Exchange rate policy impact on export performance: What we can learn from the Turkish experience

J BUSN RES lYYl:23:12Y-143

129

Exchange Rate Policy Impact on Export Performance: What We Can Learn From the Turkish Experience*

M. Ercan Kumcu The Cmtrul Bunk of the Republic of Turkey. Ankara

Erdogan Kumcu Bd State Utzivwsify

Export promotion policies, and specifically export pricing policies through foreign exchange rates, have a strong impact on export performance. The economic liberalization and export promotion policy of the Turkish government since 1980 served to underline this relationship. The liberalization program in Turkey has initiated the search for new export markets and a new export product-mix. Em- pirical findings suggest that the change in the product mix of exports induced a statistically significant increase in the price elasticity of exports supply. This result indicates that failure to keep relative domestic prices of exportable products competitive through realistic exchange rates limits the success of export promotion programs, and hence the performance of exporters.

Introduction

Recent export marketing literature indicates the significant impact marketing de- cision variables may have on export performance (Cavusgil and Kaynak, 1982; Karafakioglu, 1986; Koh and Robicheaux, 1988). Studies also find that companies perceive a strong relationship between economic policies-exchange rate policies, export promotion incentives, and international trade policies-and export performance (Karafakioglu, 1986; Kashani, 1977). The expected impact of exchange rate fluctuations and currency depreciation on export pricing policy and export performance has been forcefully demonstrated in a number of studies (Cavusgil, 1988; Clague and Grossfield, 1974; Koh and Robicheaux, 1988; World Economic Survey, 1988). Keegan (1989, p. 212) and Jain (1987, p. 122) contend that exchange rates not only affect export performance, but also directly impact the quality and effec-

Address correspondence to Erdogan Kumcu. Department of Marketing, Ball State University. Muncie, IN 4730% 0355.

*The views expressed in this article do not necessarily represent the official view of the Central Bank of the Republic of Turkey or other organizations.

Journal of Business Research 23, 129-143 (1991) 0 1991 Elsevier Science Publishing Co.. Inc. 655 Avenue of the Americas. New York, NY 10010

130 J BUSN RES 1991:23:129-143

M. E. Kumcu and E. Kumcu

tiveness of a company’s export marketing effort. However, there is a lack of empirical research on the impact of liberalization policies and of exchange rate fluctuations on export performance.

The purpose of this study is to explore the impact of export-oriented economic policies on export performance in a single country context. Turkey’s comprehensive liberalization program since 1980 illustrates the case. The findings show that Turkish exporters responded to export promotion strategies as well as to a realistic exchange rate policy of the government by increasing export volume, and by diversifying their product mix and target markets. This empirical study suggests that the liberalization policy was responsible for the successful export performance of Turkish exporters.

The role of exchange rates in import substitution and export promotion environments is discussed next. The specifics of the Turkish economic liberalization program is described briefly followed by a discussion of its impact on the product- mix and the target market composition of total exports of Turkey. An econometric estimation of an aggregate export supply function for Turkey and the impact of changes in the product-mix of Turkish exports on the price and income elasticities of export supply are then examined. Discussion of findings and implications is provided in the final section.

The Role of Exchange Rates in Export Promotion

Most developing countries continue to face major critical foreign exchange short- ages as a result of import substitution strategies, adverse international economic conditions of the 197Os, and unrealistic exchange rate policies. Import substitution was adopted by developing countries after World War II as the best route to attain industrialization and economic growth. This strategy entailed replacing imports with domestic production by imposing tariff and quota barriers (Krueger, 1984). However, protection of domestic industry became disappointing. The balance of payments of many countries has not improved: the structure of imports may have changed from final consumer goods to intermediate goods and raw materials, but the volume has not changed. Furthermore, for various reasons, exports were greatly discouraged. In most developing countries, domestic markets first became lucrative due to their ever-growing populations. Then, firms producing for export had to purchase inputs at costs above market levels from domestic companies under protection. Finally, the policy permitted the exchange rate to remain comparatively overvalued, increasing relative international prices of exportable goods and reducing their international competitiveness. In contrast, high profitability rates were maintained in industries of import substitution (Krueger, 1984).

