Regional Trade Dynamics in Turkish Regional Development Policies Mehmet Emin OZSAN1, Kamil TASCI2, Metin OZASLAN3 Senior Expert , General Directorate for Regional Development and Structural Adjustment , State Planning Organization , T.R. Prime Ministry, meozsan@dpt.gov.tr 1 2 Senior Expert , General Directorate for Regional Development and Structural Adjustment , State Planning Organization , T.R. Prime Ministry, kamil.tasci@dpt.gov.tr 3 Senior Expert , General Directorate for Regional Development and Structural Adjustment , State Planning Organization , T.R. Prime Ministry, mozaslan @dpt.gov.tr Abstract: A critical problem that regions currently face today is the phenomenal increase in urban population growth rates due to continuous migration. Regions encountering this situation need to find efficient solutions to concurrent problems such as unplanned urbanization, sky rocketing land prices, staggering unemployment, and crime rates. They shall improve their competitive power at the supranational scale and focus on attracting investment and skilled labor. Underdeveloped regions suffer markedly from insufficient demand for their local products in national and international markets. This consequently prevents these regions from exploiting their full potential and converging with developed regions. Skilled labor cannot be retained in such regions resulting in lower productivity levels in developing countries when compared with the industrialized Western world. The situation is particularly severe in Turkey. Developmental disparities among regions have manifested into a major problem especially in the last two decades. Ongoing regional development policies have failed to ensure balanced distribution of wealth across regions. New policy tools are the need of the hour for an effective utilization of local resources. This study aims assessing the importance of regional trade for regional development policies in Turkish Public Administration. It will illustrate how regions remain interconnected, within themselves and with the international markets. This study sets forth some innovative policy recommendations to improve regional developmental strategies and thus regional trade in Turkey. Keywords: Regional Development, Convergence, Divergence, International and Regional Trade, Turkey Introduction It is highly inexact to believe the countries‟ in the world would be self sufficient by producing all kinds of goods with their available resources alone. Though sounding like a possibility, it is highly debilitating in terms of efficiency. Gains from trade are the vital reason behind countries having international trade. To be more figurative, let‟s imagine a world where there are two countries and they produce two goods, apple and wheat. If country A produces apples more efficiently than country B, that is, if it produces the same amount of apples with lower inputs, then country A has a comparative advantage in producing apples. Similarly, if country B has a comparative advantage to produce wheat over country A, it should export wheat and import apples. Finally, both countries will benefit from trade. The situation illustrated here is analogous to regions too. In spite of two regions being in the same country or international markets, one region might have a different comparative advantage over the other. „What determines trade relation between two countries?‟ is a poignant question in the context of international trade. An answer to this question is found in the gravity model. This model claims that the degree of trade between two countries depends on the size of the economies and the distance between the two countries. As the economies grow, countries demand more goods and services from other countries and a greater variety in their products leads to a catapult in the exports. Hence, there is a positive relationship binding the economic sizes of countries. In this model, the other important factor is the distance between two countries. As the distance increases trade volume decreases. The formula can be written as follows; Tij = [A * Yi * Yj ] / Dij (1) where A is a constant term, Tij is the value of trade between country i and country j, Yi is the country i‟s GDP, Yj is the country j‟s GDP and Dij is the distance between two countries.1 Although world trade slowed down in 2007 because of the demand from developed countries sliding down, on an average exports increased by 2.7 percent faster than real GDP for 2000-2007. Trade of manufactured goods is increasing faster when compared with that of agricultural and mining products in the world. While it grew by 7.5 percent, exports followed with an increase of 5 and 3.5 percent respectively for the other two sectors. However, it is interesting to note that the growth value of world merchandise trade is higher for the agriculture sector. The European Union has the highest intra-regional trade shares in the world. 