Nowcasting Capacity Utilization in Turkey: A Continuous Wavelet Analysis

Nowcasting Capacity Utilization in Turkey: A Continuous Wavelet Analysis

Özlem Taşseven (Doğuş University, Turkey)
DOI: 10.4018/978-1-5225-2139-6.ch011
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Abstract

Capacity utilization in macroeconomics is always related to inflation rate and unemployment level. However, the Great Recession has taught us that there might have been other factors considered in determining and/or be determined by capacity utilization. In order to further enhance Phillips Curve relationship unconventional variables such as financial and survey variables are considered. The relationship between capacity utilization rates and several real variables such as industrial production, gross domestic product growth rate, unemployment rate, consumer expenditures, financial variables such as return on BIST 100 index, exchange rate of currency basket, interest rates, survey variables such as consumer consumption index, business tendency survey and survey of expectations is investigated using data between 2006 and 2015 for Turkey. All of the above-mentioned variables indicate the production capacity and their repercussions on other macro variables except the level of standard of living. We also highlight the repercussions of production capacity concerning welfare state.
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Introduction

Starting in 1980s Turkish industrial sector has improved its competitive situation as a result of neoliberal policy, technical advances in manufacturing and globalization. Especially, at the macro and micro level real progress is based on technical advances. Supply chain management and technical advances in information systems caused an increase in the productivity of production factors, marketing and distribution channels in horizontal and vertical expansion. Essentially, decrease in production costs improved the competitive power of industrial sector.

One of the important causes of increase in industrial sector is the change in the path of industrial production methods. The primary cause of this change is the transfer of industrial production to developing countries from developed countries. Factors like legal, political and environmental arrangements have caused significant improvements in industrial development of countries like Turkey. Developments in industrial sector have caused significant improvements in the growth of the economy as a result of exchange of information, innovation and spillover effects. The replacement of low value added items with high value added items was encouraged by government authorities.

Although neoliberal policies have added positive contributions to the development of industrial sector, the changes in industrial structure is far away from the desired level of development. The targets were determined as a result of selective policies and fluctuating situations. Therefore, the production is still based in labor intensive technologies. There’s very little progress on market research and research & development. In addition to this, the sector has become more dependent on imports instead of domestic production.

There is no doubt the productivity of industrial sector is positively related to capacity utilization. In final analysis, the utilization rate in productive capacity is related to the usage of existing industrial capacity. Capacity utilization ratio is found by comparing existing industrial capacity with the real productive capability. Especially, in economy boom periods this ratio goes up and decreases during economic crises. The capacity utilization rate is never hundred percent. However, the trends in capacity utilization rate give useful information about the direction of the economy. If this rate goes up, we get the sign of an increase in industrial sector output. This ratio becomes more meaningful when it’s combined with industrial production index. Capacity utilization helps to explain investment behavior, productivity measurements, inflation and used as an indicator of aggregate demand (Schultze, 1963).

Besides these above effects of capacity utilization we should also focus on the reflection of the changing level of living standard. It is interesting to observe that while the per capita gross domestic product of Turkey had increased from $ 7627 in 2006 to $ 9364 in 2015, the capacity utilization rate in manufacturing between 2006 and 2015 remained constant. This incompatibility between the capacity utilization rate and level of living standard moved in negative direction, because the increase in the standard of living has germinated from the increase in agricultural and services sectors. Additionally, as an indicator of an improvement in living standard of Turkish consumers, human development index could be used. In this context, human development index considering the social and cultural development can be used in order to compare the status of Turkey based on human development and its performance between 2006 and 2015. Turkey has moved from 84th place in 2006 to 72th place in 2015 according to human development index.

As to the relationship between capacity utilization rate and inflation rate, Phillips curve approach is investigated in the literature. The shape of the short-run Phillips curve is a mostly investigated issue. Phillips curve describes a positive short-run relationship between the level of economic activity and inflation. It is observed that the demand fluctuations have a positive effect on price inflation and a negative effect on growth of output. Since the aggregate demand fluctuations are high, this makes aggregate demand unpredictable. Because of aggregate demand uncertainty the output growth would decrease related to these concerns. If the aggregate demand in the economy exceeds the level of aggregate supply, then price pressures and inflation rate increase (Kandil, 1998).

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