Export-oriented development is considered the main alternative strategy to import substitution. This strategy entails encouraging the development of industries whose major markets are overseas. Promoting the exports of these industries en- sures the balance of payments by making available foreign exchange that is necessary to pay for additional imports required for growth (World Development Report, 1988).

Despite continuing controversy on export-oriented development (Adelman, 1984), and potentially overcrowding the international market with nations imple-

Exchange Rate Policy and Exports J BUSN RES 1991:23:129-143

menting such strategies (Cline, 1982), well-designed export promotion policies, within an economic liberalization and stabilization program, have achieved significant economic success in a variety of environments (Balassa, 1980; Krueger, 1980; Michaely, 1977). Liberalization refers to implementing economic measures directed toward eliminating import and export restrictions, as well as domestic marketing controls that prevent the price mechanism from operating.

Liberalization attempts in almost all countries have been initiated with a substantial devaluation of the domestic currency, followed by additional incentives for exports, and reductions or elimination of tariffs and quotas of imports (McKinnon, 1982; Kopits, 1987; Sachs, 1987). While the initiation of economic liberalization programs is similar across nations, their implementation and outcomes reveal dra- matic differences. The variations stem either from differences in the timing of liberalization measures and the commitment of governments, or from the way governments see the role exchange rate policy plays in economic policy (Michaely, 1986). In countries where liberalization programs proved to be disappointing, export earnings did not increase as much as anticipated, whereas considerable success in export performance has been observed in countries where liberalization programs were successful.

In the 1970s Argentina, Chile, and Uruguay launched similar liberalization policies to remedy acute external payment problems in economic structures dom- inated by import-substitution and heavy government interventions (Barletta et al., 1984; Dornbusch, 1982; McKinnon, 1982; Sachs, 1987). As in Turkey, an important element of their program was export and import liberalization to encourage exports. Included in these programs were the removal of non-tariff barriers, and generous export subsidies, continuous depreciation of the domestic currency by the amount of differential inflation between home and abroad that followed a substantial initial devaluation. However, in the face of a continuing high rate of inflation in these countries, within 3 or 4 years, the exchange rate became the major instrument of anti-inflationary policies.

These countries used overvalued exchange rates as a stabilization strategy aimed at reducing the rate of inflation and resuming economic growth at a relatively early stage of their liberalization programs. The future exchange rate adjustments were announced one year in advance to reduce inflationary expectations and to lower the rate of increase in product prices. Due to lack of confidence in governmental policies and continuing high public sector deficits, the new exchange rate policy could not reduce the inflation in these countries, resulting in substantial real appreciation of domestic currencies. As these countries moved to another phase of external payments difficulties, their export performance stagnated and liberalization programs proved to be unsuccessful, since exportable products lost their international competitiveness.

Some economists have attributed the failure of liberalization programs in the southern cone of Latin America to excessive liberalization implemented too quickly (Dornbusch, 1982; McKinnon, 1982; Sachs, 1987). However, the Turkish case study demonstrates that export performance is closely related to the level and stability of the exchange rate. Therefore, it is not an appropriate instrument of controlling domestic inflation (World Development Report, 1988).

It is important to understand that exchange rate depreciations are not a cause,

132 .I BUSN RES 1991:23:129-143 M. E. Kumcu and E. Kumcu

but a result, of higher rates of inflation. Therefore, the major argument of this article is that the failure to promote exports results from lack of long-term commitment to liberalization in general and unrealistic exchange rate policies in particular.

