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Turkey leads the way to an inclusive global economy

Interview - June 21, 2015

Having set out some noble priorities for its G20 Presidency, Turkey is relishing the opportunity to lead a progressive and inclusive agenda for the world’s most powerful economies, says Cavit Dağdaş, Undersecretary of Treasury

CAVIT DAĞDAŞ, UNDERSECRETARY OF TREASURY
CAVIT DAĞDAŞ | UNDERSECRETARY OF TREASURY

What impact do you think the G20 Presidency will have on international perceptions of Turkey?

Most of the G20’s work is based on multi-year work streams that all presidencies have been following up to now. Likewise, as the Turkish presidency, we have embraced the past agendas and tried to fill some gaps with our 3 I’s: Inclusiveness, Implementation and Investment for growth. The G20 has made a number of commitments in various areas; with the Implementation principle, we said let’s do them.

We saw an investment gap all over the world, especially in infrastructure; then we came up with an Investment agenda to fill this gap. With regards to the criticisms on the lack of inclusiveness, we have tried to address this.  

On the messages of our G20 Presidency; we have put forward some disputed topics – the needs of the Low Income Developing Countries (LIDCs), decreasing labor income share and 2010 IMF quota and governance reforms – on the global agenda and advocated for them loudly. Together with this year’s focus on inclusiveness, this is a very firm message about the transparent governance structure of the G20 and legitimacy of the platform as the premier forum for global economic policy cooperation, working towards the greater good of global society.

Placing the abovementioned topics successfully on the global agenda and having very positive feedback can be seen as an indicator that Turkey is rising as a soft power and an important emerging market member of global governance circles. This is not only a strong message to the local public but also a firm message to the global public that global problems require inclusive and global solutions.

This emphasis on inclusiveness, particularly in relation to LIDCs, adds a new dimension to the G20 Presidency. Why is Turkey championing the needs of LIDCs this year?

Turkey believes that ensuring comprehensive, fair and sustainable development is a common responsibility of the international community. Turkey has placed development and low-income developing countries at the center of this year’s G20 agenda and placed a strong emphasis on the international inclusiveness aspect. Our goal is not only to lay out the foundations for more robust growth; but, also to include the perspectives of LIDCs.

G20 members account for a substantial part of the global growth, output, trade and population. Decisions taken by the G20 have impact on all countries, regardless of their size. Hence, for a healthy and balanced global economy, we need to take into consideration the concerns of other economies, in particular LIDCs, and put thought into how the G20 can address them. We are of the view that further inclusion of LIDCs’ perspectives into the G20 agenda will also help to boost the platform’s legitimacy as the principle forum for global economic cooperation. 

An example in this direction is the Joint G20-LIDC Ministerial Working Dinner, organized by Turkish G20 Presidency on the margins of last IMF-WB Spring Meetings in Washington DC. This event was attended by Ministers from G20 members and LIDCs and served as a conducive platform to discuss the challenges that LIDCs are facing and how G20 members and LIDC countries can strengthen their partnership towards the implementation of an ambitious sustainable development agenda.

In line with this, 2015 is being dubbed the Year of Development due to important meetings planned outside of the G20 framework. How is this being reflected within the G20 agenda?

The Turkish Presidency is quite aware of the unique opportunity that the upcoming major international events present for advancing the global development agenda. The G20 has an important role to play in supporting efforts in the UN to agree a comprehensive post-2015 financing framework for sustainable development and to ensure its implementation in future years. The G20 is also fully engaged to make the Addis Ababa Financing for Development Conference a success.

Reflecting this sentiment, a G20 Ministerial Communiqué released in April stated that “2015 is a crucial year for the global development agenda”; stressed the importance of positive outcomes of the Addis Ababa conference, along with the New York Summit on post- 2015 development agenda and Conference of Parties 21 in Paris; and called on all relevant IFIs and IOs to develop ambitious plans in support of this goal.

The G20 has a number of active multi-year work streams to support success at the Addis Ababa Conference; including domestic resource mobilization, debt sustainability, sustainable financing, financial inclusion and remittances.

An important contribution from the G20 for Addis will be on the emphasis on inclusive business models. In recognition of the potential of inclusive business and private sector engagement on poverty eradication and implementation of the post-2015 development agenda, the Turkish Presidency has initiated new work on developing a G20 Framework on Inclusive Business. Currently a side event on inclusive business on the margins of the FfD is being planned. 

The outcomes of the Addis Ababa Conference will be closely followed by the G20. Turkey is currently putting some thought into a capacity building initiative and a prioritization and monitoring framework of the outcomes of Addis Ababa and New York UN Summit.

This element of inclusiveness also has national connotations in relation to employment, particularly in regards to female and youth participation in the workforce. Can you elaborate more on this?

High youth unemployment rates and low female participation rates are common issues in almost all countries. This is a clear indication of the underutilization of the labor force that prevent our economies from reaching their potential.