74 percent of the trade by EU countries is made with other European countries. Having an integrated market proved to be an advantage for intra-regional trade in the European Union. While Africa records the smallest share of intra-regional trade with only 10 percent exports, Middle East, Central Asian and Latin American countries precede with 88, 80 and 76 percent shares, respectively. North America and Pacific Asian countries have a balanced international trade scheme. Brazil, India and China are the three important exporters among emerging markets. Brazil had an annual growth of 17 percent in export revenues since 2000. It had a positive trade balance of $34 billion as of 2007. India has a negative balance of $72 billion in spite of having a 19 percent growth rate in exports since 2000. Both countries have just over one percent share from the total international trade. China has a share of 10 percent in world trade. China joined WTO in 2001 and this move quadrupled its exports and tripled its imports. The enormous change in trade numbers for China is very impressive. In a totality, $262 billion of trade surplus was recorded in 2007 and 45 percent of trade receipts were made by Asian countries. European countries have the highest shares in regional trade flows in world merchandise exports as of 2007. 42.4 percent of exports were however realized by EU countries. They have also increased their shares by 7.3 percent since 1948. The highest increase however came from Asian countries. While Asia had just 14 percent of exports in 1948, it doubled its share at the end of 2007. China and Japan are the leading countries in terms of mega export performances. In the 1 Krugman and Obstfeld 2006, 12 2 same period, North America lost a share 14.5 percent and its total exports in the world dwindled to 13.6 percent.2 The Turkish economy has had a booming growth since 2002. The country succeeded in achieving macroeconomic stability by means of four major economic measures. Public expenditures were controlled through tight fiscal policies, and the autonomy of the Central Bank helped facilitate the implementation of efficient monetary policies. Structural reforms aided in creating a sustainable debt management system, and short-term debts could be replaced by longterm debts. Inefficient financial institutions were rooted out, and necessary reforms in the social security system were realized. Turkey took the shape of an integrated country in international markets. Export revenues increased by 32 percent in 2003 and 2004. Macroeconomic stability and productivity increases paved way to an increase in manufacturing exports and diversity in terms of the manufactured items. Expenditures on imports also increased, due to the delayed consumption and investment demand during a crisis period. Higher import shared in the total share of trade resulted in a steadily increasing trade deficit. It catapulted to $70 billion in 2008 from a mere $30 billion in 2003. Overall macroeconomic development failed to balance development disparities across regions. Strategically speaking, Western regions are more integrated into the world economy, especially to the European Union. Istanbul and the surrounding regions are the most common and pivotal places of origin for trade in Turkey. Together, these regions produce almost 75 percent of trade in Turkey. Western regions generally tend to be either industrial or service centers in the country. Eastern regions face tremendous bolt from underdevelopment and ironically benefit very little from economic development measures in the last decade. Though agriculture is the dominant sector, its productivity is very low. The Eastern area has a closed economic structure and failed to integrate even into domestic markets. This study looks at regional development disparities from a regional trade perspective. The study has four sections. The first section will present the relationship between regional development theories and international trade. The second part will provide an overall picture on regional development policies in Turkey. Third part will be dedicated to the regional comparisons on the basis of regional trade data. Finally, the last part is devoted to suggesting thoughtful recommendations for better regional development policies in the future. 1. International Trade – Regional Development Linkage Regional development has been conceived as a multifaceted phenomenon having many variables affecting it. This conception presumably gives scope for different approaches and explanations of the subject. However, regional development theories can be evaluated under two main categories; Theories of Regional Economic Convergence assert that under the assumption of perfect mobility of the factors of production, per capita incomes and wages will eventually be equalized. Export base model and neoclassical exogenous growth theory are the two important examples of this sort. The export base model debates that economic development is based on the world demand for regional products; exogenous growth theory highlights the productivity of regional economies. On the other hand, Theories of Regional Economic Divergence believe that the 2 Statistics were gathered from World Trade Organization (WTO), International Statistics 2008. 