The Liberalization Program in Turkey

Overview of the Program

The import substitution policy of Turkey, like those in other developing countries, caused problems in the late 1970s that resulted from the strategy itself (see Krueger, 1974 for the trade regime in Turkey before 1980). Faced with one of the most severe economic crises in the nation’s history, the Government of Turkey launched a major comprehensive economic liberalization program in January 1980 (Kopits, 1987; Kumcu, 1988; Saracoglu, 1987). To illustrate the extent of the economic crisis in Turkey at the end of the 197Os, it should be noted that the crude oil import bill alone was more than 101% of total export earnings. A summary of inflation and exchange rates, export earnings, and other relevant data between 1975 and 1985 is given in Appendix Table A.

The measures introduced as part of the 1980 liberalization package can be characterized by several factors: 1) coordinated efforts of government agencies, 2) export promotion programs targeted at selected industries and markets, 3) gradual introduction of liberalization measures, and 4) long-term commitment of governments (OECD, various years).

Coordinated Efforts of Government Agencies. Beginning in 1980, the government made an effort to coordinate and then centralize the introduction of export promotion and other liberalization measures. A new department under the Deputy Prime Minister’s Office was given the authority to bring about the coordination of export policies and regulations among the various government agencies. This re- organization helped reduce formalities and bureaucratic delays.

Targeted Promotion of Exports. Within the liberalization program, the government primarily supported exporters of manufactured goods and construction companies within service industries instead of traditional agricultural export sectors. Large trading companies were especially favored.

The support, extended to selected industries, was originally aimed at Middle East, Arab, and North African markets. First, direct export subsidies in the form of tax rebates and lower credit rates were introduced. Beginning with trading companies, all exporters eventually received export incentive certificates that en- titled them to special tax rebates and higher foreign exchange allocations for their imported inputs. Through the banking system, the Central Bank instituted pref- erential credits with real negative interest rates to protect exporters from high borrowing costs. Credit quotas for manufactured exports were established for several countries in target markets, such as Iraq. Although these subsidies were a violation of General Agreement on Tariff and Trade rules, they were scheduled to be replaced by Export-Import-Bank of Turkey credits similar to the U.S. use.

Second, the government granted tariff exemptions on imported inputs to ex-

Exchange Rate Policy and Exports J BUSN RES lYYl:23:12Y-143

portable goods to lower their cost. Restrictions on imports were significantly reduced and import regulations were simplified. Third, price controls and licensing on exports were lifted. Both of these measures greatly assisted export expansion.

Fourth, exporters were gradually allowed to keep larger portions of their foreign exchange earnings from 5% to a limit of 20% as foreign exchange deposits up to a maximum of 3 months yielding market interest rates. Finally, the government made every effort to keep export prices competitive through a realistic exchange rate policy. As discussed before, exchange rates affect the export price as an important cost factor. Together these measures helped increase the overall profitability of the export-oriented industries by lowering their costs and introducing privileges. As a result, exporters intensified their expansion efforts and significantly diversified their export product mixes and target markets.

Gradual Introduction of Liberalization Measures. The introduction of export promotion and other liberalization measures, such as foreign exchange regulations, can be characterized as moving away from a controlled into a managed policy and then finally into liberalized foreign trade. The government dramatically introduced the liberalization of the foreign exchange regime in January 1980 by devaluing the Turkish Lira by 33%. In the pre-1980 period, to offset the inflation differential between home and abroad, the domestic currency was devalued at infrequent intervals resulting in overvalued rates and high economic costs (Krueger, 1968). In January 1980, the government adopted periodic devaluations with increasing frequency. Starting in May 1981, the Central Bank was authorized to replace the devaluation policy by daily adjustments. The realistic exchange rate policy assisted exporters in setting competitive export prices.

Multiple exchange rate practices, which were introduced in the 197Os, were eliminated by 1982. The permissible foreign exchange holdings of commercial banks was increased gradually from zero to 80% of their foreign earnings. They were allowed to set their own exchange rates within a range of 8% around the rates announced by the Central Bank.

