1. Financial Liberalization and Saving in Turkey
Sumru Altuğ
Koç Üniversity, CEPR, ve KU-TUSIAD ERF

2. Saving Behavior in Turkey
Figure 1. Ratios of Public and Private Saving to GDP (%)

3. Investment Behavior in Turkey
Figure 2. Ratios of Public and Private Investment to GDP (%)

4. The Impact of Financial Liberalization
The role of financial liberalization in affecting saving, investment, and growth in an economy is a much debated topic.
Emerging economies have witnessed widespread financial reform beginning in the 1970’s, including deregulation, liberalization, globalization, and privatization.
A liberalized economy should offer better saving opportunities, including
higher deposit rates,
a greater variety of saving instruments,
greater access to credit.

5. Financial Reforms in the Long Run 1
An improvement in the rate of return may expected to increase saving in the long-run depending on the responsiveness of saving to interest rate changes.
The availability of non-financial assets such as real estate may have an impact on aggregate saving.
Whether households face borrowing constraints may also impact saving behavior, as a loosening of such constraints in a liberalized economy may actually increase consumption and reduce saving.

6. Financial Reforms in the Long Run 2
One stylized fact is that countries with higher income also tend to display higher saving rates, though there is no presumption of causality.
If financial reforms increase the level of financial development which itself is associated with higher income levels, then saving may increase due to the higher income in a society.

7. Financial Reforms in the Short Run
Financial reforms may have larger effects in the short run if the loosening of financial constraints also induces middle-aged households to consume at a higher rate than they would have without such constraints.
If financial reforms are accompanied by property bubbles, the higher wealth of households may induce them to consume more.
Both effects could lead to a dip in saving below the long run level.
An increase in expected income due to liberalization and reforms could also lead to a consumption boom and a decline in saving.

8. Some Evidence
Bandiera, Caprio, Honohan, and Schiantarelli (1999) construct an index of financial liberalization for 8 developing economies including Chile, Ghana, Indonesia, S. Korea, Malaysia, Mexico, Turkey, and Zimbabwe, and examine the behavior of saving over the period
They find an average negative impact of financial liberalization that swamps the positive effect of an increase in interest rates.
They suggest that the negative impact on saving of the relaxation of borrowing constraints is the dominant effect.

9. Some Evidence
Based on an extended review, Schmidt-Hebbel and Serven (2002) argue that the impact of financial liberalization on saving is at best ambiguous.
They show that there is a positive effect of financial liberalization on growth through investment – better resource allocation in a liberalized economy leads to higher investment and to increased productivity.
For the Chilean economy, they show that a comprehensive set of reforms led to higher growth and investment, though the effects on saving were ambiguous.

10. Turkey’s Experience
In the 1990’s there is evidence that higher rates of return led to higher private saving rates.
However, public saving rates were low. Combined with weak institutions in the banking sector and macroeconomic instability, Turkey experienced two major financial crisis, in 1995 and , respectively.
The post-2001 period has been characterized by a comprehensive set of reforms that have called for fiscal prudence, enhanced banking supervision and regulation, a move to central bank independence and inflation targeting together with political stability.

11. Turkey’s Experience
Figure 3. Deposit Interest Rates and the Real Interest Rate

12. Policy Recommendations
A study of the impact of financial reform on saving behavior that takes into account the role of relaxed borrowing constraints and greater access to credit seems lacking for Turkey.
Combined with the decline in inflation and the costs of borrowing, we observe the concurrent decline in the private saving rate for Turkey.
Another added factor is the expectation of higher future income and growth that may be spurring consumption in Turkey.
Furthermore, a significant fraction of recent consumption expenditures is on durable goods, which do not get counted as saving.

13. Policy Recommendations
These factors together with the existence of non-financial assets such as real estate appear to account for much of the decline in saving in Turkey.
As the literature demonstrates, however, what may be needed is focusing on the impact of financial reforms on the composition and magnitude of investment expenditures and on total factor productivity.
In this regard, private real investment rates dipped during the global financial crisis of 2009 and have rebounded since.
However, average rates of investment in the 2000’s have remained below those in the 1990’s.

14. Portent for the Future
Table 1 gives the sectoral allocation of investment since While the fraction of total investment devoted to housing has declined in the post-2000 period, the fraction devoted to manufacturing has increased significantly while investment in transportation and communication has also remained high.
Whether Turkey can avoid future crises in the form of asset bubbles and consumption booms accompanied by the inability to exit from the “middle income trap” for developing economies depends, in our mind, as much on its investment performance as on its overall saving rate.

15. Turkey’s Experience Table 1. Gross Fixed Investments by Sectors (%)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
AGRICULTURE
5.1
5.2
4.5
4.7
3.8
5.6
5.5
4.4
4.0
3.6
4.2
3.7
3.2
MINING
1.7
1.6
1.3
1.4
1.1
1.2
1.5
1.8
MANUFACTURING
20.9
20.2
19.5
19.1
20.4
23.4
22.6
19.2
18.9
18.5
24.3
28.9
35.4
36.9
38.7
38.1
36.2
30.5
29.7
ENERGY
6.4
5.7
2.7
2.5
7.5
7.7
7.3
6.6
11.1
8.9
5.8
3.4
3.9
5.0
TRANSPORTATION & COMMUNICATION
16.5
17.4
24.0
15.8
18.3
23.5
24.9
29.4
25.3
19.8
21.3
22.0
20.1
22.2
24.6
25.5
TOURISM
3.0
2.2
2.4
2.1
4.9
6.1
6.0
6.2
HOUSING
35.6
35.1
35.0
34.9
43.4
37.2
32.7
27.5
25.6
22.7
18.2
15.2
16.8
17.2
13.1
9.7
10.3
12.2
9.1
13.6
EDUCATION
2.6
1.9
3.1
2.9
4.3
4.8
4.6
HEALTH
3.3
4.1
OTHER SERVICES
6.7
7.1
6.3
8.3
8.2
10.5
11.0
10.0
7.9
8.0
8.6
8.8
9.8
TOTAL
100
Table 1. Gross Fixed Investments by Sectors (%)

16. References
Altug, S. and Ü. Zenginobuz (2009). “What Has Been the Role of Investment in Turkey’s Growth Performance?” In Turkey and the Global Economy: Neo-liberal Restructuring and Integration in the Post-Crisis Era, Z. Öniş and F. Şenses (eds.), Routledge Publishers
Bandiera, O., G. Caprio, P. Honohan and F. Schiantarelli (1999). “Does Financial Reform Raise or Reduce Savings?” The Review of Economics and Statistics 82,
Schmidt-Hebbel, K. and L. Serven (2002). “Financial Liberalization, Saving, and Growth,” presented at the Banco de Mexico Conference on “Macroeconomic Stability, Financial Markets, and Economic Development,” Mexico, Nov , 2002.
Öz, S. (2012). “Orta Gelir Tuzağı”, EAF Politika Notu No 1206