3 development gap cannot be reduced either at supranational or sub-national level. Two divergence theories will be evaluated here; cumulative causation theory and growth pole theory. According to export base theory, regional growth is based on demand (in the economy). It categorizes the economy into two sectors; basic and non-basic. Basic sectors work as export sectors that catapult the output level due to demand from outside (of the region). Non-basic sectors serve as catalysts for serving the export sectors by meeting the local demand. The four stages involved in formulating an export base model3; 1- An appropriate regional unit should be identified, 2- The equation system should be specified according to the basic non-basic sector separation, 3- The export base should be measured (measuring income generated by basic sector), 4- The parameters of the model should be estimated (especially the income multiplier). Since the theory is demand driven, basic formulations are derived from the Keynesian supply and demand aggregate model.4 Y=C+I+X-M (2) where Y represents output level, C, I, X and M denote consumption, investment, exports and imports, respectively. Government spending (G) and taxes are kept outside to simplify the model. One of the loopholes in the theory is its assumption that the price elasticities of demand for labor and products are zero while the price elasticity of supply for labor is infinite.5 In spite of being criticized for ignoring the supply side of the economy, the theory stands as a valuable entity, as Emerson (1969, 127) rightly argued: “The energizing component of the most regional growth and forecasting models is exports.” Contrary to export base theory, neoclassical growth theory relies on the supply side of the economy. This theory was introduced by Solow (1956). The model is exogenous in nature because the population growth rate, savings rate and technological innovation are the determining factors for development. Capital accumulation is prima-facie to the argument and the amount of output relies on the aggregate capital stock under the assumptions that supply of labor and technology levels are provided. The output level is a function of capital.6 Y = F (K) (3) The only means of accumulating capital is through investment which categorically depends on how much is saved. The theory assumes that people save a constant fraction of their income denoted by sY and a constant fraction of capital depreciates as δK. Hence, the net investment (I), which is the derivative of K, can be formulated as; I = sY – δK (4) 3 Lewis, 1976: 59 Nowlan, 2006: 1-2 5 Lewis, 1972: 16 6 Arbatli, 2006: 1-4 4 4 The theory proclaims that each additional unit of capital will increase the output level in a decreasing rate. Capital flows will be through the poorer regions since capital accumulation is lower. It indicates that the poorer regions will possess a higher potential to generate output more productively than the richer regions. In the long-run, the marginal productivity of capital will be zero for every region and the economy will concurrently reach the much desired steady state. In this very way, inter-regional labor flows will end-up with an equilibrium situation where the marginal productivity of labor is zero. If two regions have equal output level and savings rate, the region which has a higher population will be poorer since Y/L is lower than the other region. The migration of people to higher-wage paying regions will lead to a relative decrease in income per capita in richer regions and a proportional raise in poorer regions due to the increase in Y/L and K/L. To sum it up, the result is an absolute convergence of regions. Cumulative causation theory is among one of the most influential theories in divergence theories. The basic idea of cumulative causation theory rotates around the fact that industrialized countries will continue to benefit from being industrialized since agglomeration in economies naturally ensures a potentially advantageous position over developing countries. The theory had its first inspirations from the writings of Smith and Marshall. The division of labor and increasing returns to scale stimulate the volume of production which in turn determines the market size.7 This causes industrialized regions to be more productive although wages are lower in developing countries. Hence, „agglomeration effect‟ is the prominent reason for industries preferring to stay in developed countries rather than tending to capitalize from lower input prices in developing countries. This theory was first formulated by Myrdal in his study of Appendix 3 of American Dilemma (first published in 1944). He made a vivid separation between a vicious and a virtuous circle. According to the theory, the former is more relevant for underdeveloped regions while the latter stands for industrialized ones. Myrdal‟s CC theory introduced two crucial concepts for regional development; spread effects and backwash effects. It can simply be explained that since the high income levels in developed regions will increase demand for products in lagging regions, these regions will be positively affected (spread effect) by the welfare levels of richer regions. On the other hand, labor and capital flows are from the poorer regions to the richer ones (backwash effect). The difference between the two effects is obvious through above definitions. There have been other approaches to the cumulative causation theory. One of them is by Veblen‟s institutional school, which states that institutional change is a determinant factor in economics analogous to the demand and supply dynamics. According to this school of thought, social structures are affected from institutional developments and individual behavior changes with social evolution. Another approach is Wicksell‟s Monetary CC Theory which differentiates natural and monetary interest rates. Wicksell‟s analysis focuses on monetary policies and on how price change mechanism affects interest rates, firm behaviors and investment decisions.8 The basic revelation of growth pole theory is that growth has different patterns for different regions. It is evident that some parts of a country are more developed while lagging regions are unable to break up the vicious circle. Perroux is one of the founding fathers of this theory. To quote him “… growth does not appear everywhere at the same time, it becomes manifest at points or 7 8 Fujita, 2007: 276 Fujita, 2004: 2-4 5 poles of growth, with variable intensity, it spreads through different channels, with variable terminal effects on the whole of the economy.” 