Turkey’s enormous problems

August 13th, 2018

From my previous professional life as a bank chief economist I remember very well the Turkish banking crisis of 2000/2001, followed by a major economic downturn (GDP 2001: -5.3%). Prior to the banking crisis, macroeconomic imbalances in mainly the budget and the current account had worsened alarmingly and, thus, strongly contributed to fading international confidence in Turkey’s financial – and also political – system. The lira weakened strongly at the time. Foreign investors sold huge amounts of their Turkish T-bills and even stocks. Logically, the currency reserves shrank dramatically. At the end of the day, the IMF provided Turkey with a 10.5 billion financial rescue package. After this, a serious political crisis followed all the same – before an economic recovery could be noted and the weak banking system was reformed into a more stable shape.

Unfortunately, the acute starting position of the current Turkish crisis does not look very different from the one 17 years ago. Major macroeconomic fiscal and trade imbalances exist also today. The Turkish currency has dropped substantially not only in recent days but also by around 35 percent so far in 2018.

Political conditions, however, look partly different this time – with other kinds of political leadership in both Turkey and the U.S., giving the current economic problems in Turkey even stronger political dimensions than in the beginning of this century. But this does not necessarily mean that the current Turkish crisis “automatically” will end in a more benign way, particularly when considering president Trump’s current resistance to potentially needed major international global financial rescue actions.

Worst case scenario

Still, the worst case scenario is only a scenario. But the current situation is critical and can aggravate further. The worst case scenario could include major bank problems in Turkey with contagion to EU banks that have major loan and securities involvement in the Turkish financial system. Such a development could lead to major GDP losses in mainly Turkey but also to a more limited extent in the EU. Read, by the way, more about this relationship in the research of Hyman Minsky!

All this leads to the conclusion that the coming development in Turkey should be given very strong analytical attention. President Trump’s future ideas and action play certainly an important role in this respect. Sometimes, he changes his mind unexpectedly in another direction. But Turkey itself should also under all circumstances work more ambitiously with its ongoing macroeconomic imbalances, particularly since the country is highly indebted abroad – both what concerns private and public debt.

Experience from other countries with similar challenges shows that nervous or speculating financial markets usually are stronger than the defense lines set up by the pressured country with its currency reserves – unless the acute problems are combatted promptly or surprisingly positive news make the whole picture brighter.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Semi-knowledge about China is risky

August 7th, 2018

We are living in a rapidly working and changing (economic) world. This development also leads many times to less profound analysis and reading. Conditions have been – and are – changing both on the analytical demand and supply side. More people express their opinions – but decreasingly based on profound skills. And less people want to spend much of their limited time on deep intellectual penetration of different special areas. The demand for good, deep and comprehensive general knowledge seems to be declining.

I do not motivate these brief conclusions by the latest results from economic and social research. Instead, I apply many years of my own experience from industry, financial markets and academia – and also proven and undisputed results from (academic) research.

What really worries me is the obvious fact that so many articles and reports on China obviously are reflecting semi-knowledge. Good understanding of Chinese politics and economic conditions or developments is certainly not an issue one can deal with briefly or occasionally – which unfortunately often seems to be the case. Analysis of China may be knowingly or unconsciously. In my view, the latter alternative is dominating.

Here we come to Nobel Prize winner Robert Shiller. In his book “Irrational Exuberance” (p 142), Shiller discusses a phenomenon called “overconfidence” which he defines by writing “people think they know more than do. They like to express opinions on matters they know little about, and they often act on these opinions …”

In other words: semi-knowledge exists indeed and can become very risky. Ambitious and future-oriented countries should not become dependent on strived special skills in IT and AI – but should also do a lot for improvements of general knowledge. I believe that the Chinese have understood this dualism better than many political and corporate leaders in the West. At least I still cannot find good evidence that necessary educational efforts for improving general knowledge are really taking place on a broad scale in our part of the world. It may be a structural problem in times of speed, electronic games and modified spare time with – probably – less interest in reading. Updated research on this area would be very interesting.

Conclusion:

A good understanding of China assumes deep and regular studies of this – by its enormous size – continental country. Overconfidence is always risky – but particularly when it comes to China.

 

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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China – analytical transparency remains limited

July 10th, 2018

Economic reporting from China to foreigners has certainly improved quite a lot during the past 10-15 years. This is, of course, positive. However, these improvements seem to be mostly appreciated by foreigners who are not looking for special statistical details or more far-reaching results from social or economic research.

Certain daily Chinese newspapers have nowadays printed and even electronic versions in English, frequently with interesting (economic) news. But there are often annoying restrictions or impediments when more detailed information is needed. Trying to find more detailed access to the original authors or publishers of interesting reports usually tends to fail – contrary to what we are used to in our part of the world from our own institutions.

This described problem is indeed not in line for a country aiming at becoming the largest economy in the world and – nota bene – at being recognized as a market economy. So far, I have not even taken up Chinese economic statistics and reports in pure quality terms. However, qualitative shortcomings in these areas can only be found and improved when decent transparency already is in place. Transparency is the key to many positive developments!

Our latest China Panel Survey (https://blogg.lnu.se/china-research/files/2018/05/ChinaPanelSurvey-May-2018.pdf) from May this year still sees the quality of economic statistics at insufficient 4.1 (on a scale from 1 – 10, 10 = very good). There is no improvement in the past few years, according to our experts. And only few China analysts in OECD countries complain about this disappointing institutional development – which probably adds further to China’s lagging analytical transparency.

Perhaps, there is too much semi-knowledge about China in our part of the world – also with professional analysts at financial institutions, political organizations and corporate organizations outside China. Semi-knowledge may induce fewer complaints.

Find more about semi-knowledge in my next China blog!

 

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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