27 Ağustos 2013 Salı

2023 goals in jeopardy

Readers who are familiar with the Turkish economy are well aware of the ambitious goals set by the governing Justice and Development Party (AK Party) for 2023, the year we will celebrate the centenary of the Turkish Republic. Let me remind other readers that the AK Party, while nothing was obliging them economically or politically, decided two years ago to announce that our gross domestic product (GDP) will reach $2,000 billion and the per capita income $25,000 in 2023, assuming that the population projection is a little more than 80 million. When these figures were announced, I made calculations to check whether they are realistic. My simple check showed that the achievement of these two goals was based on such unrealistic assumptions that miracles would be needed.
Since that time, I have been asking myself what political motive could have pushed the AK Party to involve itself in a bet that is lost in advance. I have no definite answer. I think that the AK Party considered that GDP level sufficient to prove Turkey's status as a world power. Indeed, a GDP of $2,000 billion in 2023 would probably make Turkey the thirteenth to fourteenth largest economy in the world (the tenth spot, their highest ambition, being absolutely out of the question) and a $25,000 per capita average would bring Turkey's per capita income up to the EU average. So far so good, however some moderately ambitious but more realistic targets could also have been useful for the power-obsessed AK Party. It might also be that the AK Party's economists simply made a mistake in their assumption of the impossible.
Indeed, the assumptions lying behind a GDP of $2,000 billion in 2023 are almost impossible. In 2002, Turkey's GDP was $233 billion, TL 351 billion nominally and TL 73 billionin real terms (in terms of 1998 prices). By 2007, on the eve of the global recession, these figures were, respectively, $647 billion, TL 843 billion and TL 101 billion in real terms. During the first five years of AK Party rule, the growth performance was much better than the past years, although it was still restricted to 38 percent. The remaining part of the 280 percent increase in dollar terms was caused by inflation and from the real appreciation of the Turkish lira. It is true that in 2002 the Turkish lira was probably slightly undervalued, and there were also strong increases in productivity during these years, but none of these can sufficiently explain the huge appreciation of the Turkish lira.
In 2010, the Turkish economy more than recovered from the adverse effects of the recession thanks to high real growth rates, and appreciation of the Turkish lira occurred after the exchange rate shock of October 2008, when it lost 30 percent of its value. In 2010 Turkish GDP was at $731 billion, and last year it reached $790 billion despite the low growth rate (2.2 percent) in real terms, also thanks to the appreciation of the Turkish lira. At best I expect a stagnation of GDP this year in terms of dollars. Real growth is expected to be less than 4 percent, depreciation of 15 percent will probably remain and inflation of close to 8 percent should be expected.
From now to 2023 we have 10 years. To reach a GDP of $2,000 billion, one needs an increase of 250 percent, which means an average annual growth rate of 10 percent in terms of dollars. If we assume that the real value of the Turkish lira will not change in the next 10 years, which means that it would be moderately overvalued (even despite the recent depreciation of 15 percent), and assuming an average inflation rate of 5 percent, the exchange rate will increase from its current value of 1 USD = 2 TL to 1 USD = 3 TL (note that I assume an inflation in dollars of 2 percent per year) so, with these assumptions the nominal GDP should reach TL 6,000 billion in 2023. Therefore, the nominal GDP for this year will be TL 1700 billion, approximately. If we inflate it with even a rather low average inflation rate of 5 percent, the real GDP must almost double within 10 years. This corresponds to a real GDP growth of 7 percent per year. Forget it.
Then, in order to reach $2000 billion in GDP, both the Turkish lira should continue to appreciate and the average real growth should be higher than its current weak level. These two conditions require very strong and persistent productivity gains. From where will they come, especially as increases in productivity seem to be very low nowadays?

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