Attending the 49th annual meeting of the World Economic Forum in Davos, Treasury and Finance Minister Berat Albayrak gave an exclusive interview to Daily Sabah on the future of the Turkish economy under the fourth wave of globalization.
The concept of "globalization" was first enunciated in academic circles as a cooperative business model. Many economists, including Theodore Levitt, claimed years ago that the world was undergoing a mixture of all cultures to become one common global culture. The late American economist argued for a standardized marketing plan and said, "Everywhere, everything gets more and more like everything else as the world's preference structure is relentlessly homogenized."
The conceptualization of a global market approach was the first wave of globalization, through which several companies developed new strategies and tactics within the competition arena. Today, in its fourth wave, driven by Industry 4.0, globalization is discussed in almost all subcategories of politics, economics, culture and so on, with the objective of ultimate interconnection. In this way, the World Economic Forum's (WEF) ongoing annual meeting in Davos has embraced "Globalization 4.0" as the overarching theme for hundreds of sessions, where leaders from business, government, international organizations, civil society, academia, media and the arts circles meet.
A key agent in the world, Turkey and its position in the fourth wave of globalization will also be discussed during various sessions of the forum. Treasury and Finance Minister Berat Albayrak will be at the WEF today to address current economic trends, particularly from Turkey's outlook. Daily Sabah held an in-depth interview with the minister in terms of Turkey's stance on the recent market volatility, Industry 4.0, high-tech production and emerging markets.
Daily Sabah: Turkey has overcome economic turbulence with some effective measures. How do you evaluate the last six months?
Berat Albayrak: We have had really tough five years. Starting from mid-2013, we experienced so many challenges, both at the global and regional levels, such as the start of monetary tightening in advanced economies, the civil war in Syria and refugee flows to Turkey. To make matters worse, we have also seen instability and changing priorities within the country. Over the course of the last five years, we have seen elections and a constitutional referendum, and a series of terrorist attacks.
Naturally, security and peace always come before economic objectives. That's why economic policymaking was in the back seat of the policymaking agenda. But, since then the elections were held, the terrorist threat has been diminished and a new system of government has been introduced, thus economic policy has become the top priority again. This is going to bring huge benefits with it, and we are seeing the initial positive effects of change from these priorities.
Since August it has been observed that our financial indicators have improved remarkably. As of January 21, the Turkish Lira has appreciated 22.4 percent against the dollar, the 10-year government bond yields decreased by 617 bps, and the CDS risk premium decreased by 256 points according to their peak points in August.
We have two key issues to address: inflation and current account deficit. The New Economic Program (NEP) aims at addressing these through rebalancing, fiscal discipline and structural transformation.
Despite a very difficult first half with mounting pressures, the measures we have taken have yielded really good results in inflation, the current account and the fiscal front. We are in the process of rebalancing where growth is going to slow down and then converge into the potential growth level of 5 percent over the next three years, while the source of growth is going to rotate from domestic consumption to external demand.
Monetary policy is there to tame inflation and it is doing a great job. We, as the fiscal authority are helping them, without interfering with the independence of the Turkish Central Bank. After a significant exchange rate pass through, where inflation peaked, we managed to limit inflation and beat the NEP and the central bank estimates. We finished the year with 20.3 percent. This year, we are going to further reduce inflation down to levels of around 15 percent.
On the external deficit side, we are posting consecutive current account surpluses since August. Improvement in trade balance and strong tourism revenues helped us on this front. In 2018, exports grew by 7 percent while imports contracted by 4.6 percent. This translates into a 28.4 percent decline in the trade deficit. So, 2018 exports stood at $168 billion while imports were at $223 billion. The picture becomes starker after August. Over the August-December period, exports grew by 7.5 percent while imports declined by 23 percent. The ratio of imports covered by exports in this five month period was realized at 90 percent, and the trade deficit was at $8 billion.
As of November 2018, the annualized current account deficit declined by $13.4 billion compared to 2017 and stood at $33.9 billion. While the NEP target was 4.7 percent of the GDP, thanks to strong exports, it is going to be better than this. And, in the upcoming period, this trend will continue and net foreign demand will give a strong positive contribution to growth. For this year, the current account is going to be around 3 percent of the GDP. So, we are going to achieve the NEP target on the current account.
On the fiscal side, we had a really difficult job there, especially because the first half of the year was full of fiscal slippages. But, over the course of six months we delivered significant savings there. So, basically, for 2018, the NEP estimates a central government budget deficit of around TL 72.1 billion, and the year-end central government budget deficit came to TL 72.6 billion.
On the structural side, we have also taken significant strides in a very short span of time. We have restructured the Turkish Development Bank and the Real Estate Bank. In the upcoming period, we continue to take all the necessary steps. The Public Sector Transformation Office is set up and it is functioning. The office is going to lead the structural reform and public sector savings efforts this year.
DS: With the main topic of the World Economic Forum being Globalization 4.0, where do you think Turkey stands and how should it move forward?
B.A.: The world is changing, and it is changing very fast. London-based scholar Anthony Giddens, in one of his renowned books, "Runaway World: How Globalization is Reshaping Our Lives," discusses the advent of a global cosmopolitan society, extending his arguments beyond the merely economic, Giddens shows how our growing interdependence directly affects our daily lives.
Industry 4.0 has pretty similar effects to globalization. Currently, we are only focusing on the economic effects. We have not yet thoroughly discussed the social impacts in store for us. But you can be 100 percent sure that Industry 4.0 and its aftereffects are going to shape and shove economic and social systems. It is going to restructure almost every single economic and social activity from health to agriculture and from finance to industrial production.
