How Turkey used math to drastically boost its economy
Author: Mustafa Sonmez Posted December 20, 2016
The Turkish Statistical Institute (TUIK), an official agency attached to the prime minister’s office, had announced a while ago its intention to change the calculation method used to determine the country’s main economic indicators. The new method was to be based on ESA2010, the European Union’s accounting framework, to align with the way EU countries calculated their gross domestic product (GDP). With this explanation at hand, the planned change seemed necessary and reasonable.
On Dec. 12, however, the release of the new GDP data sparked myriad objections and criticism disputing the scientific merits and objectivity of the way the revision was made. Pundits had been especially curious about the third-quarter growth rate, which was expected to be in the negative. So it turned out, but according to the TUIK, the economy contracted 1.8% in the third quarter, well beyond the 0.5% expected in line with earlier data sets. Then the entire picture painted by the new calculation method raised questions, both in terms of methodology and consistency.
According to the new data, Turkey’s GDP was, in fact, bigger than what the previous calculation had found. The difference is staggering — nearly 20%. In 2015, for instance, the Turkish economy was said to have produced goods and services worth 1.953 trillion Turkish lira at current prices. The new calculation method puts the figure at 2.338 trillion, meaning that an extra 385 billion Turkish lira in GDP had been somehow “discovered.” This amounts to about $140 billion, based on the average exchange rate last year. So the Turkish economy’s size for 2015 grew from $718 billion to $857 billion overnight. Accordingly, the per capita income also increased — from $9,257 to $11,082.
The revision is said to be made according to EU standards, but unlike the EU, which took 2010 as the basis year, Ankara opted for 2009, a crisis year in which the Turkish economy had contracted by about 5%. Relevant to 2009, GDP increases in following years turned in bigger, meaning that an important part of the overall increase stemmed from the choice of a problematic basis year.
While applying the EU method, the TUIK seems to have thought the construction sector was not done justice previously, for its share in the GDP increased from 4.4% to 8.2%. The share of the manufacturing industry, meanwhile, rose by 1 percentage point to 16.7%. In short, a third of the 20% increase in the revised GDP came from the construction sector, which is now ranked third in size after the manufacturing and commerce sectors.
Similarly, the TUIK seems to have thought that investment expenditures were undercalculated, revising them up by 74%. This means that domestic savings, too, are now bigger than what we previously knew, amounting to 24% of GDP and not 14%, as stated in the government’s medium-term economic program, adopted in September.
The revisions produced a new set of growth data, whose credibility was also called into question. In the 2013-2015 period, for instance, the average growth rate rose to 6.5% per year, up from 3.7% previously. More importantly, the new growth data looks out of sync with unemployment figures. For 2013, for example, the growth rate was raised from 4.2% to 6.5%. In an economy with such a robust growth, the jobless rate is expected to decrease, at least a little bit. Yet according to the TUIK’s labor force data, not only did it not decrease, but it rose from 8.8% to 9.1%.
No doubt, the 20% upward revision in GDP impacts positively a number of other indicators, which are important for foreign investors in particular. To start with, Turkey’s overall economic profile has now improved. With some $720 billion in GDP and per capita income of about $9,000, Turkey had dropped out of the world’s top 20 economies. Now it will make it back to the list.
Major indicators, watched closely by the International Monetary Fund (IMF) and credit-rating agencies, will now speak of a lesser fragility. Take, for instance, the current account deficit-GDP ratio, which denotes the foreign exchange deficit. It stood at 4.5% for 2015, but will now go down to 3.7%. Similarly, the $421 billion external debt stock’s ratio to GDP will decrease by a few percentage points from its previous level of 60-odd %, and Turkey’s borrowing capacity will look stronger. Military expenditures, too, will look more “reasonable” in proportion to GDP. With a higher GDP, the related public debt and budget deficit ratios will also improve, contributing to a more pleasant shop window for the country.
Some figures, meanwhile, will look worse. The ratios of health, education and social benefit spending to GDP are seen as important indicators when comparing countries and government policies. With the upward revision in GDP, the ratios will fall, and what Ankara spends for its people in those realms will look more inadequate. “If the cake was found to be 20% bigger, who got the newly discovered slice?” many will ask, and the credibility of income distribution and poverty surveys will be questioned further.
Inevitably, the new GDP requires revision in Ankara’s medium-term program, which outlines economic targets for the next three years. The program was already destined for revision after the economy began to contract fast in the third quarter, sending crisis signals and dampening expectations. How the government will review targets for 2017 and the following two years remains to be seen. An even more crucial question is how credible the new GDP figure will be in the eyes of the IMF and other foreign actors.
Read More: http://www.al-monitor.com/pulse/originals/2016/12/turkey-how-turks-became-richer-overnight.html