Some thoughts regarding Turkish EU membership (2008)

Divergent opinions regarding Turkish EU membership are not so much due to disagreement over its likely consequences but rather to the desirability of these consequences. In economic terms, preference hierarchies diverge, whether for ideological or (material) interest reasons. (We would not however that the Turkey debate strikes as incongruously fiercer than the debate over Estonian or Croatian membership.) We recognise that what one would like the EU to be (or become) will drive one’s attitude towards Turkish EU membership.

If one believes that Europe should be an exclusively European-Christian project (Giscard), then Turkey does indeed have no place in the EU. If one believes that the EU should emerge as a fairly coherent, perhaps centralised entity under the leadership of “core” European states (Paris), then Turkish EU membership may appear “unhelpful”. If one opposes the emergence of a “strong”, centralised EU and instead favours a loosely organized free trade zone with limited economic co-ordination (London), then Turkish EU membership is welcome indeed (as it might would further add to the diversity and size of EU membership). If one wants to unambiguously integrate Turkey in the Euro-Atlantic economic and political alliance system (Washington), then one will tend to support Turkish EU membership is welcome. In many cases, this one overriding normative commitment determines the position towards EU membership. I am aware that Turkish EU membership will have a bunch of consequences, but let me say a few words about the most important macro-consequences.

Demographically Turkish EU membership would seem to benefit the EU economically. The EU will be stagnating demographically, if not decline over the coming decades. The EU projects the total EU population to rise from 457m in 2005 to 469m by 2030 and then decline to 450m by 2050. While the share of the working age population will decline from 54 to 47%, old-age dependency will shoot up massively from 25% today to 53% by 2050. Turkey’s demographic situation is far better. The population aged 15-64 will see net increase of 15 m until 2050, much of which will sooner or later be absorbed by the domestic economy. Given that the total working age population will be > 200 m, Turkish demographic development will not help reversing the EU’s demographic fortunes. The EU independently will have to reform in social security, health and labour markets to cope with the demographic challenge. Sooner or later the Turkish economy will absorb the surplus labour itself. Nonetheless, at the margin adding Turkey will go some way towards stabilizing the absolute size of the working age population. By fully integrating Turkey. economically, a more efficient allocation of capital and labour will be possible, benefiting economic well-being in Turkey and the EU.

Geo-strategically, Turkish EU membership would enhance the EU’s position. (Again, whether this is deemed relevant or desirable will depend on what the EU is supposed to be.) Turkey has been a key strategic and military partner at least since it joined NATO in 1952. Turkish EU membership would arguably provide the EU with a greater influence, economically and politically, in the regions bordering Turkey. The EU has been keen to diversify its sources of energy imports and Turkey’s location is key whether it concerns accessing energy supplies in Central Asia or the Gulf region. Turkey borders on Iraq and Iran, countries with third- and fourth-largest oil reserves. (Iran also has the world’s second-largest gas reserves after Russia.) An important petroleum pipeline already runs from the Caspian to the Mediterranean. If the EU wants to reduce its dependence on Russian gas supplies (as seems to be the case), then Turkish EU membership would certainly enhance its bargaining position.  This is not to say that Turkish EU membership is pre-requisite if the EU is to tap Central Asia’s and the Gulf region’s energy supplies. But it would certainly deal the EU a stronger hand and Turkey’s relative position vis-à-vis Central Asia and the Gulf region would also be enhanced.

Economically, the case for membership is clear-cut. In 2007, Turkey was the EU’s 7^th largest trading partner (ahead of India and Brazil), although Turkey’s share of the EU-25 outward FDI stock amounts to only 1-2% of the total (ahead of India, but not Brazil). The Turkish economy would add about 4% of the current EU-25 GDP. Although given “catch-up” economic growth, this share will increase over time, it will not have a transformative effect on the EU economy (although increasing FDI outflows would certainly benefit Turkey). From the EU perspective, benefits will be more visible at the micro- and sector level. Labour markets in the new member-states will tighten over the coming decades and EU companies will want to diversify its outsourcing location where labour is relatively abundant and where political and institutional stability is a long-term prospect.  In addition, EU companies would benefit from making Turkey a regional centre to serve the fast-growing Middle Eastern region. It would seem that the economic benefits would not be overwhelming magnitude-wise from the EU perspective (it would be from a Turkish perspective in terms of investment inflows and development), but again at the margin it would benefit the EU. It is obvious that in relative terms economically Turkey will benefit more from full E(M)U membership than the EU. But benefit it will both sides.

I won’t be touching upon the institutional consequences, as these are intimately linked to precisely what the EU is meant to be (or become). Few people that greater general economic well-being, more influence and a more gradual demographic transition are not desirable. Perhaps the most normative, but perhaps also the most powerful argument in favour of Turkish EU membership is that if the EU aspires to be a political and economic project, it should not exclude countries that aspire to submit themselves to the rule. The EU as a post-modern, quasi-structure spreading, democracy, liberalism, the rule of law and domestic political stability is something to be celebrated (whatever the current and future shortcomings of the EU). Denying a country who aspires to the same values membership would strike my sense of fairness. But then again, this happens to reflect my personal hierarchy of preferences.