Determination and Long-Term Commitment of Government. The government introduced export promotion and other liberalization measures with determination. Except for a short period in 1983, the current policies were pursued with long- term commitment despite strong resistance from import substituting industrial and traditional sectors. The relatively small increase in exports in 1983 can be partially attributed to these pressures that produced some temporary divergence from the program in the first three-quarters of 1983 (Appendix, Table A). Until the fourth quarter of 1983, the trade weighted effective exchange rate was allowed to appre- ciate, while the real deposit interest rates declined considerably. The appreciation of the domestic currency and very low real deposit interest rates were later corrected in the fourth quarter of 1983.

The government’s determination built trust in the economy, and eventually, the private sector changed its behavior and structure in favor of export-oriented growth. In summary, the 1980 liberalization program reduced, if not reversed, the bias against exports (see Krueger, 1984 for a discussion of the bias created by import- substitution strategies against exports).

134 .J BUSN RES lYY1:23:12Y-143


Traditional Products New Products

Traditional

Markets

Market Penetration

Agricultural products, textiles and

simple consumer goods in OECD,

some OPEC and Eastern Bloc

countries

Product Development

Processed food, and advance

manufactured products

New Markets Market Development

Traditional products in Western

European, Middle East, Arab and

African countries

Export Diversification

Non-traditional products in newly

entered markets

Figure 1. Growth of Exports

Response of Exporters to Liberalization

Exporters in Turkey have responded to all these export promotion signals rapidly (adapted from Kumcu and Kumcu, 1988). Total value of exports in U.S. dollars registered a yearly average increase of about 17% between 1980 and 1986. This is well over the yearly real GNP growth rate of 5.1% over the same period (Monrhfy Statistical and Evaluation Bulletin).

Sizable incentives in both pricing and cost reductions prompted exporters in Turkey to initiate “intensive export expansion programs” (adapted from Ansoff, 1957). First they emphasized a market penetration strategy by concentrating export efforts in current Organization for Economic Cooperation and Development, and some OPEC markets. This strategy mainly consisted of penetrating the available export markets, with textiles and with agricultural products that had traditionally been strong for Turkey (Fig 1).

Next, in order to develop new export markets, the exporters focused their marketing effort in neighboring Islamic countries where they enjoyed competitive advantage both in transportation and knowledge of cultural/religious backgrounds to better identify consumer taste. As Table 1 depicts, in 7 years, the share of exports to Middle Eastern and North African countries more than doubled. It increased from 18% in 1979 to 48% in 1982, mainly to Iran, Iraq, and Saudi Arabia. At the same time, those industries that were not internationally competitive in the pre-1980 period have since become competitive at least in Islamic countries im- mediately after 1980.

A caveat is needed here. The success of the liberalization program in Turkey may have favorably been affected by the Iran/Iraq war, and in Iran’s breaking ties with the United States and losing its major supplier of industrial goods. However, there would be little “halo” effect, since the product mix of Turkish exports is different from traditional U.S. export packages to Iran.

The exporters were able to pursue an aggressive export product development strategy in these current markets by introducing nontraditional products such as processed food, diversified textiles, and advanced manufactured products (Fig 1). As Table 2 presents, while the share of agricultural commodities in total exports declined from 59% in 1979 to 21% in 1986, the share of industrial goods exports has increased from 35% in 1979 to 76% in 1986. The most notable development has occurred in textiles and metals exports. Specifically, the share of textile ex-


Table 1. Export Markets (Shares in Percentage)

1979 1980 1981 1982 1983 1984 1985 1986

EC 50 43 32 30 35 38 45 44

W. Germany 22 21 14 12 15 18 18 19

Italy 9 8 5 6 7 7 6 8 France 6 6 5 3 3 3 3 4

U.K. 5 4 3 3 4 4 7 5

Others 8 6 5 6 6 7 11 8

Middle East and North Africa 18 23 42 48 46 41 42 35

Iran 1 3 5 14 19 11 14 8

Iraq 5 5 12 11 6 13 12 7

Libya 2 2 9 4 3 2 1 2

S. Arabia 1 2 4 6 6 5 5 5

Others 10 11 12 13 12 10 10 13

U.S. 5 4 6 4 4 5 6 7

Soviet Union 6 6 4 2 2 2 2 2

Japan 1 I 1 1 1 1 1 1

Others 21 23 16 14 13 13 4 11

Total exports (mil. U.S.$) 2,261 2,910 4,703 5,746 5,728 7,134 7.958 7,457

Sources: Awwal Report: 1986. 1986 Yihda

(Due to rounding off of percentages, columns may not add to 100.)

