I hope readers can recall my column about the middle income trap that Turkey is facing (“Turkey on the brink of middle income trap,” Sept. 2) in which I discussed the astonishing increase of per capita income in US dollar terms in the last decade (from $3,000 to almost $11,000).
I claimed that this performance is not likely to be repeated in the next decade for a simple reason: An important part of this success was due to the impact of the large appreciation of the Turkish lira on the gross domestic product (GDP) in nominal US dollar terms and such an appreciation might not be pursued in the coming years. On the contrary, we are currently witnessing developments in the opposite direction. It is not only Turkey; in all emerging countries running high current account deficits (CAD), local currencies are on the path of depreciation.
This is not surprising since these countries also experienced the same kind of astonishing high GDP growth rates in US dollar terms in which local currency appreciations played a crucial role. I had a vague idea about this but a recent article by Ricardo Hausmann from the Harvard Kennedy School (“The End of the Emerging Market Party”) helped provide me with more facts on this issue. Hausmann considered the GDP growth of main developed countries as well as those of some emerging countries from 2003 to 2011 in US dollar terms. Then he evaluated the part played by currency appreciations in the very high growth rates realized in emerging countries.
Let's start with the developed countries for the sake of comparison. From 2003 to 2011, GDP increased by 35 percent in the US, 32 percent in Great Britain, 36 percent in Japan and 49 percent in Germany. During the eight-year period, the average nominal growth rate, including the inflation rate, was approximately 4 percent (slightly higher for Germany). Real GDP growth can be estimated to be around 2 percent. A portion of the higher German growth was due to the appreciation of the euro against the US dollar.
Now, let's look at growth for some emerging countries during the same period: Brazil, 348 percent; China, 346 percent; Russia, 331 percent; and India, 203 percent. Hausmann adds that the GDP in countries such as Indonesia, Ethiopia, Ukraine, Chile, Colombia and Romania grew more than 200 percent. Needless to say, the per capita income in these countries also increased tremendously in the past decade, as was the case for Turkey. So far so good!
Unfortunately, the critical point is that the role played by real growth in these impressive performances is quite modest for some countries. For example, in Brazil, only 12 percent of its nominal US dollar GDP growth was due to growth in real GDP. This means that real GDP increased by only 42 percent during the eight-year period and that the average real GDP growth rate was limited to 4.2 percent a year. The remaining 306 percent increase originated from both increases in prices faster than in the US and the huge appreciation of the Brazilian real.
Except for East Asian countries where the contribution of real growth was sizable -- I calculated this contribution to be around one-third for China -- in other emerging countries real GDP growth contributed only about 20 percent on average according to Hausmann. Turkey's performance is rather close to the East Asian performances, except that the nature of its growth was based on domestic demand causing a high CAD. Indeed, nominal GDP in US dollar terms increased by 155 percent in Turkey but only a third of it originated from real growth. Thus, the average real GDP growth rate reached 5.2 percent from 2003 to 2011 in Turkey.
Hausmann wrote: “In most countries, the US dollar value of GDP growth handsomely exceeded what would be expected from real growth and a reasonable allowance for the accompanying Balassa-Samuelson effect. [The Balassa-Samuelson effect indicates higher increases, in terms of dollars, of the prices of services in developing countries compared to developed countries. This effect allows an appreciation of the currencies of developing countries of about 1 to 2 percent per year.] The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction.”
I agree. Most of the high capita income increases realized in the last decade in the emerging countries with high CAD like Turkey seem to be artificial and no one should be surprised if these increases are reversed in the coming years.