IS TURKEY IN A MIDDLE INCOME TRAP?

Transcription

1 Journal of Applied Research in Finance and Economics Vol. 1, No. 1, IS TURKEY IN A MIDDLE INCOME TRAP? Izzet TASAR a, Esma GULTEKIN b, Yunus ACCI c a Department of Economics, Fırat University, Elazığ Turkey, b Department of Economics, Fırat University, Elazığ Turkey, c Department of Economics, Şırnak University, Şırnak -Turkey ABSTRACT Every government faces the same question, is the growth sustainable? For many, the barrier from being a middle income country to a high income country is quiet high. In our analysis, Turkey, as a middle income country will be investigated for the period from 1960 to For the empirical analysis Robertson and Ye (2013) will be followed. Standard Unit root tests and also unit root test with structural breaks will be considered. Apart from the answer of the question if Turkey is in a middle income trap or not, there are few points that will be advised to avoid such risk. KEYWORDS Middle Income Trap, Developing Countries, Sustainable Growth. JEL Codes E01, O11, F43, O47. CONTACT: itasar@firat.edu.tr

2 Is Turkey in a middle income trap INTRODUCTION The middle income trap is generally explains the situation that most of the middle income countries get stuck in a range of economic income and they cannot reach high income status. The definition also concluded with the fact that, the countries fall in a circle that they cannot break even in the long run. (Müsiad, 2012; Cherif and Hasonov, 2015). In that case, it make sense to put the question to the theory; what countries are defined as middle income country and what is the criteria to become a high income country. Due to the literature, it can be considered $ per capita. The world bank defines the countries in terms of growth in three groups and the income levels are as; low income countries that has GDP up to $ per capita. Low middle income countries are defined as countries that has GDP per capita between 1.45$ to 4.125$, and the high middle income countries has 4.125$ to $ per capita. For a country to be accepted as high income country, the country should have more than $ per capita. 2. World Bank announces the situation of Turkey as a high-middle income country with a GDP per capita $. This study will analyze the Middle Income Trap theory for Turkey. Turkish economy has a growth trend except the financial and political crises. The main breaks in the graph seems to be in 1980, that the government replaced the military power, the economic crises in 1994, banking crises in 2001 and the big economic crises in If these dates are not considered, the growth trend in Turkey has a significant increase. It is a big advantage for Turkey that it provides many opportunities to entrepreneurs as a developing country. Apart from that, the fact that Turkey needs to improve the potential in terms of regulations in the economy and financial sector. The expectations about the future of Turkey are very important, because the real economy is based on the expectations, so Turkish government, like all the other emerging countries, should also focus on the expectations to make them positive. For most of the developing countries, to get over the middle income trap, the positive expectations has a crucial role. When testing middle income trap, the literature has many implications. In the study made in Thailand suggests that it is not only structural and institutional but also personal decisions are important as a reason of the middle income trap (Rigg et al., 2014). Another important point about the middle income trap is, the strategies that can help the governments to get over that period. For example Southeast countries that has a development strategy based on export are good examples and this is underlined as a reason for that countries to skip the middle income trap. (Dabus et al., 2015). The effects of the large scale firms are another point that might be an exit from middle income trap. (Eryılmaz and Eryılmaz, 2015). Innovation, FDI and productivity matters are also very important. Especially with the endogenous growth theories such economic indicators are taken into consideration. Solutions for the countries that experience middle income trap are advised to get better in innovation, FDI and productivity (Ozturk, 2015). Such headlines are also highlighted in the study of Yiping (2014) in the paper that China middle class trap is investigated. DATA AND METHODOLOGY In the study, GDP per capita of Turkey and USA are examined for the dates The data is collected from the World Bank database. For the analysis the logarithms of the series will be used. In order to see the gap and the difference in the growth rates of two countries, another series is obtained from the differences of the growth rates belongs to Turkey and USA. For the methodology, Robertson and Ye (2013) will be followed. The descriptive statistics and the graph for the series are as below: Table 1: Descriptive Statistics Variable Average Median Standard Deviation Kurtosis Skewness In the Graph 1; that the differences in the growth rates of Turkey and USA, there are some periods that the graph has breaks. Apart from that breaks, for the other periods, both country seems to have the same changes in the growth rate. Especially after 2001 and 2002 financial crises the variable seems to have a positive trend. It will not be logical to argue about the existence of the middle income trap from the graph, so for the further claims, we will continue with the econometric tests. 37