Dragon or giant panda? What China means for Brazil (2008)

At first sight Brazil and China look strikingly complementary in terms of trade and investment.  China needs commodities to fuel its rapid economic growth. Brazil has abundant natural resources, ranging from iron ore over soy to oil. (Recent oil finds could turn Brazil into a major exporter in the coming years.) Brazil suffers from low savings and investment rates. China generates “excess” savings. The savings ratio is a paltry 17% of GDP in Brazil and a massive 45% of GDP in China, and China exports its “excess” savings as reflected in its huge current account surplus. The Brazil-China pairing looks like a compelling story, except maybe for the fact that China will become an increasingly important commercial competitor in manufacturing. This has some sectors of Brazilian industry wondering about how beneficial Brazil’s economic relationship with China really is (or will be).

Brazilian exports to China have been booming, but Brazil registered a bilateral trade deficit for the first time in many years. Structural factors drive resource-intensive economic growth in China, mainly urbanisation, demographic transition and industrialisation. This is good news for Brazil’s commodity-intensive export industry. Not surprisingly, bilateral trade has been booming, growing very rapidly from a low base. Last year Brazilian exports to China accounted for only 7% of total exports. But this made China Brazil’s third-largest trading partner (or second-largest if one does not count the EU as a single partner) and the country with which trade grew fastest. But last year Brazil also registered a trade deficit with China despite record-high commodity prices, and Brazilian manufacturing exports to China have basically stagnated in recent years.

Chinese overseas direct investment (ODI) in Brazil has thus far disappointed. China has largely “recycled” its huge capital and current account surpluses in the form of official FX reserve accumulation, the recent establishment of a sovereign wealth fund notwithstanding. Given the huge domestic demand for commodity imports, political, strategic and even economic logic would seem to make it attractive for China to invest directly in overseas (Brazilian) commodities sectors. Indeed, during his 2004 trip to Latin America, President Hu allegedly promised USD 100 bn in Chinese foreign direct investment until 2010. So far, Chinese ODI in Latin America, let alone in Brazil, has been disappointing. Chinese ODI data record average annual ODI in Brazil of USD 10 m! Even under the assumption that some of the Chinese FDI flows to Brazil are routed through off-shore centres, Chinese ODI in Brazil remains disappointing.

The key question is whether Brazil can afford to rely on an essentially commodity-based export model. Will China not become a threat to Brazil’s manufacturing sector and future economic development? No doubt, Brazil’s labour-intensive, low-tech manufacturing sector will increasingly come under pressure and even some of the tech-heavier parts of the economy may face increasing competition from China over time. China registered a staggering increase in high-tech exports in the past few years. Already in 2005, 31% of Chinese manufacturing exports consisted of high-technology products compared with 13% of Brazilian exports. Brazil will find it difficult to pursue a development strategy based on a rapidly expanding, broad-based, export-oriented manufacturing sector. First, China combines rapid productivity growth, low-cost labour and the fact that it has already built up a competitive export-oriented manufacturing sector with the help of foreign direct investment. Occupying a favourable position in the Hausmannian “product space”, China will find it much easier than Brazil to move into the higher value-added, tech-intensive segments of the manufacturing space. Finally, China found and will continue to find it easier to maintain a competitive exchange rate than Brazil whose exchange rate is much more volatile.

Brazil is unlikely to become a manufacturing powerhouse like China or an internationally competitive “service centre” like India(although it will have internationally competitive manufacturing and service companies). Building on its comparative advantage, Brazil will have to move to more high-value-added, adjacent parts of the “product space”. Brazil is well-placed to offer the whole range of commodities ranging from energy over metals to soft commodities. The key challenge will be to increase the “value-added” in these sectors. But Brazil is in a unique position to draw on its resource wealth, to further develop its technological edge in agriculture, alternative energies etc. and move downstream (e.g. distribution, marketing) in order to capture the more profitable stages of the value chain. Brazil is one of the few countries with a sufficiently large resource base and a relatively sophisticated research infrastructure in promising economic sectors (e.g. ethanol, agricultural research) placing it in a fairly unique position among resource-rich emerging markets. 

It is a mistake to believe that the only path to sustained economic growth leads via export-oriented, manufacturing-based development. Granted, pursuing an export-oriented economic development has historically proven a relatively successful strategy. It provides economies with important benefits like stable demand and a clear technological upgrading trajectory. But in the end, Paul Krugman is right. What matters is productivity growth, not trade or international competitiveness. It may be that an internationally integrated manufacturing sector makes it easier to overcome domestic opposition to economic reform. But in the end it is increasing productivity that propels an economy forward, not trade or a large manufacturing sector. Focusing efforts exclusively on building a competitive export sector is a dubious strategy (as the 1970s demonstrated), especially if amongst other things the economy is relatively closed and services already represent 2/3 of the gross national product. The key to economic growth is domestic economic reform, nomatter whether the economy is closed or open, or whether its export industry is dominated by manufacturing or commodities. Again an internationally integrated manufacturing sector may spur productivity-enhancing reforms, but it is by no means the only way to achieve sustained economic growth. This is particularly true for continental-sized economies with large domestic markets like Brazil. China will therefore appear to some economic experts as a giant panda, to others as a fire-spitting dragon. But for Brazil as a whole the panda/ dragon question is a moot one. China’s meaning for Brazil will be whatever Brazil wants it to be and this in turn will depend on whether Brazil gets on with economic reforms.