Foreign capital for growth - AHMET ULUSOY

Foreign capital for growth

Capital stock is one of the most important factors that developing countries need.

Because countries like Turkey have a dynamic population, there is a need to create new fields of employment.

Therefore, it is clear that new investments and capital stock are a must for new employment opportunities.

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It is also known that in countries like Turkey capital stock is insufficient because savings/deposits are insufficient, therefore external savings are needed.

External savings can be used in two ways. The first is external borrowing and new loans, and the other is ensuring that foreigners invest in the country (foreign direct investment and portfolio investment.)

As long as external borrowings direct toward productive investments, they will contribute to growth and the economy. However, if not used in productive fields, then when repayment of capital and interest nears the economy is put under a burden.

However, as there is no repayment in taking advantage of external savings in the form of direct foreign capital investment – with the exclusion of profit transfers – it is the soundest way to finance investments.

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Most countries in the world try to suit their political, economic and corporate structures to these investments in order to maximize their benefits from foreign capital investments.

The volume of foreign capital investments throughout the world in 2015 reached $1.76 trillion. The foreign capital amount directed toward developing countries was $799.7 billion and this rate was 962.5 percent for developed countries.

China owes its high growth rate in the 7-10 percent range over the past 30 years to foreign capital investments. When you add the foreign capital investment made in Hong Kong during 2015, China has received $310 billion worth of foreign capital investments ($135.6 billion of that being China's alone.)

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When we take a look at the recent developments in the Turkish economy, we can say that the long term growth rates are below the Turkish average of 5 percent and there is an observable increase in unemployment (at 12.1 percent.)

As it has a young and dynamic workforce, Turkey needs to grow at least 5 percent if it wants to keep its current unemployment rate, or if it wants to find jobs for those who have just entered the workforce. Which means in order to peg its unemployment rate it needs a 5 percent growth rate and in order to decrease its unemployment rate it needs to grow above 5 percent.

This reality shows us that we need foreign capital for high economic growth, especially foreign direct investment.

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Foreign capital needs developed infrastructure, qualified and cheap labor, a stabilized economic structure, political stability and an economy which has a steady exchange structure and economic freedom.

To be frank, if you have an unsteady economy and political structure, you need to forget about foreign investment.

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The foreign capital inflows in Turkey being at $19.6 billion between 1975 and 2004, increased about eight-fold between 2005 and 2015 to $161 billion.

We should note that foreign investments increased greatly after 2002, peaking in 2007 at $22 billion, then entered a decreasing trend after the global crises, and finally, in 2015 Turkey became one of the 20 countries that have attracted foreign capital (this rate was $16.5 billion in 2015.)

We should also note that the economic and political crisis that took place in the region between 2015 and 2016 has had negative effects on foreign capital.

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The recent economic indicators announced have signaled that Turkey is out of the economic turbulence and that it is slowly entering a positive investment climate. In that, from December 2016 onward, foreign capital investment reached a record high in the past 17 months, reaching the $1.991 billion mark. This figure means there is a 37.4 percent increase since December of 2015.

Last year there was only $614 million worth of foreign purchases in the stock market; this year in January alone this figure was $816 million.

The offer to the nine-year maturity borrowing being threefold higher and the fast decrease in the dollar exchange rate during this past week shows that foreign capital has confidence in Turkey.

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Foreigners have been saying that a steady political structure that is expected to come after the referendum in April will make the Turkish markets attractive.

The government should of course update its work on foreign direct investment; it should especially issue regulations that decrease bureaucratic limitations, ease relevant legislation, decrease tax burdens and improve regulations in regards to corporate structures.

I would like to end noting that the Asian countries that have very high growth rates have the highest foreign capital stocks, thus we don't need to reinvent the wheel do we?



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