3 I. TASAR, E. GULTEKIN, Y. ACCI Graph 1: series in the selected period which will be a positive sign for the selected country for the sustainable development. Robertson and Ye (2013) offers middle income trap for Turkey in their study based on ADF test, but our analysis reject that and for Turkey based on the same econometric test, it is shown that middle income trap is valid UNIT ROOT TEST THAT DOES NOT CONSIDER THE STRUCTURAL BREAKS Firstly, the unit test that ignores the structural breaking points is applied. Those are Augmented Dickey-Fuller (ADF) and Phillips Perron (PP, 1988). Table 2: ADF, PP Unit Test Results Level Constant Constant + Trend First Differences Constant Constant + Trend Variables ADF PP (0) (3) [0.3237] [0.2170] (0) (3) [0.1892] [0.1264] (0)* (1)* [0.0000] [0.0000] (0)* (1)* [0.0000] [0.0000] Notes: * shows where the variable is stationary. The value that are in parenthesis show the lag length for the SIC criteria and they show the DF test results if the lag length is zero. Mac Kinnon critical value, for the constant term in %5 confidence interval , and for the constant and trend model For PP test the values in the parenthesis shows the band length according to Newey-West by using Bartlett Kernel criteria. Critical values are same as ADF test. While variable has unit root in the level, the variable is stationary in the first difference. If we follow Robertson and Ye (2013), it might be considered that Turkey does not experience any Middle Income Trap in the selected period. The test results parallel to the literature suggest that if there is not a unit in the level, such countries cannot maintain the development and more likely will be in the middle income trap (Robertson; Ye, 2013:4). That also mean, if there is a unit root in the level, UNIT ROOT TESTS WITH STRUCTURAL BREAK When considering unit root tests, it is very crucial to check if there is structural breaks or not. (Enders, 2015). In the analysis, the unit root tests that consider one structural breaks, Zivot and Andrews (1992) and also Lee and Strazicich (2013), moreover Narayan and Popp (2010), Lee and Strazicich (2003) tests that consider two structural breaks are employed. ZIVOT-ANDREWS (1992) UNIT ROOT TEST WITH ONE STRUCTURAL BREAK Zivot-Andrews critics the unit root test developed by Perron (1989), because Perron (1989) takes the structures as external. With the new methodology, the new test determines the break in a certain point. (Zivot and Andrews, 1992). According to Zivot-Andrews (1992), Model A allows the structural breaks in level, Model B trend, Model C both trend and intercept. In that parallel; Zero Hypotheses; y t = α + y t 1 + u t Model A; y t = α + θ 1 D 1t (λ) + β t + γy t 1 Model B; p + δ i y t i + u t i=1 y t = α + β t + θ 2 D 2t (λ) + γy t 1 Model C; p + δ i y t i + u t i=1 38

