There are also analysts who say that the interest rate cuts made by the US central bank, the Federal Reserve, have contributed to the price rises. 1 In recent years, portfolio investment in commodities appears to have become an increasingly common means of diversifying and spreading risks. The expected return on many other types of asset has declined and inflation has begun to rise in many areas. As this has occurred, real assets such as commodities have appeared to be a good and safe investment – a “safe haven”. This has reinforced the price rises. Demand from emerging markets – a more long-term driving force There are a number of interacting explanations as to why commodity prices have risen so sharply. It is hardly possible to say exactly how important each of them has been. However, one can say with some certainty that the persistence of the different driving forces differs somewhat. 1  See, for instance, Feldstein, M. “Enough With the Interest Rate Cuts”, the Wall Street Journal, 15 April, 2008 and Frankel, J. “The Effect of Monetary Policy on Real Commodity Prices”, NBER Working Paper No. 12713, 2006. 2  BIS Review 57/2008  What I mean more specifically is that demand for commodities from emerging markets may well have pushed up and may also continue to push up prices more persistently than the other explanatory factors. After all, the emerging economies are undergoing a structural transformation, which will probably be under way for a long time.
Improving the state of the labor market, removing rigid labor market regulations, reducing the tax wedge, and more importantly enhancing the human capital through education reforms are essential to accelerate the growth rate of the economy on a sustainable basis. Second, Turkey is a net commodity importer in contrast to Latin American countries and South Africa. We need to import in excess of 35 billion USD worth of oil and natural gas each year, almost 5% of our GDP. Looking at the composition of the foreign trade, you can see that our imports are mainly commodities and intermediate goods, whereas industrial goods cover more than 90% of our total exports. Therefore, promoting Turkey's competitiveness is the key to her future success. 2  BIS Review 32/2008  Third, high domestic savings rate, which is high in emerging countries in Asia, is quite low in Turkey. It is around 20%. We need to attract foreign savings to finance investments. It is not surprising to observe a strong and direct positive relationship in Turkey between growth rate and current account deficit. Of course, the upward trend in energy prices has also contributed to the widening of the current account deficit to 5.8% in 2007. The current account deficit is a structural problem and a source of vulnerability. However, Turkey did not have difficulty in its financing in the last 6 years. In fact, the quality of foreign capital flows has improved sharply.