ports has increased from 15% in 1980 to 26% in 1986. As a result of the 1980 liberalization program, by the end of 1983, Turkey had been transformed from a country that exports agricultural products to industrialized Western European countries to a country that exported industrial products to neighboring Islamic countries. Goldstein and Khan (1982) found similar developments in non-oil-developing countries.

Marketing efforts of Turkish exporters have not been limited to areas where Turkey has a comparative advantage in terms of physical distance and cultural/ religious background. As they gained know-how in production of exportable products and accumulated experience in export marketing, they have been able to

Table 2. Export Product-Mix (Shares in Percentage)

1979 1980 1981 1982 1983 1984 1985 1986

Agriculture 59 56 47 37 33 25 22 21

Mining 6 7 4 3 3 3 3 3

Industry 35 36 49 60 64 72 75 76

Processed food 7 9 10 12 11 8 9

Petroleum prod 1 2 6 4 6 5 3 Textiles 15 17 18 23 26 23 26 Metals 3 5 7 9 9 14 12

Chemicals 3 2 3 2 2 3 5 Cement 1 4 4 1 1 1 .4

Others 7 10 12 13 16 23 22

Total exports (mil. U.S.$) 2,261 2,910 4,703 5,746 5,728 7,134 7,958 7,457

Sources: Amual R~porr: 1986, I986 Yilinda.

(Due to rounding off of percentages, columns may not add to 100.)

136 J BUSN RES 1991:23:129-143


penetrate markets. This stage represents a successful export diversification strategy (Fig 1). As can be seen from Table 1, the share of exports to the European Community (EC) countries increased from 30% in 1982 to 44% in 1986 although still lower than in 1979. In particular, the share of exports to West Germany rose again from 12% in 1982 to 19% in 1986, whereas these figures were 4% in 1982 and 7% in 1986 for exports to the United States. Although the export market shares for the EC countries declined from 1979 to 1982, this trend has been reversed since 1983. It was after the success of the Turkish exporters in these markets, that protective policies against Turkish exports of EC countries and of the United States were initiated.

Export diversification efforts of Turkish exporters is also reflected in the increasing number of products and markets. In 1980, only 956 different products (of which 21% were agricultural) were sold abroad, whereas 2,259 products (of which 13% were agricultural) were exported in 1985. Also, the number of countries with which Turkey has conducted business has increased from 83 in 1980 to 109 countries in 1985 (1986 Y&z&, 1987). New export target markets and a new export product mix are final outcomes achieved. The remarkable performance of exporters pro- vides strong evidence of a structural change in Turkish exports. This change, in turn, is expected to impact the price elasticity of aggregate exports supply. A statistical analysis for such a change allows one to evaluate the impact of the pricing policies of exported products and the role of the exchange rate regime in a liberalization program. In turn, this will help determine the export performance as well as the foreign exchange earnings potential of the country.

A Test For Structural Change in Exports

An empirical analysis of the structural change in exports of Turkey examined whether the elasticities of the export supply equation changed as a result of the implementation of the 1980 liberalization and export promotion program. It was hypothesized that relative domestic prices of exported goods and productive capacity directly affected export volume. Quarterly data from 1975:Ql to 1985:Q4 were utilized in the analysis. Data sources are given in Appendix A, and annual values of various variables summarized in Table A.

It is quite conceivable that changes in both the market and the product-mix of exports would influence the price elasticity of demand for Turkish exports. In an attempt to specify a demand function for Turkish exports, the following estimation of the aggregate export supply function experimented with simultaneous equation systems. However, a reasonable fit for a demand function for Turkish exports could not be found, partly due to the lack of income data for Turkey’s two major trading partners, Iran and Iraq, for part of the analysis period (Table 1). On the other hand, the results proved to be robust concerning the estimation of export supply. Hence, only those results obtained from the estimation of the aggregate export supply function are presented here.