While the concept of Industry 4.0 is pretty new, it is the natural next step of technological evolution we have seen over the last couple of decades. Digital technologies are expected to have a significant impact on various sectors. For example, McKinsey – the management consulting firm – forecasts that the global digital health market will grow to $233 billion by 2020, while the agricultural robotics market is expected to approach $20 billion in the same time frame. Digital technologies and advanced production technologies also have the potential to significantly increase the efficiency of manufacturing industries and their competitive edge. The smart manufacturing technologies currently in place have the potential to increase the efficiency of the manufacturing industry by an average of 3 to 5 percent. These technologies can reduce the amount of time machines remain idle by 30-50 percent. Furthermore, advances in robotics technologies can increase labor force productivity by 45 to 55 percent by having robots perform both dangerous and routine tasks.
We have announced our Digital Turkey Roadmap – the document that sketches out our Industry 4.0 transformation strategy. This document sets our priorities for digital transformation of our manufacturing industry. We have developed this document on the basis of public-private cooperation. As part of this transformation, we have established the Digital Transformation Platform in Industry. The platform brings together all the large nongovernmental organizations (NGOs) with an economic mandate.
Adopting this trend is going to help us address the current account deficit problem permanently while facilitating high-value added production in Turkey.
DS: What are the contributions of the use of advanced technology in production to the Turkish economy?
Our manufacturing industry has one, single systematic problem. We are exporting low and mid-tech while we are importing high-tech. This, naturally, translates into persistent external imbalances.
Approximately 30 percent of our manufacturing and 37 percent of our exports consist of medium and high-tech products, while the EU's medium and high-tech products comprise 63 percent of their total exports. One of our priorities is to increase our exports of medium and high-tech products and achieve the EU average. Some 10 percent of the difference is in medium-tech and 16 percent is in high-tech products. High-tech sectors are those affected by digitalization the most. Therefore, it is absolutely essential that we digitize our industry in order to increase our high-tech manufacturing and exports.
We know that we have to move up the value chain, produce more high value-added products. To this end, we are adopting a sector-oriented prioritization scheme. Pharmaceuticals, energy, petrochemicals, machinery and equipment and software are going to be on the forefront of public sector incentives. We are restructuring our support for research and development (R&D) spending. So far, we have provided incentives to R&D. To further leverage technology and R&D, we are going to adopt the public-private partnership (PPP) model for technology and R&D investments. To further foster high-tech and innovative production, we are going to establish industry and technology zones. These zones are going to host vast domestic and foreign investments. These measures will help us create more value-added and increase our competitiveness in the international markets.
DS: What do you think awaits emerging economies, particularly Turkey, this year?
It has been 10 years since the global financial crisis. This crisis affected all of us. Homes were lost, jobs were shed and businesses were shut down. Then came the tide of reversal – the long but bumpy road of recovery – after a series of policy measures, whose effects we still feel. The pace of growth over the past 10 years was robust, but still below the pre-crisis average. In 2017, we saw really strong and broad-based growth. Last year, we also experienced a relatively positive outlook. However, at the same time, we saw stronger downside risks to outlook, such as increased protectionism and the risk of a trade war looming on the horizon.
So, what we are seeing is waning risk appetite, declining capital flows to the emerging markets, and a pickup in inflation in advanced economies, with normalization in monetary policies. Against this backdrop, we also saw that global expansion seems to be weakened by the relatively softer performance of Germany and China.
Apparently, the U.S. Federal Reserve (the Fed), the risk of trade war, and the unfolding of Brexit are going to shape the risk appetite in the short-term this year.
Automation, cloud computing, big data analytics, and the "Internet of Things" (IoT) are changing the world. This change is all-encompassing. These large-scale developments transform production structures, alter the fundamentals of how we do business, enhance connectivity, facilitate interaction, fuel innovation, and redefine the boundaries of competitive advantage.
These improvements, coupled with the availability of better education and international integration fuel the rise of the emerging market (EM) economies. The EMs have been the engine of global economic and commercial growth in the last couple of decades. Thanks to the broad based and strong growth in the EMs, a significant chunk of global population rose from poverty, global prosperity improved and global policy making environment became more inclusive.
But, despite all the developments, the EMs, as a whole, are still in the convergence process. We have traveled a huge distance, but we still have a lot more to go. We will see a really different picture in the coming decades with the further rise of the EMs.
DS: How can the high potential of Turkey boost the global economy with its 2019 goals?
Turkey has huge potential and provides significant opportunities for investors. The businesses that invest in Turkey can seize the opportunities not only in Turkey but also in a wider region. Investors also have access to the European Union as Turkey has a customs union with the EU. Turkey also has historic, cultural and linguistic ties with many countries in Central Asia, the Middle East, the Balkans and Africa.
We have a dynamic and young population that supports an innovative, vibrant, competitive productive base.
We have very strong physical infrastructures, combining all sorts of transportation and energy. We are right at the intersection of the north-south and the east-west energy corridors, hosting almost eight oil and gas pipelines.
We have a huge network of highways, and we are further improving our highway system through a series of PPP projects. We also have a strong network of air traffic, almost all of our cities have active airports and there are regular domestic and international flights from these cities.
We are also taking significant steps to improve our railway network. Modern high-speed railway lines are active across major cities, and we are taking every measure to further improve this network.
And, we have very favorable market conditions, suggesting lucrative business opportunities.
Last Updated: 1/31/2019 11:05:15 AM