9 Some regions are naturally in a more advantageous position than others with respect to development. This prevalent advantage could be either due to the region being abundant in resources or from being a strategic location geographically, which means it is convenient for trade or transportation. The bottom line is that growth poles or regional growth centers emerge because of the high economic activities in certain regions. Growth poles have some common characteristics worthy of mention. As a primary criterion, they should be urban centers. Rural areas or villages cannot be named as growth poles since they cannot be the driving forces for diverse economic activities. Urbanization also works towards showcasing the attractiveness of a center for new migrants who supply labor in a competitive market. A secondary characteristic is the sustainability of growth. Peripheries are positively affected from the growth centers. This might happen due to the increasing service sector activities in the center tending to push manufacturing activities in the direction of outward regions. Some growth centers are actually so powerful that they have a whole set of less developed regions of a nation under their captivity. Perroux perceives growth poles as dynamic units which are either individual firms, a group of firms that are not institutionalized or a group of institutionalized firms. Other authors have attributed certain functional meanings to the growth pole concept. To further explain, if a single industry is able to stimulate the development of other industries through demanding their products - as intermediary inputs, then technical polarization increases in that region. Income polarizations occur when the addition of industrial value causes a raise in the welfare level of the service sector. Similarly, new activities are attracted to a region due to the industrial activities causing an increase in geographical polarization.10 2. Regional Development Policies in Turkey Regional development has been an important policy agenda item in Turkey since the planning era took off in 1960s. Development disparities among regions are so severe and astonishing that GDP per capita in the most developed part of the country is 11 times more than the least developed region. The situation worsens when the socio-economic development index is also taken into account. In this context, the country can easily be separated into two parts: the western industrialized part is the developed side and the eastern part is heavily dependent on agricultural production activities for its sustenance. The western part seems to be getting closer to the European Union standards both in terms of economic structure and social life. However, the eastern regions could not break down the vicious circle of underdevelopment. The situation illustrates the stand point that new regional policies have taken the shape of a necessity to succeed in reaching the targets of balanced development. Until today, there have been four development tools employed to further regional development. The first one is regional plans. They were prepared to combine industrial and spatial priorities in accordance with the national plans and strategies. It is disheartening to note that only the South-Eastern Anatolian Plan has been implemented though several plans were made for various regions. Insufficient local institutional capacity is the main obstacle in the way 9 Perroux, 1970: 94 Mandla and Gantsho, 2008: 3 10 6 of implementation of regional plans and strategies. The second development policy is about Priority Regions for Development. The success level of this policy is low since financial incentives are limited to invoke local potential and more than half of the provinces being included in the policy (49 provinces out of 81) considerably restricted its impact. The third policy tool sites about Provincial Development Plans. These planning activities were carried out only in a limited number of provinces, yet there was no proper allocation of sufficient financial and human resources. There is also a fourth policy option, related with other development measures that have regional dimension. For example, Organized Industry Zones (OIZs) and Small Industrial Estates (SIEs) were administered under Ministry of Industry and Commerce but they did have a significant impact on regional development. To add on, though Technology Development Zones and Techno parks were established under Science, Innovation & Technology policies, their contribution to the regional economic development was note worthy. Another notable aspect of regional issues in Turkey is the intra-regional development gap and this adds on to the already existing interregional disparities. Development disparities between urban and rural areas still prevail as a consequence of industrialization and socio-economic transformation in the social and economic development process of Turkey. Rural areas failed to catch up with the rapid development of urban areas in this process. The annual population growth rate was consistent around 0.6 percent between 2000 and 2007. To give an overview of population dispersion across the country, 70.5 percent of total population lives in urban areas. There is a marked difference between the percents in the western and eastern parts of the country with the west having about 70 percent, while the eastern part only having about 50 percent. 