15 Ocak 2013 Salı

Undesirable tradeoff

Current account deficit with and without energy
In my last column (“Erdem Başçı, central banker of the year,” Jan. 12, 2013), I wrote: “I am afraid that an undesirable tradeoff between these multiple goals will be unavoidable in 2013. Advanced indicators show that we will probably be obliged to forget the rebalancing process. I do not think that net exports will continue to contribute positively to economic growth this year. Domestic demand has started to increase, but at the same time imports have also started to increase more than exports.”

The last economic outlook and forecasts published by Bahçeşehir University's Center for Economic and Social Research (BETAM) (“Revival becomes clearer,” January 2013) seems to confirm this prediction, at least for the moment. Industrial production increased in November along with an increase in consumption and investment. One can easily assert that the decrease in loan interest rates is playing its role in the revival of domestic demand, as expected. BETAM forecasts 3 percent year-on-year growth for the last quarter of 2012. Admittedly, this is much better than the performance in the third quarter, when the Turkish economy was content with a mere 1.6 percent growth rate.
That said, 3 percent growth is still far from the 4 percent desired and hoped for by the government and central bank. However, the reaction of demand to lower interest rates takes time, and we should expect further increases in domestic demand in the coming months. I think that 4 percent growth, and even more, is doable in this context. However, the problem would be that this growth risks being unbalanced. Now, the government and central bank are committed to the preservation of positive net exports. In other words, the goal for economic growth is not only its increase to a sufficient level that will stop the increase in unemployment but also to keep its balanced character. According to BETAM's forecasts, the last quarter of 2012 is likely to mark an end to the export-led growth that has prevailed since the third quarter of 2011. Indeed, BETAM expects a higher increase in imports than exports, which seem to be running out of steam, along with the revival of domestic demand.
An early return of the Turkish economy to its traditional pattern of growth based exclusively on domestic demand would be very sad. This is the first time since the 1990s that Turkey is seeing a decrease in its current account deficit (CAD) without being in economic crisis. In the case of a return to the traditional pattern of growth, one would have to admit that the Turkish economy would face a dilemma: Accept insufficient growth to minimize the CAD, or push growth up but endorse an increasing CAD. Currently, economic growth is in fact becoming very volatile with ups and downs. This high volatility will in turn keep the average growth rate quite low in the long run, something between 3 and 4 percent.
Economic growth of about 4 percent based on domestic demand is quite possible for 2013. In this case, we will witness a moderate increase in the CAD. I do not think that its financing will be a problem this year. However, this should not conceal the fundamental structural problem. As I have argued many times in this column, the Turkish economy seems to be trapped in a low-growth regime. The basic reason for this trap is the lack of competitiveness of Turkish industry coupled with low domestic savings. As defended by some Turkish economists, a low-valued Turkish lira can make a positive contribution to this problem, but the relatively high inflation (6-7 percent) prevents this from being a solution. The central bank cannot approach its targeted inflation of 5 percent when the Turkish lira is depreciating. So, cost-cutting and productivity-enhancing reforms remain. Labor market reforms, such as a regional minimum wage or severance pay system, have either been canceled or postponed. A new electricity law aimed at restoring the country's competitiveness in production and distribution of electricity is waiting on Parliament. There have been many statements and rumors circulating about a very important income tax reform, but there is no proposed bill as of yet.
It is clear that Turkey cannot claim to be the main regional power without establishing a decent, sustainable growth regime. The problem is that politically, this is not an easy task because reforms will unavoidably affect  many well-established interests in the country. At present, Turkey is focused on the Kurdish issue and the electoral period that is approaching. I am afraid that Turkey will not be capable of escaping from the trap this time, either.

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