4 Is Turkey in a middle income trap y t = α + θ 1 D 1t (λ) + β t + θ 2 D 2t (λ) + γy t 1 D 1t (λ) = { 1 D 2t (λ) = { t nλ 0 p + δ i y t i + u t i=1 t > nλ 0 t > nλ In the models, u t residual under normal distribution, t represents the time. y t i takes place in the model in order to avoid autocorrelation for the error term.. D 1t (λ) and D 2t (λ) are dummy variables in the model. LEE-STRAZICICH (2013) UNIT ROOT TEST WITH ONE STRUCTURAL BREAK That test is kind of an evaluation of the test Lee and Strazicich (2003). That test uses the Minimum Lagrange Multiplier (LM) for the unit root test. (Lee and Strazicich, 2013). The process; y ' t Zt Xt, Xt Xt 1 t Z t considered to be external variable. While β=1, unit root null hypothesis is defined. There are two models in the test, Model A shows the model that allows one break under alternative hypothesis. While Z t = [1, t, D t ], for D t =1; shows t T B + 1 condition, on the other hand 0 is the opposite. T B explains the period for the structural break. For Model C, it is allowed for both trend and also intercept for the alternative hypothesis. For condition Z t = [1, t, D t DT t ], for the DT t = t T B it is shown as t T B + 1 otherwise if it is 0 the opposite is valid. LEE-STRAZICICH (2003) UNIT ROOT TEST WITH TWO STRUCTURAL BREAKS Perron (1989) modified the Dickey-Fuller (DF) test and evaluated a test that includes external structural break. Lee and Strazicich (2003) renewed the test by using LM test procedure. Different from Zivot Andrews (1992), Vogelsang and Perron (1998), Lee-Strazicich (2003) tests the structural break under null hypothesis. Model A in the test allows the break in level, on the other hand Model C allows the break both in level and trend. The regression model according to LM test statistics is defined as: y ' t Zt S t 1 ut, δ = y t ψ x Z t δ, t = 2,, T; δ, is the coefficient of y t that derives from the regression on Z t. Moreover, ψ x is derived from y 1 Z 1 δ. Null hypothesis of the unit root test is φ = 0. LM test statistic; ρ = Tφ, τ = test statistic that the null hypothesis is tested (φ = 0) T Bj is the break dates in the unit root test with LM test statistic. NARAYAN -POPP (2010) UNIT ROOT TEST WITH TWO STRUCTURAL BREAKS This test is another Dickey-Fuller version that convert the unit root test to a two structural break form. (Narayan and Popp, 2010). The process is; y t d t ut u t u t 1 t 1 L e A L B L e * * t t t In the equations, y t, stands for inflation rate, deterministic variable, stochastic variable. Also e t ~iid(0, σ 2 ). (Model 1) allows break in level, and (Model 2) allows break in bot level and trend. The differentiation in the models is sustained by the deterministic variable change M * ' ' d 1 t ( L)( 1 1, t 2 2, t) t DU DU u t d t M * ' ' ' ' d 2 t t ( L)( 1DU 1, t 2DU 2, t 1DT 1, t 2DT 2, t) DU i,t = { 1 t > T B,i 0 diğer DT i,t = { t T B,i t > T B,i, i:1,2. 0 other In the equations, T B,i, i=1,2 signs the break points. θ i Represent the break in level and γ i represent the break in trend. d t 39