Two different export supply equations are estimated. The first equation assumes that the elasticities of export supply will be the same within the entire sample. The second allows the change in elasticities of export supply in 2 sub-periods, pre- and post-liberalization. The term “elasticity of export supply” is used to designate the elasticity of exports supply with respect to the change in domestic productive capacity. The estimated export supply functions are:

Exchange Rate Policy and Exports J BUSN RES lYY1:23:12Y-143

137

log X, = a*b,, + a*b,log RP, + a*b,log y,

+ (l-a)log x, _ , + a*u, (1)

log X, = a*b,, + a*b,log RP, + c,log RP,*DSO

+ a*b,log y, + czlog y,*D80

+ (1 - a)log X, , + ~$80 + a*~, (2)

where X, is the quantity of exports at time t, RP, is the relative price of exported goods in the domestic currency relative to domestic prices at time t, yt is the real gross national product at time t, and u, is a stochastic error term of the regression equation. In this regression analysis, real gross domestic product is used as the proxy for domestic productive capacity.

The parameter “a” is the export adjustment parameter, which is between zero and one. A value for a closer to one implies a relatively quick adjustment in exports, whereas a value closer to zero implies a slow adjustment. 080 is a dummy variable that takes the value of zero for observations before 1980:Ql and the value of one for observations in that quarter and thereafter.

The relative domestic price of exported goods, RP,, is simply the U.S. dollar price of exported goods multiplied by the exchange rate and divided by the general domestic price index. Hence, any depreciation of the domestic currency vis-a-vis foreign currencies would increase the price of exported goods in the domestic currency and, ceterispuribus, increase the relative domestic price of exported goods. Provided that b, > 0, a depreciation of the domestic currency would increase the quantity of exported goods.

In Equation (l), parameter “b,” is the long-run price and “br” the income elasticity of export supply. Short-run price and income elasticities in Equation (1) are “u*b,” and “u*b2,” respectively. In Equation (2) it can easily be seen that the short-run price elasticity of exports supply will be “u*b,” before 1980:Ql, where 080 = 0, and “u*b, + c,” after 1980:Ql, where D80 = 1. Similarly, the short- run income elasticity of exports supply will be “a*b,” before 1980:Ql, where D80 = 0 and “a*b* + c, after 1980:Ql, where D80 = 1. The estimation results from these 2 equations are presented in Table 3; in column 1 for Equation (1) and in column 2 for Equation (2).

In actual estimation, seasonal dummy variables are taken into consideration to control the seasonal movements in exports that are independent from the explan- atory variables already included in the model. These are:

Dl = 1, for observations on the first quarter; 0, otherwise. D2 = 1, for observations on the second quarter; 0, otherwise. D3 = 1, for observations on the third quarter; 0, otherwise.

The results from the estimation of Equation (1) indicate that the error term, Us, is serially correlated and heteroskedastic, leading to important statistical problems concerned with the asymthotic properties of estimated parameters. Therefore, test results concerning the statistical significance of the estimated parameters are not valid.

The modified model, Equation (2), where elasticity estimates of export supply are allowed to be different before and after 1980:Ql, has an error structure with desirable properties. Therefore, all statistical tests concerning the significance of parameter estimates as well as structural change in export behavior are considered valid.