High youth and female unemployment rates also show that these groups have disadvantages in the labor market. This problem requires policy approaches designed specifically for these groups. In order to increase the employment of women and young people, the G20 has done extensive research. We have developed various policy sets but still we have a long way to go. As the G20, we are working on a new monitoring mechanism by which we will track closely the implementation process of commitments to this end.

In almost all countries, female labor force participation rates are considerably less than the male participation. The main reason behind this global fact is women's maternal role in society. When successful cases are analyzed, increased schooling, harmonization of work and family life, and positive discriminatory policies can be listed as effective ways of increasing female participation.

On the other hand, a negative correlation between fertility rates and female employment across some countries makes finding a perfect solution more complicated. As the G20, we have set a target to reduce the participation rate differences between men and women by 25 percent by 2025. We call this ambition “25 in 25”. We asked our members to find their country specific solution to increase female participation.

As this year’s presidency, we have also initiated a Women-20 outreach group to work on women’s problems in our economies. We aim to finalize this initiative this year. 

The OECD released a study last year demonstrating that rising income inequality is detrimental to growth. Turkey remains one of the most unequal countries in the OECD in terms of income share. Does Turkey have the credibility to lead on this issue?   

Throughout the last 30 years, income inequality has been a phenomenon for both advanced countries and emerging market economies. According the recent study carried out by OECD, the Gini coefficient, which is a standard measure of inequality, has increased from 0.29 in mid-80’s to 0.32 in 2010 on average in OECD countries.

Despite the strong economic growth during the 90s and the beginning of 2000s, inequality has also widened in non-OECD countries. We also observed that household disposable income has not increased as much as the increase in GDP per capita. It means that the gap in income between rich and poor has been growing. On the other hand, the global financial crisis has further aggravated income inequality in most countries.

While the debate on reasons why income inequality is on the rise has been ongoing in circles of academia and several international financial organizations, governments with concerns for sustainable growth have also been involved in that debate. Inequality obstructs social transition between socio-economic classes through undermining progress in health and education.

It also leads to political and economic instability and thus hinders strong sustainable and balanced growth. Hence, policymakers started to seek remedies for reducing the inequality recognizing the nexus between rising inequality and the fragility of growth.

All things considered, we give the utmost importance to inclusiveness which is one of three I’s of our G20 Presidency. On the grounds of inclusiveness, we have placed income inequality on the agenda of G20 for the first time. As you know, at the Brisbane Leaders’ Summit, each G20 member adopted its own growth strategy for achieving our common objective of an additional 2 percent global growth by 2018.

Building on that, we are assessing the implications of G20 growth strategies for inclusive growth and income inequality during our G20 Presidency. If deemed necessary, we will adjust our growth strategies so as to reduce income inequality and ensure inclusive growth.

Turkey’s Presidency has said that the growth rate of global trade should return to at least pre-crisis levels. To what extent is Turkey’s own export-led growth model and example for other countries to follow?

Since 2010 we have been witnessing anemic world trade growth, which is on average 3.5 percent and well below the average pre-crisis annual rate of 7 percent. As we observe from research, both experts in IOs and plenty of academics grasp the importance of this problem and are working on it.

They recognize that both structural (reduced sensitivity of trade to changes in global income due mainly to alteration in the structure of global value chains and increased trade protection) and cyclical (weak demand) factors have contributed to the slowdown in global trade.

At this point, as G20 President, we have been of the opinion that a long term slowdown in global trade has deserved close attention. Therefore, IOs, particularly the IMF and World Bank, have been preparing a report analyzing the reasons for this widespread deceleration of world trade growth and they have been scrutinizing mainly the change in international production patterns and the composition of global value chains.

In addition to this, UNCTAD, WTO and OECD have been making a joint report about trade and investment measures, touching on the importance of avoiding protectionist measures.

Turkey has been striving to fully integrate itself with the world economy and realize an export-led growth strategy, especially since 2001. As announced in our medium-term program, exports have been backbone of the Turkish economy.  Recently, both the volume and value of exports have been upgraded and we keep deploying policies and strategies to boost them.

Turkey is still in a transformation process and moving away from traditional sectors to technology oriented sectors. We are aiming to increase Turkish exports up to 500 billion dollars by 2023. We managed to more than triple the total value of exports from 2003 (47 bn.) to the end of 2014 (157 bn.).

However we still have a long way to go to implement a precise export led growth strategy. In line with this target, we are trying to increase the share of high value added goods in our exports. 

There is still some way to go to finalize the post-crisis financial agenda at G20 level. How can we expect this to progress under Turkey's presidency?

Since 2008, the G20 has developed a broad range of policy reforms for addressing the major fault lines that were revealed by the global financial crisis and for ensuring that the financial sector is appropriately regulated and supervised in an internationally consistent and non-discriminatory manner. In this direction, the Financial Stability Board (FSB) was mandated by G20 to advance the financial regulation agenda.

We are glad to see that, with the generous efforts of the FSB, we have recorded a substantial progress in restructuring the financial sector after the global financial crisis. During our G20 Presidency, we will move forward to complete the new regulatory framework, and for full, timely and consistent implementation.

