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so Turks have bought new cars

Reader comment on item: Is Turkey Going Rogue?

Submitted by Selami Zorlu (United Kingdom), Sep 28, 2011 at 18:11

Mr Goldman thank you for your detailed response. But I am sorry, I still fail to see how CAD can be a problem for a country's economy as long as it is financed (something Turkey has had no problems with for a decade now). And when it can no longer be financed, it is stopped. Very simple. Your argument that the effect of that halt would be detrimental is overreaching. You would need to make a detailed sector by sector analysis of the economy and compare market shares of imported versus local products.

On the one hand you are quite right about the composition of the Turkish imports. Yes Turks have imported luxury items and have paid for them upfront (consumer finance for a EUR 80,000 Audi car doesn't exist). So where is the problem? In your analysis you rather "assume" that the Turkish bubble is identical to the Western ones, that the public borrowed on plastic and splashed money on goods that were not produced locally. Yes an element of that certainly does exist, but your estimate of its size should not be that dramatic. These analyses often ignore the sheer size of the black economy, and the never-pay-tax nature of Turkish corporate governance. Academicians usually fail to explain why there are so many luxury cars in the streets of Istanbul. The answer is very simple: Let's say you had a good trading year and made some money. You want to buy a nice car with the profits. So would you prefer paying corporation tax plus a second round of income tax as you take your dividends and then buy a car, or would you rather buy the nice car "for your firm" and significantly reduce your taxable income? Without grasping this phenomenon one cannot accurately forecast for the Turkish economy.

Academically, I think what's unsustainable is not CAD itself, but rather the overall consumption. Afterall if you can't finance your imports of luxury goods then you don't import those any more, it's very simple. The Turkish case simply does not mirror the "import and consume" model of the West. Yet, that is...

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