138 J BUSN RES 1991:23:129-143


Table 3. Estimation Results of the Export Supply Equation

Dependent variable: Log of export volume [X,]

Independent Variables (1) (2)

Constant

Income elasticity (log y,)

Price elasticity (log RF’,)

Export volume (X,_ I)

First quarter: Dl

Second quarter: D2

Third quarter: D3

Change in income elasticity of exports after 1980 (log y, * 080)

Change in price elasticity of exports after 1980 (log RP, * 080)

D80

R’ RBAR’

SSR

DW

Durbin’s h

F value

- 13.8287

(1.534)

1.3688

(1.749)

1.2956

(2.709)’

0.4509

(2.783)*

-0.1409

(1.171)

-0.2844 (2.326)*

-0.3679

(3.473)s

0.836

0.805

1.769

2.542

- 11.2863 (1.419)

1.0424

(1.497)

- 0.2079

(0.315)

0.2297

(2.470)*

-0.1405

(1.331)

-0.3047

(2.818)*

- 0.3689

(3.908)*

0.1227

(2.523)’

1.0519

(2.990)”

0.1234

(0.325)

0.883 0.851

1.226

2.097

-0.417

3.4(d.f. = 3,23)

‘Significant at the 5 percent marginal significance level. Note: Absolute values of t statistics are given in parentheses

SSR = sum of squared residuals. DW = Durbin-Watson statistic (Durbin, 1970). The critical value of the Durbin’s h is t 1.645.

In Table 3, column 2, the structural parameters of the model show statistically significant variations between the 2 subperiods. For example, the price elasticity of exports increased by 1.05 in the post-1980 period (whereas the difference from zero was not statistically significant in the pre-1980 period), as the product-mix of exports has shifted from agricultural to industrial and manufactured goods. (See Goldstein and Khan, 1982 for a similar finding in non-oil-developing countries.) This finding indicates that infrequent devaluations of the Turkish Lira and partial export incentives did not effectively increase exports in the pre-1980 period. Also, the income elasticity of exports increased by 0.122 in the post-1980 period. This indicates that the productive capacity of the economy was not a binding constraint before the liberalization program, whereas it is binding in the post-liberalization period.

Additional evidence of a significant structural change in Turkish export behavior is the goodness-of-fit in column 2 of Table 3 which is significantly higher than that in


Table 4. Price and Income Elasticities of Total Exports

Price Elasticity

Short-run

Pre-1980 period ~ 0.208

(0.32)

Post-1980 period 0.844

(2.31)*

Income Elasticity

1.042

(1.50)

1.165

(2.42)’

Long-run Pre-1980 period

Post-1980 period

0.270 1.353

(0.41) (1.94)

1.096 1.513

(3.00)* (3.14)*

*Significant at the 5% marginal significance level. Norr: In computing the elasticities, point estimates in column 2 of Table 4 are used. In computing f statistics for

the long-run elasticities, the adjustment parameter is assumed to be non-stochastic. Absolute values of I statistics are given in parentheses.

column 1. Specifically, RBAR’ increased from 0.805 to 0.851 when the parameters of the model were allowed to be different in the 2 subperiods. Statistically, the Ftest indicates that one can easily reject the hypothesis of no structural change (Pindyck and Rubinfeld, 1981, pp. 117-119). In other words, the liberalization and export promotion policies in Turkey caused a structural change of exports after 1980, i.e., the change in the product-mix of total exports induced a statistically significant increase in the price elasticity of aggregate export supply. Specifically, it is found that the price elasticity of exports supply-which was not significantly different in statistical terms from zero in the pre-liberalized period-has almost become a positive one.

Both short-run and long-run elasticities of exports supply are reported in Table 4. Note that there is not much of a difference between the long-run and the short-run elasticities, as the export adjustment coefficient “a” is close to one (0.77). However, statistically speaking, at the 95% confidence interval, one must reject the hypothesis that the adjustment coefficient, a, is one. On the other hand, at the 95% confidence interval, one cannot reject the hypothesis that both the short-run and the long-run price elasticities of exports is one. This result implies the structural change of exports in Turkey in the post-1980 period. Stated differently, changing the composition of the export product-mix increased the price elasticity of exportable goods. Conse- quently, Turkish exporters became more competitive in their target markets.

These results clearly indicate that the necessary condition of successful export performance in any liberalization program is consistently keeping the prices of exportable products internationally competitive with a realistic exchange rate regime. In the Turkish case the significant increase in the price elasticity of exports from almost zero to nearly one has been presented as evidence to support this conclusion.

