What is globalization?

Increasing integration of economies around the world, through trade, financial flows, movement of people (labor) and knowledge (technology) across international borders.

Four Aspects of Globalization

• Increasing international trade flows– Growth rate of world trade larger than growth rate of

world production

• Increasing international capital flows

• Mobiliy of individuals: Flow of migrants to advanced countries

• Mobility of Knowledge: production methods, management techniques, export markets and economic policies

Difference between 2005 and 1992 trade to GDP ratios in percentage points

(Trade to GDP ratio- average of imports and exports (goods and services) at current prices as a percentage of GDP)

Employment in manufacturing and services in affiliates under foreign controlAs a percentage of total employment, 2004 or latest available year                                                                                

Benefits of Globalization

• Lowered barriers to capital and financial flows• Decline in transportation costs• Decline in communication costs• Rising income per capita• Rise in living standards

– Education– Health, life expactancy

Problems with Globalization

• Volatility:– openness to global capital markets bring

volatility– the succession of crises in the 1990s—

Mexico, Thailand, Indonesia, Korea, Russia, and Brazil

• Inequality:– within and across countries– strongest gains are made by advanced

countries

Are financial crises a direct and inevitable result of globalization?

• Exposure to global capital markets is the cause of crises.– But these countries wouldn’t achieve their impressive

growth records without the financial flows.

• Globalization is not the only cause- interaction of shortcomings in national policy and the international financial system.

– The countries that had financial crises came up short in one or more of the aspects:

• Macroeconomic stability,• Financial soundness,• Open economies,• Transparency, • Good governance

Inequality in Income Growth

Policy Responses for Developing Countries

In order to turn globalization into an advantage, developing countries have to create policies aimed at

• Macroeconomic stability• İnstitution building• Structural reforms

A possible policy package to manage globalization

• Macroeconomic stability to create the right conditions for investment and saving

• Outward oriented policies to promote efficiency through increased trade and investment

• Structural reform to encourage domestic competition

• Strong institutions and an effective government to foster good governance

• Education, training, and research and development to promote productivity

• External debt management to ensure adequate resources for sustainable development

Advanced economies can help integrate low income countries to

global economy by:• promoting trade - unrestricted market access for

all exports from the poorest countries to help them move beyond primary commodity exports.

• encouraging flows of private capital to the lower-income countries, particularly foreign direct investment, with its twin benefits of steady financial flows and technology transfer

• supplementing more rapid debt relief with an increased level of new financial support.

Reflections of Globalization on

Turkish Economy

• Trade Liberalization

• Customs Union with EU

• Increasing rates of Foreign Direct Investment

Turkey: From inward looking to outward looking economy

• 1945-1980: Skepticism towards the unbound funcitioning of capitalism(Keyder)

– 1960-1970: Import Substitution – 1973-1979: Oil crises – End of 1970s: Dept crises

• external payment problems• stand-by agreements with IMF and WorldBank• trade liberalization and financial sector reform

implemented by IMF

• During 1973-1977 the aim was to accelerate and deepen the industrialization.

• Period of investment boom (share of investments to GDP had increased to %25 in 1977 from %18.1 in 1972)

• The investment and growth boom were financed mostly by heavy borrowing and imports. As a result imports↑ exports↓

• heavy borrowing →external debt (share of short-term debts had increased rapidly)

• Consequently, the widening current account deficit became an important burden.

Trade Liberalization• Definition: The reduction of tariffs and trade barriers to

permit more foreign competition and foreign investment in the economy.

• January 24th 1980 Decisions: a new, outward and market oriented stabilization program was introduced

• created a change in both the value and the content of exported goods.

Objectives and Arrangements• abandonment of an inward-oriented ISI strategy, and replacement

with outward-oriented one based on a more market-based economy

• reduction of direct government intervention in the productive sector

• lowering of barriers to foreign direct investment

• Export oriented regulations and liberalization reform

• domestic demand suppressed by means of lowering of wages in real terms and the elimination of the agricultural support prices to provide room for the initial push in export expansion.

