A veteran Marxist economist and soL columnist, professor Korkut Boratav evaluated the recent growth statistics released for January-June 2017 and discussed whether the Turkish economy entered a phase of chronic stagnation or shows a dynamism that puts the country at the forefront of "the emerging economies".
Many researchers, both from Turkey and abroad, defined the period after 2007 as "stagnation in chronic external fragilities" using the old national income series, (Gross Domestic Product, GDP) for the period 1998-2015. But according to the Turkish Statistical Institute’s (TurkStat) new national income statistics, "a healthy dynamism" was realized after 2009.
TurkStat supports the "dynamic economy" thesis with the national income predictions for 2016 and 2017. According to these predictions, the growth rate o the economy was close to 5 percent in the first six and last three months of 2016. The growth rate in the period of January-June 2017 was 5.1 percent.
Critical of the changes in the GDP calculation method, Boratav added "Most of the mediatic economists put up with the new GDP statistics and supported the 'dynamic economy' discourse. According to me, stagnation tendency connected to economy’s structural problems continues."
He continues to explain why the recent GDP statistics are not reliable.
GROWTH DETACHED FROM PRODUCTION
National income is the sum of all value added created during the production process. The national income share of each sector is derived from gross production statistics. Therefore, production surveys and indexes are very important.
When we look at the industrial production index, also released by TurkStat, there is a 2.1 percent increase in January-June 2017 in comparison to 12 months before. Calculated based on the past years' average elasticities, a 2.1 percent increase in the industrial production index cannot create a more than 2 percent growth rate for the industrial share of national income. TurkStat, on the other hand, "discovered" a 6.5 percent growth rate in the industrial sector in its GDP calculations for January-June 2017. Boratav explains that TurkStat came up with this number by changing the calculation method. Instead of constructing GDP statistics from production surveys, now it relies on accounting records such as tax returns. The new GDP statistics are calculated using administrative and bureaucratic records by the Finance Ministry, the Interior Ministry, and the Banking Regulation and Supervision Board.
According to new calculations of TurkStat, the gap between the growth rate of industrial production and share of industry in GDP has been widening: 1.9% and 4.5% in 2016 respectively; 2.1% and 6.5% in January-June 2017.
Boratav asks "is there an economic and technological miracle in the Turkish industrial sector that makes it possible to create value-added without production?" Apparently, TurkStat is going to solve this puzzle that economists and engineers failed to solve by ending the publication of industrial production indexes.
Boratav reminds that TurkStat used this method in the past. The growth rate of building construction cost index was 2 percent in 2016 while the growth rate of construction’s share in GDP turned out to be 5.6 percent with the new calculations. The TurkStat "solved" this mismatch by getting rid of building construction cost index.
GDP-EMPLOYMENT LINK IS BROKEN
The employment statistics are directly related to the level and growth of GDP. Transfer of labour in between sectors and technical improvements increase the overall labour productivity in the economy. Therefore, GDP is expected to grow with a slightly higher rate than employment in "normal" years.
But this link completely disappears in January-June 2017, Boratav argues. The employment in Turkish economy increased at the average rate of 2.1 percent in the first six months of 2017. Based on past years’ employment and GDP statistics (that Boratav and many other economists still trusts) this increase in employment would be expected to create about 3 percent increase in GDP. According to TurkStat, however, this slowly growing employment (2.1%) created a glowing revival in GDP (5.1%). This is a big jump in average labour productivity in Turkish economy that is hard to explain.
Meanwhile, unemployment increased strikingly in January-June 2017 in comparison to 12 months before, from 10.4% to 11.6%. The number of unemployed increased by 17 percent on average in these six months.
In other words, economy’s growth rate in the first six months was not high enough to absorb the increase in labour supply.
EXTERNAL FINANCE FLOWS
External finance flows affect the short-term growth rates. The economy received about the same amount of foreign capital in the first half of 2017 with 2016 (28 billion dollars). Meanwhile, “the unrecorded money” showed “net outflow” in 2017. Moreover, domestic rentiers, banks and businesses speeded up the transfer of funds to abroad. As a result, total external finance flows contracted by one-third in the first six months of 2017. In other words, Boratav shows that external financial flows could not have created the dynamism to increase GDP.
FOREIGN TRADE AND GROWTH: STRANGENESSES
The economic shock after the coup attempt in July 2016 was tried to be offset with fiscal policies. The contraction in the economy was prevented with increasing public spending, incentives and transfers feeding bank credits and employment. However, the growth in the domestic demand is stonewalled with the limits of capacity which was determined by the previous years’ stagnant capital accumulation. It increased inflation and current account deficit, however.
According to the balance of payments statistics, the goods and services imports increased by 7.5 percent in the first six months of 2017. This means that a significant portion of domestic demand goes to imports and creates value added for other countries. This negative effect is fully compensated with an increase in exports. TurkStat reflects this information in GDP statistics using dollar/TL exchange rate movements.
So, we have the same result in the balance of payments which is calculated using dollar; and in GDP statistics which is calculated using current TL. That is, the value added transferred to the rest of the world through imports increased by the same amount with the value added the rest of the world transferred to Turkey through exports. In other words, there is no change in foreign trade that would pull the growth rate up in January-June 2017, Boratav argues.
The growth rates are calculated using real GDP with base year prices. Using a base year fixes the prices at that year and only focuses on changes in the real production. Starting from 2016, instead of choosing a base year, TurkStat uses a new method called chain-linked volume index.
TurkStat’s table for GDP calculated with chain-linked volume index shows an unexpected result: Exports increased by 10.7 percent during January-June 2017 while imports increased only by 1.5 percent. Here we found the source of 5.1 percent GDP growth: foreign trade…
This brings a new puzzle, Boratav explains. The recovery in this table (positive development in trade) is not recorded under the main statistics. According to the balance of payments statistics, exports and imports were growing at the same rate. The only factor that could change this balance so strikingly when using the volume index is worsening terms of trade. In other words, the gap between TL received by the Turkish exporter for one dollar and TL paid by the Turkish importer for a one dollar worth foreign product has increased. This happens when the relative prices of a country’s exports decrease while the prices of imports stay constant or increase.
Oktar Turel, another well-known Turkish economist, calculated that the terms of trade must have changed against Turkey by 14.3 percent during this period to explain this puzzle. Of course, the 5.1% growth in GDP would not increase people’s income with this worsening in terms of trade. We call this phenomenon as immiserizing growth in textbooks, Boratav adds.
THE STAGNATION CONTINUES
The expanding domestic demand with fiscal policies had some positive effects on production, value added and GDP. We can trace these effects through industrial production, employment and foreign trade statistics. Based on these, Boratav argues that we can predict a growth rate only about 3 percent: "TurkStat finding of 5.1 percent GDP growth that is completely detached from production and employment statistics and realized through an "export boom” that is not shown in foreign trade statistics or changed people’s income cannot be taken seriously."