Summary and Conclusions

In the liberalized environment, the findings underline the importance of liberalization and exchange rates for export performance. The use of exchange rate policy as an instrument of the anti-inflationary program in various countries, with similar experiences to Turkey, seems to be the source of the failure of their liberalization

140 J BUSN RES lYY1:23:12Y-143 M. E. Kumcu and E. Kumcu

programs. The mistake of using exchange rate policy “to reduce inflation” has not been made in the process of implementing the liberalization program in Turkey. This very error, however, was made in some Latin American countries at a relatively early stage of their liberalization programs which, in nature, were very similar to the one Turkey implemented in the 1980s. As a result of overvalued exchange rates, their export promotion programs did not enjoy the success experienced in Turkey.

This article analyzed the impact on export performance of Turkish liberalization program in the 1980s. It is shown that economic liberalization favoring exporters, along with an appropriate exchange rate policy for international competitiveness, transformed the export structure. An export structure mainly consisting of agricultural goods to industrialized Western European countries was replaced by one of industrial and manufactured products. The market shifted from neighboring countries where a comparative advantage existed to industrialized countries after the necessary expertise in export marketing had been acquired. Centralization of policy implementation, lifting of regulations, and the commitment of governments have possibly contributed to export performance. Necessary conditions for im- proving the performance of exporters have successfully been created in Turkey through this program.

The statistical analysis of the export supply function of Turkey showed that both the price and the income elasticities of exports supply improved after the implementation of the liberalization program. In particular, the price elasticity of exports, which was very low in the pre-1980 period, has come close to positive one in the post-1980 period. This finding indicates that keeping prices of exportable products internationally competitive with realistic exchange rates is the necessary condition for the success in export performance.

Based on 10 different country case studies, Krueger (1978, p. 297) notes that:

. it seems a fair conclusion that one of the policy mistakes of the two decades covered by the country studies was using. fixed exchange rate as an instrument to attain both domestic price stabilization and a liberalized trade regime. The adoption of a sliding-peg exchange rate policy would have freed the fortunes of the trade sector from their dependence upon successful price stabilization.

It seems that policy makers finally need to learn from successful as well as failing examples, and to attempt to create necessary conditions for effective export assis- tance programs.

Appendix A: Data Sources Used in the Econometric Estimation

The price of total exports in U.S. dollars is obtained from The Monthly Statistical Bulletin, The State Institute of Statistics, various dates. The quarterly period average exchange rate (the Turkish lira price of the U.S. dollar), quarterly U.S. dollar value of total exports, and the domestic wholesale price index published by the Treasury of the Republic of Turkey are taken from The Monthly Statistical and Evaluation Bulletin, the Central Bank of the Republic of Turkey, various issues.

The officially published Gross Domestic Product figures in Turkey are annual. Quarterly real Gross Domestic Product is obtained by an interpolation method


correlating yearly real Gross Domestic Product with yearly production levels of

some commodities whose data are also available quarterly. For more information,

see the Annual Report: 1985.

Table A. Annual Values of Variables

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 198.5 1986

Exports Productive Termsof Nominal Exchange Rate of (mil U.S.$) Capacity” Trade” Rate’ Inflation

1.401 86 134 14 10 1.960 93 136 16 23 1,753 99 137 18 37 2.288 101 127 25 54 2.261 104 127 32 82 2.910 100 100 78 87 4.703 104 80 110 25 5.746 108 86 162 36 5.728 112 84 224 40 7.134 118 9.5 368 54 7.958 122 9.5 523 38 7.457 132 100 669 25

Sourest Same as Tables 1 and 2.

“Index of Gross Domestic Product, annual average (1980 = 100) ‘Export prices/import prices, annual average (1980 = 100). ‘Turkish Lira price of U.S. dollars, annual average.

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Documents

Exchange rate policy impact on export performance: What we can learn from the Turkish experience