A Turkish Economy 101 Chart?


A picture is worth a thousand words, as they say, and this could be the Turkish Economy version. I like this chart below, because it says a lot to me at least about how the Turkish economy works… Turkey needs other people’s money – or capital inflows — to grow, which is financially intermediated by banks (or turned into credit or debt) domestically. When inflows are ample, so is credit growth, and we get to grow fast.  In times of (relative) drought, though, growth slows.  Of course, this is not a water-tight relationship; there are periods/years during which these three deviate from each other, but the correlations look pretty interesting and strong nevertheless.

So if you take this picture seriously as a starting point, the challenge for Turkey is to figure out how to have solid growth, with less credit and less inflows. This is a very tough one, but it’s probably fair to say that quick and dirty solutions like weakening the lira or throwing more money after defunct companies (under the disguise of “industrial policy”) won’t do. The answer lies in boosting “productivity” growth, one driven by TFP, but how that can be made possible is another very, very difficult question…