• broad-based price liberalization, including a realistic and flexible determination of exchange and interest rates

• gradual import liberalization by reductions in quantitative restrictions and cuts in the rates of customs duties

• tight monetary controls and discipline to restrain domestic absorption and reduce the inflation rate

• financial sector reform; by the end of the 1980s, there were only few remaining restrictions on the financial markets

• public enterprise reform to reduce their heavy burden on the economy and improve their efficiency

• encouraging privatization and limiting the extent of public enterprises

• export drive strategy; that is, more effective export promotion measures to encourage rapid export growth

• steps to an improved external debt management and increase the creditworthiness.

Post 1980• Turkey's export performance has been impressive, especially

in the first half of the 1980s. factors are:

– The exchange rate was maintained on a depreciating path. (The government’s policy to support exporters was to achieve a real depreciation trend, until 1988)

– significant reduction in domestic demand and the shift of production from domestic to foreign markets.

– the introduction of new export promotion schemes and the improvement of existing ones

• It is estimated that direct payments as subsidies reached 17 percent of the value of manufactured exports in 1984.

• The Export Promotion Fund, Central Bank, Turkish Development Bank andTurk Eximbank provided subsidized export credits

• Liberalization of imports and the capital account were, however, approached gradually and at later phases of the 1980 adjustment programme – nominal tariff rates were reduced– quantitative restrictions were abolished– bureaucratic controls over imports were reduced in and after

1983-84.

• However, import liberalisation process in the late 1980s led to an increase in the imports of consumer goods.

• In 1990, further import liberalization measures were introduced during a period of real exchange rate appreciation due to capital account liberalizations and resulted in trade and current account defecit

Import Liberalization

Source: tuik.gov.tr

$75 billion

$118 billion

$43 billion

Source: tuik.gov.tr

Debate on the Benefits of Liberalization

• Does trade openness lead to economic growth?– There are opposing ideas– It creates growth via technologivcal change

and competition– Investing in human captial (education) creates

growth

CUSTOMS UNION

• In March 1995, TR decided to harmonize its tariffication structure with that of the EU in a “Customs Union” which has been put into effect in January 1996

• This is the first step toward EU integration process

• Next phase will be the full integration of the commodity and service markets.

• The CU with the EU does not deal with agriculture or

services.

Partnership Agreement• Consists three periods : preperation, transition, last period

• When Additional Protocol(1970) passaged into law at 1973, transition period began

• EEC abolished custom duties of commodities that CU covers in favor of Turkey

• Turkey was supposed to do the same incrementally in 22 years

• As a result, CU began asymmetrically after 1970

Customs Union as a Unique Example

• Turkey is the first and only country that enters into such integration without being a member of the EU.

• Not only involves the abolition of all customs, restrictions, tariffs

• It ALSO harmonise its commercial and competition policies, including intellectual property laws, with those of the Union, and extends most of the EU’s trade and competition rules to the Turkish economy.

Work achieved so far • Elimination of all customs duties and equivalent charges as to

industrial imports from the EU, as well as all quantitative restrictions;• Adoption of the Community’s common external tariff in trade with

third countries;• Adoption of measures that are substantially similar to those of the

common commercial policy of the EU, which include;– Common rules on imports and exports, – Management of quotas,– Protection against dumped or subsidised imports,– New commercial policy instrument,– Officially supported exports credits,– Autonomous arrangements on textile imports,– Technical barriers to trade and standardisation of foreign trade,– Preferential trade regimes of the Community,– Inward and outward processing regimes.

• Progressive alignment of Turkish agriculture sector with the principles of the Community’s common agricultural policy.

• Adoption of customs provisions in line with those in force in the Union.

• Enactment of the Community competition rules and relevant legislation.

• Enactment of new rules governing state aid.

• Progressive adjustment of any state monopoly

Helsinki Summit

• In Helsinki(1999), Turkey was officially recognised as ‘a candidate State destined to join the Union on the basis of the same criteria as applied to the other candidate States’

Result:• intensifed the harmonisation of Turkey's legislation and

practice with that of the EU.

