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Chinese Economic Model and its Application in Turkey

9 mins read

These days, the Turkish people are struggling with high inflation. As Friedman said, “There is no assets not affected by Inflation”, and like households in every country in the world, Turkish households are trying to avoid this phenomenon and are looking for solutions. But did the Turkish economy really come to this day because of one thing, or did they wake up to these inflationary days because of a situation when everything was going great? The answer to our questions will be answered succinctly in this article. But that is still not the most intriguing question, it is China and its easy to say but difficult to implement economic approach that has suddenly risen to the top of the global world economies. The underlying question and information in this article will be: “Can the economies of developing countries handle the Chinese Model and what are the problems if there are problems in implementation?”. “. Let us examine this model together and observe its results in Turkey as a case study through data;

Q1) “First of all, what does the Chinese Model represent?”

The Chinese model actually represents more than one situation. The people, who were caught in the middle with the communist ideology of the Mao line and were going through an ideological crisis, would have to evolve into one of two lines. It was either the Soviet Union or the United States… But in this case a leader would change the fate of the country, Deng Xiaoping. Xiaoping would implement a market economy for the welfare of the people, which was the opposite of China’s ideology. Starting the game with an agriculture-based economy and a population of close to 1 billion, China took a pragmatic approach and turned to Light Industry. The aim was to capture high technology and innovation by utilizing the residual value here and bring the economy to prosperity. The only thing they had at their disposal during this experiment was human capital. China was in a strong competitive position against many other countries in terms of its labor force. In addition to all this, the fact that China represents an Economy of Scale with its sheer size is one of the biggest indicators of the peculiarity of the situation, you can take a market with 1 billion households, but only if you share your technology and innovation with me…
In the light of these lines, an economic model was developed based on attracting investors to China by focusing on high industry, as well as export surpluses and current account surpluses. The locomotive of this system was cheap labor and its costs. China continued to develop and grow its economy with the residual value it gained from this. This system, which also includes the Asian Tigers, is called the “East Asian Type Development Model” in the literature.

Q2) “What were the results of Turkey’s implementation?”

Turkey’s economy makers decided to cut interest rates as a policy starting from September 2021. As these decisions indirectly lowered the cost of borrowing, they increased the money supply and the days of high inflation began for Turkey. With each decision, the monetary base expanded and the Turkish lira depreciated rapidly and sharply against the dollar;

Chinese Economic Model and its Application in Turkey 1
Table 1- Value of USD against TL; (September 2021 “Policy Rate Decline” Borrowing Cost Decline, monetary base expansion Inflationary movements TL/Dollar depreciation)

At this point, the expectation was that Turkey would experience a decline in “Import Demand”, which Turkey had been fighting for many years, and that foreign investors would prefer Turkey for production due to its relatively cheaper labor force. Thus, the Turkish economy would both increase its exports and cut its imports. In this way, the Turkish economy would not only have a current account surplus but also return to its production center and gain an advantage in terms of sharing high technology. But as I always say, some things that are great on paper can cause you pain in practice. In the light of the observed data, contrary to expectations, this policy led to an increase in Imports and a slight decrease in Exports. The reasons for this were very clear;

Chinese Economic Model and its Application in Turkey 2
(Import Export Data between September 2021 and September 2022) Orange: Export Blue: Import
  1. Due to the “Loss of Purchasing Power” caused by inflation, Turkish Households started to spend their assets very quickly and started accumulating physical goods for fear of not being able to buy tomorrow the products they can buy today.
  2. Turkish firms, showing the same reflex as Turkish households, have again resorted to “stockpiling” their planned future purchases for fear of future price hikes, leading to a sudden surge in import demand.
  3. On the export side, Turkish firms were crushed under the heavy burden of foreign currency borrowing and scaled back or closed down their operations.
  4. Foreign investors did not prefer Turkey in the production phase because they did not trust Turkey’s political conjuncture and perceived instability, despite the development of the phenomenon of cheap labor.
  5. Although exporters’ revenues increased, they also faced an increase in their expenses as many of their input costs were linked to the exchange rate and they were unable to expand their production lines sufficiently.
  6. In terms of economies of scale, Turkey, which does not have the domestic demand capabilities of the Chinese economy and is experiencing an unstable economic conjuncture, has not been able to find sufficient domestic demand support.

CONCLUSION

The deliberate devaluation of the Turkish lira, similar to devaluation, did not have the expected effect, but rather worsened the situation. Turkey faced a larger trade deficit. This is a case study of the various disadvantages of GOPs in the “East Asian Type Development Economy” model. GOPs will continue to experience these disadvantages as long as they do not carry out structural reforms and maintain the rule of law due to their concerns about foreign direct investment and external funding. As a result, it has been clearly demonstrated that in order for our study, which we call the China Model, to work in the same way, a “Controlled and Stable” conjuncture must also take place. Although the economy is in fact linked to the general economy, countries have their own factors of production and resource allocations. Due to the differences in many variables, countries should build an economic model with their own anatomy as much as they can and meet the characteristics demanded by economic science in general. There is nothing that Law, Stability and Science cannot solve (at least for economics).


Best Regards and Wishes

Ozan Kireççi

Istanbul University, Departmant of Economics, Interested Economics and Political Science.

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