Turkey And Twin Deficit Theory
Turkey And Twin Deficit Theory
Today, the instability of public balance is based on 1980s. Especially, 24 January 1980 decisions can be considered as the turning point in the process of outsourcing. After this date the importance of trade and the liberalization of capital movement increased and those developments brought up the concept of current account more often. As well as other developed and developing countries, the hypothesis of twin deficits in Turkish economy is discussed. In this part of the study, the effects of the macro economic variables to the twin deficits were described with considering the conditions of time. In table 1 we can see the public and current account deficit to the GDP ratio from 1980 to 2010.
In this figure, the rate of non interest borrowing requirement, public sector borrowing requirement and the current account balance to the gross domestic product shown. With the effects of the expansion of capital movements in 1989, budget deficit and current account deficit began to move together after 1992. Between 1980 and 1985 all the parameters decreased. In 1985, the budget balanced, the same year, the current account deficit has declined. The period of 1985-1990, non-interest borrowing requirement, public sector borrowing requirement increased again.
In Turkey, more expenses and less revenue in public sector lead the budget deficit. Because of import dependent growth, the period of high growth also become period of the high current account deficit. The period of recession or slowdown in growth is the period of current account surplus.
Between 1990 and 1994, the public sector borrowing requirement decreased but the non-interest borrowing requirement decreased more. On the other hand, the non-interest borrowing requirement had surplus since 1999. The public sector borrowing requirement increased until 2003. This situation shows that public interest payment increased. Current account had deficit except 1989, 1994, 1999 and 2001. Since 1995, non-interest public spending could be financed with interest income. However, there is a need for new borrowing for the debt service payments which consist of interest and principal. In other words, public sector creates vicious circle to finance old deficits and to create new ones: this named as “debt trap”.
Literature Review on the Twın Deficit Hypothesis
This part of the study involves some work done on the twin deficit. Güriş and Yılgör (2008) in their study of 29 OECD countries over the period 1990-2005 using panel data for the causal relationship between budget deficits and trade deficits examined. Newey and Rosen Holtz Eaken-test was used during the examination, foreign trade deficits, budget deficits have been identified a unidirectional causal relationship.
Erdinc’s (2008) co-integration analysis and Granger causality test is made in Turkey for the economy as a result of the relationship between the twin deficits examined using annual data covering the periods 1950 to 2005. The Johansen co-integration analysis, opinion of the traditional Keynesian says that budget deficits and current account deficits in support of a long-term relationship. The budget deficit to the direction of causality has found to be true. Budget deficits cause current account deficit, the current account deficit does not cause the budget deficit.
Yılmaz, his study published in 2002, for the 1980-2001 period examined the causal relationship between budget deficits and trade deficits and Keynesian Opinion that the same results.
Altay and Gök, their study published in 2007, tested the validity of the twin deficits in Turkey covering the period 1989-2005. In tests with the long-term budget deficit did not find a relationship between the current account deficits. However, the increase in the budget deficit in the short term, the current account deficit and increase the national income. This study is available on the short-term twin deficits reached the conclusion that in the long run is not valid.
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