We believe implementation of common international standards will provide the appropriate foundations for a more stable global financial system. As part of these efforts, we will monitor the impact of the new regulations to avoid any unintended consequences.

Turkey suffered through its own financial crisis in 2000-2001, but the national reforms made back then enabled Turkey to be the only OECD country to weather the 2008 crisis without having to bail out any banks. Does this give Turkey more credibility to lead on issues of global financial reform?

The financial crisis of Turkey in 2001, stemming from the balance sheet weaknesses of the banking system, exerted a cost of almost 25% of our GDP. After this crisis, we launched a radical structural reform agenda, especially in the financial sector. We established the Banking Regulation and Supervision Agency (BRSA).

With the effective oversight of this institution, the resilience of the Turkish banking sector has increased immensely. Thanks to the robust structure of our banking sector, the impact of global financial crisis of 2008 on Turkish financial markets has been limited. A buffer against external shocks was created by the structural reforms and prudent policy approach that we have been implementing since 2003.

In retrospect, we have made significant efforts to restructure and rehabilitate the banking sector in the wake of the 2001 crisis. We increased the capital adequacy ratios and the liquidity requirements and we improved the regulatory and supervisory framework. Therefore, during the 2008 crisis, we did not have to bailout any bank, we did not transfer any state funds to any bank and we did not have to change our guarantee scheme. 

Turkey’s G20 Presidency has made financing for growth a key component of its agenda. This year, besides Turkey, other Muslim majority countries such as Indonesia and Malaysia are playing key roles within the G20. Going forward, what role do you foresee for Islamic finance in creating inclusive global growth?

Since the global financial crisis, traditional sources of infrastructure and SME finance have been constrained. The banking sector, which has traditionally been a major source of funding for long-term infrastructure and SME investments, has undergone a significant deleveraging process.

Against this backdrop of a constrained funding environment, there has been a gradual shift from a traditional bank-funded model towards a model that includes a greater share of asset-based funding.

Limited available funding and fiscal constraints are the main challenges for all countries. The solution is pooling in private sector resources and designing appropriate risk sharing methods. The PPP model for infrastructure projects can be an effective and cost-efficient tool to facilitate public and private sector cooperation.

On Islamic Finance, let me first tell you how we approach this issue. There is a growing interest among the corporates and sovereigns in the asset based financing modalities, including Islamic finance products. Considering political sensitivities of some of the G20 members, we would like to take a broader perspective.

We follow a holistic approach to this growing segment, and try to facilitate its integration into the global financial world. There are monetary policy, fiscal policy and regulatory implications of this new segment. We are currently working on those and asked the IMF and World Bank to prepare reports for us.

As acceptance of Islamic Finance, as an alternative to the conventional financial system, has gained significant support in the last decade and the Islamic financial industry has become an integral component of the global financial system. We strongly believe that Islamic Finance industry could play a vital role in infrastructure and SME financing due to its emphasis on risk-sharing and contributions to real economic activity.

There is a large untapped potential and this will clearly be supported by the growing awareness and the development of the financial infrastructure.

In this regard, the Turkish Presidency would like to increase the awareness for Islamic Finance among G20 members and encourage the G20 members to increase the role of non-traditional lending models including Islamic Finance.

We will help to ensure a level playing field between conventional and Islamic finance instruments, and help to support the integration of Islamic finance with the rest of the global financial system. All these works are expected to contribute to addressing the impediments to the expansion of Islamic Finance.

Sukuk are seen as well-suited for infrastructure financing because of their risk-sharing property, which is a major advantage when trying to fill the financing gaps. However, there are still challenges in the market that hinders the immense potential of Islamic Finance, such as the underdeveloped legal and regulatory environment and limited linkages with conventional hedging and risk management tools.

The G20 will further explore the utilization of Islamic Finance as an alternative financing of infrastructure investment.

Why have SMEs been afforded such importance by Turkey’s G20 Presidency?  

We believe that in both developing countries and developed countries, SMEs play a critical role in boosting employment and competitiveness and, as a result of these, of course, growth. SMEs, with their backward and forward linkages, have an important role in providing stimulus to economic growth, creating employment opportunities and driving innovation.

In many countries, at least 50 percent of the employment actually comes from SMEs.  In the context of Turkey, 75 percent of the employment, 50 percent of investments and 60 percent of exports are generated by SMEs. Although they are called “small and medium sized”, their impact on economies are “gigantic”. So, putting a special emphasis on them is crucial to helping them to be more involved in global value chains and to facilitate their access to finance.

Being aware of the importance of SMEs in a strong economy, we, as the Turkish G-20 Presidency, pay utmost attention to the issue and SMEs are one of the cross-cutting issues in this year’s agenda.

As part of our efforts, we are opening a World SME Forum together with the International Chamber of Commerce. The forum, which will consist of representatives from different countries, is expected to address the problems and needs of SMEs and to share their expectations and concerns at an international level.

We also aim to focus on SMEs in order to develop the capacity building efforts including corporate governance principles, bond market initiatives, and Islamic finance oriented principles etc.   

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