Trading Economic in Turkey Crisis 2001
In 2001, after a severe financial and economic crisis, Turkey embarked on a drastic austerity programme. The OECD (2002: 43) describes the details as follows:
The tightened fiscal package in 2001 included significant revenue raising measures and emphasised expenditure reductions. The revenue measures included:
i. a rise in the petroleum consumption tax by 20 per cent in April and 25 per cent in May; thereafter the tax is to be increased at a rate at least equal to WPI inflation;
ii. an increase in the standard and luxury VAT rates by one percentage point;
iii. a rise in the minimum base for social security contributions by 40 per cent to cover the payments.
On the expenditure side, the number of civil servants and their real wages were kept constant in 2001; negotiations on new contracts with public sector workers were targeted to be supportive of the disinflation objective; current expenditures, transfers and investment were adjusted by less than the inflation rate; and defence spending was also scaled back. Savings were also projected in the State Economic Enterprises (SEEs) as well as by slower spending in extra-budgetary funds.
You are asked to analyse the short- and medium term impact these measures have had on the Turkish economy, and provide lessons that other countries can learn from this experience.
Task details and marking grid
1. By way of introduction, provide a short overview of the austerity programme, and the justification that was given for it.
2. Shortly describe, using diagrams, equations and text, the equilibrium level of national income in the Keynesian Cross, the IS/LM model and the AD/AS model.
3. Shortly describe, with reference to the Keynesian Cross, the multiplier effect.
4. Making extensive use of academic literature, explain
which conditions in the IS/LM model and the AD/AS model must be met for the multiplier effect to take full effect.
how the size of the multiplier effect could be determined by factors both in the goods and the financial market.
how the size of the multiplier effect could differ across fiscal measures, i.e. different tax- or spending measures.
5. Using the models developed above, analyse and critically discuss the effects of the Turkish austerity programme of 2001 on economic growth and unemployment.
Take into account that the government was faced with high debt levels and low growth at the same time.
Form a view on the short- and the medium run.
Use theoretical and empirical academic literature as sources to form a view and form your argument.
6. Conclude: What lessons can be learned from the Turkish experience after 2001, for Turkey and for other countries that face similar problems either now or in future? What if any alternatives are there?
The conclusion must be clearly your own.
Your conclusion must be based on above models and clearly follow on from your analysis and discussion.
Take into account the short run and the medium run, and all stakeholders in the economy.
7. Acknowledge all your sources fully and according to Harvard style.
8. Write a coherent academic report. Format your report appropriately and professionally with a title page, contents, page numbers, and clear tables and diagrams with titles, numbers and sources.
Word count: 2,500 words
– Write a coherent academic report; do not answer question by question.
– As the homework is to be submitted electronically all diagrams need to be created electronically, too.
– All figures and tables must be fully labelled, numbered and have a title.
– Please use MS Words Equation editor to create equations.
– Have a title page and a contents page, and separate lists of tables and figures.
– All sources must be acknowledged according to Harvard style. The references in this text and the reference list below follow this style.
– Do not forget page numbers.
OECD (2002) OECD Economic Surveys: Turkey 2002. Paris: OECD Publishing.