35 percent of the total population lives in the most developed four regions. Less than 15 percent of the total population lives in the least developed five regions of the country. Agriculture has a bigger share of employment in the eastern regions when we talk in terms of division employment. Half of the total employment is in the agriculture sector in the least developed two regions, TRA2 and TRB2. There is a limited industrial development in the region though. Industrial employment is less than 20 percent. Western regions possess a higher industry share. It is about 42 percent in the most developed region of Turkey (Istanbul). The distribution of the service sector seems to be more balanced when compared to other two sectors. Table 1.1 Several Indicators for the Most and Least Developed NUTS II Regions Regions Share in Popn. (2007) TR10 (Istanbul) Urb. Rate ()2007) Agri.(%) 88.9 0.5 17.8 Industry(%) 41.9 Service (%) 57.6 TR51 (Ankara) 6.3 92.7 7.5 25.2 67.3 TR31 (Izmir) 5.3 84.9 17.5 31.2 51.3 TRC3 (Batman, Mardin, Siirt, Şırnak) 2.7 62.4 20.0 TRA2 (Ağrı, Ardahan, Iğdır, Kars) 1.6 48.3 56 TRB2 (Bitlis, Hakkari, Muş, Van) 2.8 49.5 48.5 100 70.5 27,3 Turkey Source: Turkish Statistical Institute, 2007. 7 17.5 62.5 5.9 37.8 10.7 41.1 25,4 47,3 3. Regional Trade Scheme in Turkish NUTS II regions Turkey‟s total trade volume for 2008 was equated to $334 billion. 39.5 percent of this was drawn from export revenues and 60.5 came through imports of goods & services from other countries. Turkey came up with a $69.8 billion worth of trade deficit in 2008. The export/import ratio was 65 percent. During the last decade, rapid economic development also had its impact on trade. Total trade more than doubled in this period. While it was $159 billion in 2003, it peaked to $334 billion in 2008. This stupendous growth happened grossly due to an increase in imports. Imports increased by $107 billion, while exports increased only by $67 billion. In percentile terms, exports rose by 51 percent while imports crossed the 53 percent mark. On an average, the total trade volume increased by 52 percent, a net worth $174 billion. Trade Values ( billion $, 2008 Prices) Trade Performance of Turkey 400 350 300 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 Years Export Import Total Trade Talking in terms of trade deficits, there was a steady increase as a result of higher import shares adding up in total trade. It was about $30 billion in 2003 but increased to $70 billion at the end of 2008. However, export/import ratio did fluctuate marginally between 61 to 68 percent between 2003 and 2008. Year 2003 saw its peak while in 2006, it hit the bottom but then began to rise again. Istanbul is the biggest exporting province in Turkey. It magnificently doubled its export performance from $37 billion to $73 billion in 2003-2008 period. Undoubtedly, Istanbul reigns as the commercial and financial center of Turkey. More than half of the exports were actualized by the province. Bursa, Izmir, Ankara and Kocaeli provinces followed Istanbul. Bursa and Kocaeli are the highest in terms of industrialization and they are also the „automobile-churning‟ cities. They mostly benefit because of their proximity to the demand centers, Istanbul and Ankara. Spread effects from big metropolitan centers play a pivotal role in industrializing these cities. As the capital city of Turkey, Ankara is the hub of public institutions. Consequently, it not just boasts of being an important service center, but also houses a large population of public servants. Being a technologically sound and technically advancing area, it stands as a growth place for science based industries. Izmir is one of the earliest birth centers of trade and tourism in Turkey. The city has critical advantages with respect to climate, culture and geography. Izmir also has one of the biggest harbors in the country further strengthening it as a trade place. 8 Export Values (Billion $, 2008 Prices) Export Performance of The Top Eight Provinces 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 İSTANBUL BURSA İZMİR ANKARA KOCAELİ GAZİANTEP DENİZLİ SAKARYA Provinces 2003 2004 2005 2006 2007 2008 As the graph illustrates, there is marked difference between Istanbul and other exporting provinces of Turkey. It is remarkable to see that seven provinces altogether could only produce just 50-55 percent of export revenues when matched with Istanbul. Though this situation got better in 2006-2008, there is an obvious necessity to spread industrial production to other cities. It should be noted that all of those provinces, except Gaziantep, are located at the western side of Turkey. 