Durmuş Yılmaz: Evaluation of global financial developments and structrual reforms Speech by Mr Durmuş Yılmaz, Governor of the Central Bank of the Republic of Turkey, at the 19th Annual World Business Congress, Konya, Central Anatolia, 21 July 2010. *  *  *  Honorable Rector, Esteemed Academicians, Distinguished Guests, We are gathered here today for the 19th Annual World Business Congress of the International Management Development Association (IMDA), where the lessons learned from past experiences in the global business world, current issues and future tendencies will be discussed. I would like to congratulate everyone, notably Prof. Dr. Mehmet Babaoğlu, Rector of Karatay University, and distinguished members of the University for their Contributions to organizing this esteemed Congress, which is held in a different country each year. I would like to start my speech with a brief evaluation of global financial developments. Then I will address structural reforms, which we deem essential for raising Turkey’s potential growth rate, when considering the Turkish economy on a macro scale and from in a longterm perspective. 1. Global developments:  As is known, problems, which emerged in the global financial markets about two years ago and spread across the corporate sector over time, affected the Turkish economy as well as other economies. We see that the impact of global turmoil on economies mainly emerged through three channels: (1) Foreign Trade, (2) Capital Flows and (3) Expectations. The Turkish economy has been affected by global turmoil through all these three channels due to its structural features.

Economic literature besides country experiences has shown that the value of the currency of a country is the result of all other economic variables. Putting interest and exchange rate policies in the forefront leads structural reforms, the prerequisites for sustainable and high growth rates, to remain in the background. The level of foreign exchange rates is of course a noteworthy and influential factor on economic variables. In the short run, the foreign exchange rate is determined by monetary and fiscal policies, international capital movements, expectations and even political developments and current issues. However, in the medium to long term, the most important factor determining the value of a local currency is the economic performance of that country. The foremost factor influencing this performance is productivity increase. Productivity increase, at the same time, is the only variable to ensure the permanent increase in the welfare of a society. The monthly real exchange rate index, which is released by the Central Bank, shows that compared to 2003, the Turkish Lira appreciated in real terms compared to the currencies of developed countries, while no significant change occurred against the currencies of developing ones. 4  BIS Review 104/2010  This is not surprising. The increase in the real exchange rate index against developed countries is a natural consequence of the high productivity increases in our economy compared to these countries. For example, OECD data suggest that in the 2003–2008 period, the productivity increase per employee in Turkey is approximately 6 times higher than that in Europe.