• In this context, eight sub-committees including customs and taxation under the Association Committee have been set up to carry out the screening process

Exports to EU / Total Exports

Imports from EU / Total Imports

Overall Effects

• Quantitative estimates of the welfare gains for Turkey from the liberalization are rather significant. Thus, Harrison et al. (1996) estimate the welfare gain to be in the range of 1.0 to 1.5 per cent of GDP per year

• The gain for the EU results from the greater improvement in its tariff treatment in the Turkish market, its industrial exports mainly attracting zero rates of duty. In Vinerian terms, therefore, the CU meets the criterion that trade creation was the dominant feature.

• Positive effects for the general conditions for business with all trading partners, not just with the EU.

• “Turkey’s CU with the EU in 1996 increased considerably import penetration in manufacturing while not significantly affecting the share of EU in Turkey’s trade.” (Erzan,2002)

Problem Areas

• Agriculture: Agriculture is the main sector which is not integrated into the customs union and there is no timetable for such integration. Agriculture is a sensitive sector both for Turkey and for the EU, and, under the EU's common agricultural policy (CAP) as presently constituted, it is difficult to see how the sector could be integrated without full membership.

• Anti-dumping: Turkey does not apply anti-dumping procedures or findings of the EU, which is the second most important user of such procedures at the global level (WTO, 1997). However, Turkey has been an active user of its anti-dumping legislation.

• State aids, state-economic enterprises: Turkey has an extensive state-aid system of tax exemptions and concessional credit, amounting to 7.5 per cent of GDP in agriculture alone. Textiles and clothing, followed by chemicals, were the main industry recipients. Turkey's state-aid system of tariff duty and tax exemptions and concessional credit continues to be complex, non-transparent and generous.

• Government procurement: The Customs Union between Turkey and EU recognizes the importance of public procurement but, as mentioned earlier, except in the case of State monopolies, does not lay down any specific arrangements.

• TRIMs: Trade-Related Investment Measures

Problem Areas

FOREIGN DIRECT INVESTMENT

1.Definition

2.Types & Conditions

3.Two Faces of FDI

4.FDI with Numbers

5.Sectoral & Country Distribution

6.Outflow

1.Definition of FDI

Investment by a resident entity in one

economy with the objective of obtaining a

lasting interest in an enterprise resident in

another economy.

2.Types & Conditions• Types :

● Privatization and TMSF sales● New investment● Merger & Acquisitions

• Conditions :● Sufficient infrastructure● Stability in economical and political environment

● Necessary regulations (Institutions, Laws)

Expected FDI in 2007

Concern about the M&A

• High share of M&A in FDI

–Disable the economy to increase

employment

–Disable the inflow of high

technology from foreign resources

Concern about the M&A

• Opposite view :

–Money from M&A can be used for

new investment

–New investment of foreign

investors to increase the capacity

3.Two Faces of FDI• Good Face:

– Increasing production capacity

– New technology and management knowledge

– Foreign exchange inflow

– Dynamism in economy due to competition

– Reducing unemployment

– Tax revenue for treasury

• Bad Face:– Foreign domination in

economy– High capital capacity of

TNCs relative to local companies

– Unfair competition due to management and technological skills

– Profit outflow– Increasing dependency

on foreign technology– No need to deal with

tariffs & quotas

4.FDI with Numbers / TurkeyBillion $

93-02 avr 2003 2004 2005 2006 2007 Jan

Source : Treasury

* EU negotiations* Political and Economic Stability

* Global Trends

* Effect of Privatization WHY ??

4.FDI with Numbers / World

%

• Turkey 2006 GDP : $ 400 bn • Turkey 2006 FDI : $ 20 bn• FDI / GDP for Turkey in 2006 (%) : 5

Source: “Globalization and Turkish Economy”

Turkey's Attractiveness for FDI

• Unattractive because

– Minimal level of

privatization-related

FDI

– Political and

economic instability

– Lack of effective

investment

promotion

• Attractive because

– Potential EU

member

– Well placed location

– Economic size

– Dynamism

– Quality of labour

force

5.Distribution of FDI / Industrial

5.Distribution of FDI / Country

6.Outflow of FDI / Turkey

Thank you for your kind attention

Group 5