68 provinces had export revenues worth less than one billion dollar and 39 of them had less than $100 million as of 2008. Needless to say, almost all those provinces were eastern cities. Not just in export values, Istanbul, Ankara, Kocaeli, Bursa and Izmir provinces had the biggest share in imports, as well. 55 to 62 percent of all imports in Turkey have been realized by Istanbul province. Both Denizli and Adana are industry based cities. Their main export item is textile & apparel and these do not rely on imported intermediary inputs. This makes Denizli an important export center with lower import levels. Six provinces had an import value less than a million dollars. These are the least developed cities in Turkey and do not have a significant export performance. Most of the eastern cities have an economy unrelated to the outside of the province. Macroeconomic policies do not make any progress in those provinces since they are separated and cut off from the course of the country. Many space based policies are required to overcome this situation. When the trade performance of cities are evaluated on regional basis, TR10 (Istanbul) NUTS II Region has the highest value in export revenues. 55 to 58 percent of total exports were catered from this region. TR41 (Bursa, Eskisehir, Bilecik) Region is the second biggest exporter. TR42 (Kocaeli, Sakarya, Duzce, Bolu, Yalova) is third among 26 NUTS II Regions. This illustrates that Istanbul and its surrounding regions are the trade hub of Turkey. Nearly 75 percent of export revenues are produced by these three regions. TR10 (Istanbul) has had 55 to 62 percent share of imports between 2003 and 2008. TR10 is followed by TR42 and TR51 (Ankara) Regions. 80 percent of imports are made by these three regions. 14 NUTS II regions have a trade surplus and 12 regions have trade deficit in 2008. TR41 Region has the biggest surplus value. This is because of it being an automobile exporting region. It is followed by TR32 (Aydin, Denizli, Mugla) Region. Since the biggest trading regions have higher deficit values, Turkey had a $70 billion trade deficit as of 2008. The figure below illustrates overall trade performance of some of the NUTS II Regions. 9 Overall Trade Performance of NUTS II Regions TR10 TR42 TR51 TR81 TRC1 TR90 -10.00 TR32 TR41 Surplus/Deficit (2008 Prices, Billion $) 10.00 -20.00 -30.00 -40.00 -50.00 NUTS II Regions 2003 2004 2005 2006 2007 2008 Conclusion Import substitution policies in 1970s resulted in a more centralized development in big cities like Istanbul, Ankara and Izmir. Industrial development was sort of triangulated around these three prominent cities during this period. Intense migration from eastern regions to this triangle had two major effects. The first one is the demand-oriented effect which means that the triangle acted as the consumption center of the country. The second one is the supply-oriented effect indicating that capital accumulation and skilled labor share in total employment is higher in the triangle than in other regions. When import substitution policy was replaced by an export-oriented development strategy, industry had the chance to develop across space. Especially, cities circumventing Istanbul such as Bursa, Kocaeli, Tekirdag and Sakarya, largely benefited from the spillover effects accrued from Istanbul. This however is not true for Ankara, since it is more of a service center for government affairs that inhibits development of other provinces around it. Post the 2001 crisis, rapid economic development has had a positive impact on poverty rates in Turkey. Apart from the overall economic performance, initiation of the EU negotiation process has also made important contributions to the regional development policies. However, western regions of Turkey are still at an advantageous position compared to the eastern and inner parts of the country. This definitely points out in the direction that „geographical advantages play an important role in the distribution of wealth among regions‟. It is to be underlined in red that government policies could not help in achieving a remarkable success to reduce disparities. In this juncture, government policies need to be targeted towards integrating the lagging regions with regions and countries that are better off. This can be done by increasing the accessibility of „regions at a disadvantage‟ to those in a favorable position. Additional integration between western and eastern regions will consequently boost the trade volume of lagging regions. As a priority, the Turkish Government needs to take necessary precautions to disperse industry equivocally among regions, enabling the creation of a „balanced and sustainable‟ development. Educational and employment generating strategies need to be coupled with 10 government incentives and industrial policies. The irony that “disconnected efforts towards policies often cause conflicting consequences” will cease to be ironic once we target on „directional integration of economic reforms‟. Domestic markets are far from eastern regions and domestic markets are not willing to demand goods and services produced by those regions. Government incentives provided to them shows that supply driven incentives did nothing to stimulate regional economies and the government should therefore investigate other kinds of supports for these regions. Cross-border cooperation policy has the potential to boost foreign trade performance of eastern regions if it can be combined with labor and industrial competitiveness policies. Import substitution policy should be implemented for high tech and medium high tech imports to increase productivity of exporter sectors, and reduce foreign trade deficit. Investments in underdeveloped regions should be promoted via corporate and income tax deductions, provision of land, machine and equipment, know-how and information technologies. 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