5 I. TASAR, E. GULTEKIN, Y. ACCI Table 3: Results for Unit Root Test with Structural Break Intercept Trend and Intercept Test Statistics Break Point Test Statistics Part (λ) ADF (ZA,1992) LM (LS,2013) ADF (NP,2010) *** 1978, *** 1992, 1999 LM (LS,2003) , * 0.618, 1993, Note: * (%10), ** (%5), *** (%1). Optimal lag length determined by using maximum 12 lag and Akaike Criteria. When considering the critical value for Lee and Strazicich test, break in intercept and trend due to the fact that λ 1: 0.61 and λ2: 0.76 they are considered as λ1: 0.6 and λ2: 0.8. Break Point The tests that applied in advance are (ZA, 1992) and Lee Strazicich (LS, 2013). series tested via that two test has unit root both in level and trend. Following Robertson and Ye (2013) unit root tests with two structural break; Narayan and Pop (NP, 2010) and Lee and Strazicich (LS, 2003) tests are applied. According to the test results of Narayan and Pop (2010) that uses ADF test statistics, both in level and trend a unit root was significant in the %99 confidence interval. On the other hand, Lee and Strazicich (2003) test that considers LM test statistics the break dates are accepted to be significant in %90 confidence interval in level and trend. The break dates that are significant in the unit root tests mostly refers to the Turkish economy. Our variable,, is effected from both USA and Turkish economy. We take USA economy as anchor, the dates mostly explains the changes in the Turkish economy. The biggest and deepest economic crisis that Turkish economy experienced was the 2000 and 2001 Banking crises. That crisis can be also called as a finance sector crises due to the fact that Turkish finance sector existence depends on the banking at all. Late 70 s is also a limestone in Turkish economic and financial history, that period ends with the military coup. Economically the high inflation, inefficient investments also the recession in the economy is shown as significant break for ZA(1992) and NP(2010). Beginning of 90 s period, is called the populist years in Turkish political history. The effect of the liberalization, the extensions in the fiscal and monetary policies resulted high inflation in the period. Especially the financial sector liberalization experienced artificial economic welfare in the economy. On the other hand, as mush important as the others, in 1999 the big earthquake that destroyed the heart of the real economy, the Marmara Region in Turkey had a very negative effect on the real economic variables such as production, consumption and savings. CONCLUSION Middle income trap is a big risk for the developing countries. In the studies, as a reference a country in the tests, a country with stabilized growth rate is preferred. USA is considered as a reference country in most of the analysis. Countries that cannot reach the desired growth rate called to be in the trap. In our analysis, the GDP per capita of Turkey and USA for the period considered. Middle income trap is tested unit root tests, both with and without structural break unit root tests employed. The tests will be evaluated according to fact that is the series has unit root or not. The series has unit root test in all the test result in level. The first difference of the series does not have any unit root. That results together shows that Turkey does not have a middle income trap risk. It is never a guarantee that Turkey will not experience the middle income trap. The modern growth theories (Endogenous Growth Theories) should be applied in the Turkish economy to see which method works for the economic conditions in Turkey. It is also very important to have a sustainable growth rate that wills convergence to high income countries. For the further studies, the followings are kindly advised. In order to investigate the middle income trap for Turkey, not only USA, but also some other countries should be considered for the tests. The variable used as in our research that was the difference in of the growth rates in GDP for Turkey and USA. As an alternative, GDP ratios of Turkey and USA can be used as a variable. 40

6 Is Turkey in a middle income trap Notes 1- REFERENCES Cai Fang, (2012), Is There a Middle-income Trap? Theories, experiences and relevance to China. China & World Economy, 20, Ceherif, R., & Hasanov, F. (2015). The Leap of the Tiger: How Malaysia can escape the middle income trap (IMF Working Paper, WP/15/131). Retrieved from /2015/wp15131.pdf Dabus, C., Tohme, F., & Caraballo, M. A. (2015). A middle income trap in a small open economy: Modeling the Argentinean case, Economic Modelling, doi: /j.econmod Enders, W. (2015). Applied econometric time aeries, Fourth Edition, Wiley. Eryılmaz, F., & Eryılmaz, E. M. (2015). A discussion about the possible effect of middle income trap on large scale firms selection of competitive strategy. Procedia - Social and Behavioral Sciences, 207, Lee, J., & Strazicich, M. C. (2003). Minimum lagrange multiplier unit root test with two structural breaks. Review of Economics and Statistics, 85(4), Lee, J., & Strazicich, M. C. (2013). Minimum LM unit root test with one structural breaks. Economics Bulletin, 33(4), Müsiad. (2012). Kalkınma yolunda yeni eşik: Orta gelir tuzağı, İstanbul: Müsiad araştırma raporları. Narayan, P.K., & Popp, S. (2010), A new unit root test with two structural breaks in level and slope at unknown time. Journal of Applied Statistics, 37(9), Ozturk, A., (2015). Examining the economic growth and the middle-income trap from the perspective of the middle class, International Business Review, doi: /j.ibusrev Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica, 57(6), Phillips, P.. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biomѐtrika, 75(2), Rigg, J., Promphaking, B., & Mare, A. L. (2014). Personalizing the middle-income trap: An inter-generational migrant view from rural Thailand. World Development, 59, Robertson, P. E., & Ye, L. (2013). On the Existence of a Middle Income Trap (University of Western Australia Economics Discussion Paper, 13-12). Vogelsang, T.J., & Perron, P. (1998). Additional test for a unit root allowing for a break in the trend function at an unknown time. International Economic Review, 34(4), Yiping, H., (2014). Financial liberalization and the middle-income trap: What can China learn from the cross-country experience?, China Economic Review, 31, Zivot E., & Andrews, D.W.K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business & Economic Statistics, 10(3),