The main contribution of the public sector to growth no longer comes through its expenditures, but through the role it undertakes as a strong supervisory and regulatory agent in the framework of good governance principles and also from its policies focusing on the goal of increasing competitiveness. The public sector’s need for borrowing from financial markets declined due to tight fiscal policies, which provided the private sector the opportunity to find lower-cost and longer term resources. Another change observed in growth dynamics in line with the structural transformation in the economy is that productivity increases have become the most significant factor in growth. The cumulative productivity increase in the private manufacturing industry for the period between 2001 and the first quarter of 2006 reached 35 percent. While the said productivity increases support the growth process on the one hand, they improve the quality and contribute to the sustainability of growth on the other. BIS Review 89/2006  7  The last issue I will touch on about growth factors has to do with the increased level of integration of the Turkish economy with the world. In this framework, exports, which rose by 151.5 percent cumulatively from 2001 to July 2006, made a critical contribution to the rapid growth observed for the last four years. Domestic and foreign competition, which increased due to the increased number of firms that took up export activities and entered international markets as a result of integration with the world, led to a decrease in profit margins in these sectors.

In the framework of the exchange rate policy that I have mentioned earlier in detail, developments in the foreign exchange market are monitored carefully by the Central Bank as they have a direct impact  BIS Review 89/2006  5  on inflation and constitute an important part of financial stability. In this scope, I would like to briefly analyze the fluctuations in financial markets. In the period between the beginning of May - when fluctuations started - and the end of June, the Turkish lira depreciated by approximately 29 percent. What triggered the rapid depreciation of the Turkish lira was the change in international liquidity conditions against developing countries. Global risk perceptions changed along with expectations that the central banks of developed countries would tend to increase interest rates, and global liquidity abandoned developing countries and shifted to developed countries. Along with all developing countries, Turkey was significantly affected by the changes in international liquidity conditions, as well. The impact observed in Turkey was stronger compared to other countries because the domestic risk perceptions about inflation, current account deficit and political issues increased in this period. As a result of these impacts, capital outflow took place over a two-month period. At this point, it should be underlined that a major part of the said outflow was met by the foreign exchange sales of residents. The process of structural change in the Turkish economy, in other words, the background of the steps taken to strengthen macroeconomic fundamentals and to normalize the economy took only five years.