The world's financial markets witnessed major turmoil last week with growing concern about the Chinese economy. Amid this fluctuation the Turkish lira weakened to historic lows against the dollar and euro. While discussions among economists continue as to whether this turmoil is foreshadowing of a new world economic crisis, we sat with the Professor Murat Yülek and discussed the recent developments in world economy as well as issues related to the Turkish economy.Professor Murat Yülek (L) and Daily Sabah's Ali Ünal Yülek, a former International Monetary Fund (IMF) economist and a Yale University alumnus, believes that the recent market turmoil is unlikely to cause a new crisis similar to the 2008 Lehman Brothers crisis and that financial markets indicate readjustments in asset price bubbles. Regarding the Turkish economy, Yülek said there are not any structural factors to cause an economic crisis. Yülek believes that the recent fluctuations will be attributed to the lack of a strong government and he predicts that in the upcoming Nov. 1 elections people will vote for a stable single-party government.The recent developments in Chinese markets and world markets in general are perceived to be a precursor of a new global economic crisis. What is your opinion on this subject?As you have said, some believe that the global economy is heading toward a new crisis. The collapse of the Chinese stock exchange reinforced that mood.But let's look first at some structural factors that may explain why the current fluctuations are occurring. When Prime Minister Shinzo Abe and his government came into power in Japan, they foresaw an economic model that would resuscitate the Japanese economy through keeping interest rates low and provide almost an infinite amount of quantitative easing. This model was called "Abenomics." These policies caused the depreciation of the Japanese yen against other currencies, especially against the dollar, at a rate of almost 50 percent between the last quarter of 2012 and today. After the depreciation of the yen, other Asian countries' currencies were expected to lower their currencies as well. In addition, there were other concerns in the region such as the non-performing loans in the Chinese financial sector. On the other hand, we have observed an increase in China's outward capital investments with a weakening of the trend in inward capital flows. This caused pressure on China's reserves. All of these coincided with the decline in China's growth rate, the Chinese administration had to devaluate the yuan and reduce interest rates to push exports and growth. These developments caused turbulence first in the Chinese stock market and then in global markets. While China is surely in a transition – especially to higher wages – to make a prediction about whether there is an impending global crisis, first we have to know if these issues will be reflected in the Chinese banking system. If China falls in the same downward spiral like 1990s Japan, which suffered from deflation and low growth rates, we may witness fluctuations and a decline in asset prices maybe for one or two decades even.However discouraging the Chinese situation looks, it still will not directly lead to a conclusion of a global collapse. The European economy is healthier than before and U.S. macroeconomics also does not point to a collapse. In my opinion, the financial market has overreacted to what transpired in China and moderation will be achieved eventually.How will these fluctuations affect the U.S. and the rest of world economies?Chinese developments will have a prominent impact on the U.S. First of all, I do not think the U.S. Federal Reserve (Fed) will be able to increase interest rates in September anymore. As a prediction, I think the Fed will still increase rates to 50 base points within 2015. But I believe that will be a mistake both for the sake of the world and themselves.In general, we see that the U.S. economy produces a crucial amount of industrial value-added growth and provides innovative productivity growth. On the other hand, when we look at the economy's macroeconomic data, we see a highly indebted economy at the federal, state and local levels. This is the other side of the coin regarding the globally positive perception of the U.S. economy. As interest rates increase so will the cost of borrowing, including for the government, and therefore, there may be a revival of concerns about the high debt of the U.S. economy.Can these concerns cause a new crisis like the 2008 Lehman Brothers crisis?I do not regard it as possible. While I believe that U.S. growth is still fragile, after the 2008 crisis financial policymaking actors have learned their lessons.We can summarize these developments as the turbulence in the financial markets indicates readjustments in asset price bubbles rather than being a precursor for a new crisis.There are wave theories that are used to predict economic transformation and crisis. Do you subscribe to any of these theories? What is your opinion regarding economists who predict crises according to these theories?Wave theories are very interesting and some economists predict crises with wave theories, but I do not prefer to assign myself to any of them, as I find they still lack a robust analytical background.Coming back to Turkey, exports have slowed down recently. Do you think this points to a permanent trend?I do not think the slowdown in the growth of Turkey's exports is permanent. I expect that Turkey's exports will witness a rapid increase after 2016. Analyzing Turkey's exports statistics since 1980, one can see that there are repeating cycles where a rapid increase in exports are followed by a period of stagnation. There was an uptrend that lasted between the early 2000s and 2011. Exports during the last years currently halted at about $150 billion. According to my analyses, there may be a tremendous increase in exports and, correspondingly, in the growth rate after 2016, as happened in various previous cycles, triggered by the elimination of the overvaluation of the Turkish lira. Of course, for this to happen a stable government should be established as a result of the upcoming elections in November leading to expanded planning horizons for firms, and there should not be any global crisis slowing down the global demand.How do you evaluate the current lira-dollar exchange rate?In my opinion, the current exchange rate is near its long term fundamental equilibrium. Since 2013, due to certain domestic and foreign developments, the Turkish lira gradually fell from a highly overvalued rate of $1.80 to $2.90. While some take it negatively, I believe this is healthy for the competitiveness of Turkish exports. If this increase had not happen in a gradual manner, with the recent fluctuations it could have still increased to $3.00 very rapidly. This would have caused a shock to the economy, creating problems in company and bank balance sheets, maybe even in the state itself. However, as the Turkish lira's depreciation happened relatively gradually, individuals and institutions were somewhat ready, so the impact was softened.While it is challenging to identify the ideal lira-dollar parity, in my opinion, rates between $2.70 and $3.00 are reasonable regarding competitiveness for today.The Fed's interest rate hike decision is not a one-off occurrence, but will be implemented in a series of increases. There is an expectation of increased capital outflows from the markets of developing countries such as Turkey. If that happens, some bankers said that the lira-dollar exchange rate may increase to $3.50. How do you assess this possibility?I do not think it is likely. Turkish stock markets were one of the least affected when the Chinese-based global fluctuations occurred last week. Turkey currently lives in a political and economic episode that can be described as the worst case scenario. There is war in Syria, Iraq and Ukraine and collapse in Greece and China. And Turkey is in an election period. Thus, the country in undergoing a real-life stress test.Despite all of this, Turkey's macroeconomics is still solid and we may end the year with 3 percent growth. This indicates that the Turkish economy has consolidated itself and decreased its vulnerabilities. The contributions of the structural reforms implemented by the Justice and Development Party (AK Party) in the past 13 years are crucial in this. Elimination of all the traditional economic vulnerabilities is not coincidental, unlike what some economists say.The Fed's interest rate hike decision will affect Turkey as it will the rest of the world. However, the effect will not be tremendous, nor will it be permanent. There are two reasons for this – the markets have already bought in much of the expectation and a hike will likely be low. There may be some volatility when investors become pretty sure the Fed is going to hike interest rates and then when the announcement is made, but the effect is likely to be moderated pretty rapidly. I should also underline that the duration of the interest rate hikes are more important than the starting date. Investors will not shift significantly to the U.S. or Germany until they are sure that the hikes are over, as otherwise they will suffer losses. And once the hikes are over, there will be some additional share of safe haven U.S. and German bonds in portfolios, but there will still be a huge amount of investments in safe emerging markets such as Turkey. This means a significant cash inflow into these countries.When you analyze the general macroeconomic indicators, do you think that an economic crisis is possible in Turkey?I can say that there aren't any structural factors to cause an economic crisis. First of all, public sector debt is in a better condition than the global standard. On the other hand, the banking system is strong with higher capital adequacy ratios than most developed countries. Depreciation of the overvalued Turkish lira puts some balance sheets under pressure, but that is a necessary adjustment.How do you regard comments that the Turkish private sector holds high foreign currency debt, so there may be a private sector-based crisis?While the private sector seems to have borrowed from abroad, that has been done with collateral such as cash that is not accounted for in the statistics. After the global financial crisis Turkish companies experienced no financial strain probably because of the same reason.We have witnessed over time that significant exchange rate increases had negative impacts on the ruling political parties. During the last year, the Turkish lira has lost almost 40 percent of its value. How will this be reflected at the ballot box on Nov. 1?The economy is always influential in voting behavior. The moderating growth rate must absolutely have had an influence in the fall in AK Party votes. The business community and the general public were dissatisfied with the economic slowdown. On the other hand, they have remembered what it meant to be without a government after June 7 elections. I think the recent fluctuations will be attributed to being without a strong government. Therefore, I predict that the people will vote for a stable single-party government on Nov. 1.If Turkey has a stable government after the upcoming elections, this will have a positive influence on economic indicators. A single-party government and strengthened political stability will mean a significant cash flow into Turkey. More importantly, if this single-party government can prioritize a growth policy based on exports, Turkey may witness rapid growth between 2016 and 2020 driven by exports despite slow global growth.There has been a decline in growth over last couple of years. This situation led to comments that Turkey's current growth model has become obsolete, so Turkey has to create a new model. What is your take on this?I am one of the advocates that Turkey needs a new economic model. The average growth rate has been around 3 percent after 2011, but this is not a rate that can sustain Turkey's economy. Our population growth is still high and we still need high development to back up the infrastructural needs of a large territory. Turkey does not have the luxury to grow at 3 percent levels. However ambitious the current global and local circumstances are, Turkey should target 5 percent growth or so.During the last 10 years we completed our macroeconomic infrastructure, which was tested successfully during recent global fluctuations. However, while the macroeconomic base is solid, we have to design a new generation structural policy set. Leading growth countries such as China, South Korea and Germany prioritize industry and exports. Their public and private sectors have worked in a synchronized manner and derived growth benefits from world markets. In Turkey, we still have some shortcomings both in the public and private sectors.Our new model should be based on exports and growth, which requires a strong industrial layer. Turkey's export orientation, which started in 1980, is still not complete and is still not adequately conducive to growth. A full-fledged mindset shift is necessary both for the policy makers and business.