Sample Essay Where in Current Account would the imported telecommunications equipment
TURKEY’S CASE STUDY QUESTIONS
1. Where in the Current Account would the imported telecommunications equipment be listed? Would this correspond to the increase in magnitude and timing of the Financial Accounts?
The billions of dollars worth of telecommunications equipment imported by Telis from Nokia (Finland) and Motorola (United States) throughout the year 2000 would be listed in the trade in goods account, particularly in the imports of goods (physical). (2001:554) stated that the trade in goods account ‘records imports and exports of physical goods (previously known as ‘visible’). Exports result in an inflow of money and are therefore a credit term. On the other hand, imports result in an outflow of money and are therefore a debit item. The balance of these two is called the balance on trade in goods or balance of visible trade or merchandise balance (Baume & Blinder 2004). A deficit happens when imports exceed exports, which is the case of Turkey from 1998 ($14,220M), 1999 ($10,443M) and 2000 ($22,377M), as shown in the sub-accounts of the Turkish Current Account.
This huge import of capital equipment corresponds to most of the increase in net other investment and thus the large balance in the Financial Account in the year 2000.
- Why do you think that net direct investment declined from $571 million in 1998 to $112 million in 2000?
The net direct investment decline was probably primarily caused by a lack of confidence in Turkey’s long-term growth prospects. Also, it could stem from an absence of assurance in the political stability of the country. Turkey’s struggle on its inflation during 1999 to early 2000 must have, among other things, included high interest rates and macroeconomic policies formulated by the Turkish government that slowed down growth rate. A slower rate of growth, if maintained in the long run, would reduce expected returns and direct investment inflows. According to (1997), inflation tends to cause uncertainty in the business community at large, especially when the rate of inflation fluctuates; evident in the financial accounts of Turkey, and generally speaking, the higher the rate of inflation, the more it fluctuates.
If it is difficult for investors to predict their costs and revenues, they may be discouraged from investing. In the bottom line, this will reduce the rate of economic growth. On the other hand, policies to reduce the rate of inflation may themselves reduce the rate of economic growth, especially in the short run. This may then provide the Turkish government with a policy dilemma.
- Why do you think that Telis defaulted on its payments for equipment imports from Nokia and Motorola?
Telis necessitated the need to invest a great deal in capital equipment to construct a modern, high-speed and high-capacity telecommunications networking in Turkey. Regrettably, a substantial time-gap characteristically subsists between the time a network is created and its capacity is utilized by revenue-paying customers (Super 2004). Therefore long term investment rather than short-term trade investment was called for. The gap in timing suffered by the telecommunications company in Turkey was also experienced by telecommunications companies around the globe, counting the case of Global Crossing, which bankrupt, and was much publicized, at that.
Prospects for the telecommunications industry, its capacity to create noteworthy returns from established networks, and its capability to monetize its base of consumers, bore out to be excessively sanguine (2004). An overloading of telecommunications networks around the world resulted to aggressive competition for prices, accumulating to the deficit in revenues experienced the world over. However, the congestion was persistent for several years as companies tried to stay alive by covering not fixed capital costs, but variable costs of offering telecommunications services.
