I will continue from where I stopped on Monday. The question was: if Turkey gets an 'economic story' and as a result if the lira tends to appreciate, can we increase exports? The question appears as conflicting in this wording. But in fact it is not. To show why, I would like to summarize my comments on Monday.

Policies implemented after the 2001 crisis put a clear end to the vicious circle which can be illustrated as 'high public deficit - high public debt, deepening in the concerns about the sustainability, rise in lack of confidence - high real interest rates and high public deficit and debt'. Concerns about sustainability disappeared gradually, interest rates and public debt dropped steeply. Under these circumstances, exchange rate remained low. Abundance of global liquidity also contributed significantly. In a climate where lira appreciates continuously, exports rose sharply. This outcome, which seems 'weird' at first glance, was mainly a product of the will to compensate for the fall in international competitiveness driven by the appreciation of Lira by controlling other costs. In this process, productivity increased. In addition, as large economies grew above their potential, demand for Turkey's exports went up. What is more, thanks to abundant international liquidity, firms were able to finance investments and ensure productivity raises easily.

Let us think that we construct a new 'economic story' now in this climate: Assume that we enact the legal structure guaranteeing that the Medium Term Program (MTP) fulfills budget targets in 2010, as scheduled in the MTP. Say that we declare the initiation of a new structural reform which will eliminate the high tax rate - low tax revenue contradiction, which is considered as the biggest impediment beyond the improvement of growth rate. Say that we implement a program to derive income for and improve skills of the poor and unemployed, the most desperate victims of the crisis. Assume that we seek to answer what industrial policies might be suitable for Turkey and in this context declare that we will launch a reformation attempt. Assume that we have an approach abstracting current political developments and the approaching elections. Of course this is an unrealistic abstraction; but it has no harm considering the subject I discuss. This type of an economic program is feasible. Such a program can attract international capital. Yes, international fund flows will not be as strong as it used to be in a couple of months ahead. But this does not mean that developing countries like Turkey will not enjoy any fund inflow.

Higher amount of capital over longer maturities will flow to those at a better condition while those with no 'stories' will receive much less and over much shorter maturity. Therefore, an 'economic story' similar to the one explained above can attract capital inflows to Turkey though not as much as it did. And this can ensure a lower exchange rate compared to the case with no 'story'. It is obvious that a downward pressure on exchange rate creates negative impacts on exports. Can we compensate for this, this time as we did after the 2001 crisis? 
First, let us evaluate the demand for Turkey's export goods. In 2010 we will witness an increase in world trade volume. However, this increase will be below that that in previous years. Moreover, level of income will not be improved in the substantial part of Turkey's export markets. This implies that, unless we make additional effort to find new export markets, exports might not increase at the pace achieved in the post-2001 period.

Adverse effects resulting from low interest rate can be compensated if firms can reduce their costs. However, this will not be as easy as it was in the post-2001 crisis period. First of all, many firms were damaged by the global crisis. For instance, they used internal resources more to pay their debts. Particularly small firms were left without any resource for investment. And those willing to invest will face more trouble in accessing foreign funds despite the presence of the new 'economic story'.

In that case, if we get a new 'economic story' that will lead to low exchange rate in the coming period, exports will be affected quite adversely unlike the case in the post-2001 crisis period. So, the question to ask is what to do then. I will continue with this subject.

Happy new years to all!

This commentary was published in Radikal daily on 31.12.2009