Export Dynamics in Turkey

Abstract

This paper presents a structural vector autoregression model to explore the export dynamics in Turkey. Given the notable export performance after 2002, albeit high-rated real appreciation of Turkish lira, we investigate the role of unit wages in explaining the high export growth. We observe that, through historical decomposition of exports, real unit wage, not the real exchange rate, has been the main determinant of Turkish exports after 1999. Moreover, the impulse response analysis suggests that the short-term impact of a real unit wage shock on exports is larger compared to that of the real exchange rate. The same conclusion applies even for the long-run effects, provided that the confidence in the economy is maintained. We also demonstrate the importance of real unit wages by estimating an error-correction model, which provides consistent results with the impulse response analysis. The analysis points out that the real exchange rate is not the sole determinant of the export behavior in Turkey. The main point of the study is that, export growth can be sustained, even when the real exchange rate is appreciating, if the improvement in labor productivity can be sustained.