. Whenever the domestic demand is high, Turkey grows rapidly. As long as it grows rapidly, so does its current account deficit. Turkey needs foreign savings inflows to sustain growth. No wonder it was among the first countries to initiate the financial liberalization process in the early 1980s.

Remember the early 1980s? That was the Thatcher-Reagan world. Liberalization was the buzzword. In the period before it, however, international financial transactions had largely been composed of government-to-government flows of funds. In that era, Turkey was at the recipient end due to the value of its land. Take a look at the map. You have the Soviet Union in the north. The Cold War made Turkey valuable and started its addiction to foreign funds. Sound too sinister? Deal with it. We consume more as long as foreigners are sending their savings in some form to our country. In the post-war, NATO world, our checks came from Western governments. We were content.

That system started to change in the early 1980s. Fund flows based on the private market started to overtake government-to-government flows. Turkey has adjusted by creating channels for private foreign savings to flow into the country. As the value of our location started to decline with the end of the Cold war, the stock exchange, privatization programs and currency convertibility started. Policy reforms have also paved the way for domestic industrialization and exports. Domestic demand, however, remained as important as ever. Look at the import requirement of our industry today; that is now feeding the current account deficit and also the addiction for foreign savings. The essence of Turkey’s growth model remains the same.

It may be time to start thinking about structural change. Perhaps the Arab Awakening can give Turkey new strategic value. Maybe there is no need for drastic change at all.

But one thing is certain: Growth always comes from domestic demand in Turkey. The issue must therefore not be achieving a high growth rate, but sustaining it. Controlling domestic demand through fiscal and monetary discipline is once again the major issue of the day.

It’s the domestic demand, stupid.