I wish rate cuts could solve all our problems…

CBRT Chair took the magic wand and… I’m not kidding. That’s how people think that all of our problems will get solved. Inflation, unemployment, recession, even diplomatic problems will magically disappear.

Well, they won’t! However, some people will say, “Rate cut is a cure-all!” especially after having started the “high interest rates are the reason for high inflation” debate. This is all normal. But, we should know that this isn’t the biggest problem. That’s why, today, I felt the need to talk about the current world economic situation and the situation in Turkey.

First of all, we need to realize that the paradigm that was built on “production” has collapsed, allowing pre-manufacturing and post-manufacturing activities to increase added-value, while on the other hand, the rankings of the world’s most valuable brands have changed as a consequence technological developments and digitalization. Spot-on AI analysis of consumer profiles and AI’s specific structure which is capable of immediate response to consumer demands paved the way for a brand new type of colonization to emerge.

As the highly-anticipated momentum in world Merchandise Trade hasn’t occur yet again, social media advertising and e-trade ads created global-scale interaction, which led people to put the way we define “GDP” into discussion as it is calculated through “end products and services units”. While people argue that GDP growth rates have been miscalculated because of the current definition of GDP, investors seem very concerned about low GDP growth rates which are calculated with conventional methods. Accordingly, constant fluctuations in global capital flows have become almost inevitable as a result of these concerns.
Turkish exports, on the other hand, achieved sometimes similar to, and sometimes a lower performance than the world trade during the previous period. From 2014 to 2018, however, Turkey faced major challenges indeed, especially regarding international terms of trade. In other words, the value of Turkish exports has significantly declined.

We must admit the fact that Turkey’s foreign trade regime is partially to blame for such considerable decline. While Turkey’s growth model which was designed to facilitate intermediate goods imports, or rather compel people to import intermediate goods was quite prominent from 2002 to 2014, Government has sadly continued to take all the wrong actions to improve the situation, thus causing production costs to rise further and forcing manufacturers/exporters to deal with manufacturing facilities with low capacity utilization that produce relatively expensive domestic intermediate products. As a result, unit value of Turkish exports still remains below 1.5 USD.

“We absolutely need a Plan B!”

When we look back on the history of world economy, we see that the World Trade still remains on the East-West axis. What I mean is that I think all those efforts and campaigns aimed to sell goods and services to China or India are nothing but a huge waste of time and energy. Instead, Turkish Industrialists should try to keep the real added-value in Turkey by investing in South Asian Countries. If their ultimate is to create a brand, they probably won’t make it in Turkey! Turkish companies must invest in new rising stars in South Asia and realize that it’s not so difficult to sell products to these countries. Such drastic change, however, still seems like a remote possibility considering government pressure on employers to hire more workers and government efforts to protect the interest of certain sectors.

“Protectionism” is the biggest obstacle to World Economic Growth. The free trade agreements (FTAs) that EU and the US signed with other countries/blocs remains as a huge impediment to Turkish economy. Unfortunately, our Trade Diplomacy remains incapable of taking any action to reverse the situation in favour of Turkey. I think I would not be wrong in saying that Turkey’s hands are tied because of ongoing conflicts and deteriorating relations with the United States and EU.

I honestly do not expect raw material, intermediate goods and investment goods prices to go up soon. However, it’s quite likely that world economy will gain new momentum in 2-3 years due to growing human populations and human needs. On the other hand, I do not expect final product prices to equally rise. This whole situation may cause profitability and GDP growth crises, eventually leading World Trade to enter a recession once again just like it did from 2014 to 2018. So, Turkey should urgently work on a plan B ahead of a possible financial crisis.