Structural features of unemployment

The low-growth patch in which the Turkish economy appears to be trapped will lead us to speak more of unemployment in the future. I have pointed out many times in this column that despite sluggish growth, many jobs have been created during the last year. This strong job creation took place particularly in the service sector. As a result of rising employment but a slower pace of added value, labor productivity has so far decreased in the service sector in 2012. This is an exceptional event in the development of the economy. Admittedly, the trend won't continue. As long as growth remains weak, and there are many signs that this will be the case, unemployment may accelerate its true rise.
Economic bureaucracy and labor economists focused too much on the relationship of growth to employment in the past. The robustness of economic growth as well as its capacity to create jobs have been the main subjects in debates on joblessness. Now, the capacity for job growth has risen tremendously following the global economic crisis, due to significant employment hikes in the service sector as noted above. In addition to plentiful hiring in the public sector, I think incentives like the 5 percent cut in social security premiums as well as higher cuts in premiums for hiring young people and women have also contributed to the capacity of growth for job creation, along with other factors still to be identified. The lack of a contribution of economic growth to job creation, however, can no longer be blamed. But the problem is that even with a high capacity for job creation, a growth rate of less than 4 percent will not be sufficient to prevent unemployment from rising in the future. Here we come to the structural features of unemployment that have until recently been widely neglected by the academic community as well as by public institutions. If economic growth remains weak and its capacity to create jobs remains stagnant, we must find other ways to address unemployment. Readers who are not familiar with labor economics should not believe that the existence of a rather high unemployment rate, which Turkey has, at 10 percent, means that all available jobs are occupied, that the unemployment problem is exclusively a problem of insufficient labor demand. Rather, job vacancies coexist commonly with people looking for jobs, i.e., with unemployment. Readers should know that the existence of a high number of job vacancies amidst high unemployment is definitely a sign of the existence of the issue of structural unemployment. What is the level of structural unemployment in Turkey? The first survey to offer an answer to this question was recently completed by the Turkish Employment Organization (İŞKUR). Unfortunately, our media ignored this original and important survey. İŞKUR surveyed a thorough sample of firms that employ at least 10 workers in the months of September and October 2012. According to the survey, firms employed 6.240 million employees and maintained 270,000 job vacancies, with a weighted national average of job vacancies of 3.3 percent. This is a very high rate, signaling a serious problem of structural unemployment. For the sake of comparison, let me note that, according to the European Union Statistics Institute (EuroStat), the rate of job vacancies was 1.4 percent in 2012 for the countries of the EU, in which unemployment numbers are quite similar to those of Turkey. Eighteen percent of firms surveyed responded that they have job vacancies, with 27 percent expressing difficulties in finding suitable workers for the available jobs. As for the reasons for these difficulties, 54 percent of firms point to the insufficient qualifications of applicants, 51 percent say simply there were no applicants and 45 percent report a lack of experienced applicants. Those are factors preventing employment from the demand side of labor. But there are supply-side factors: 27 percent of firms declared that applicants had not accepted the offered salary and 26 percent declare that applicants do not like the working conditions offered. The minimum wage is most likely too low in the developed West but too high in the underdeveloped East, where the main problem is an under-qualified labor force. Let me conclude the discussion of structural unemployment with a few final figures. TurkStat's 2012 unemployment statistics by college graduation show that the jobless rate among health personnel is limited to 2 percent, while the same rate reaches 21 and 22 percent among persons with degrees in the humanities and journalism, respectively. Obviously, the Turkish labor market suffers from a serious problem of a mismatch between labor supply and demand.

Peace process going well but not the economy

The “peace process” aiming to put an end to the bloody and wearing “low intensity war” between the Turkish Armed Forces (TSK) and Kurdistan Workers' Party (PKK) militants is under way. The day before, the PKK officially announced the withdrawal of its armed teams from Turkey to northern Iraq. If this retrieval is hopefully terminated without any provocation, the first stage of the peace process will be completed and we will finally have a peaceful environment in eastern Turkey. Admittedly, this does not signify a definite solution of the “Kurdish problem.” Other steps, like a new constitution securing democracy and human rights for all citizens -- but particularly for Kurds, are a must. This is, for sure, not an easy task, but both sides estimate that the point of no return has already been passed.
Government postponed structural reforms The end of armed clashes along with the democratization of the Kurdish problem will certainly bring beneficial economic results, but the so-called “peace dividends” would not be, unfortunately, as high as expected. (See my March 18 column, “Peace dividends”) All of the energy and attention of the government -- particularly that of Prime Minister Recep Tayyip Erdoğan, whose energy and attention matter more than those of others -- are focused on the peace process. This is quite understandable, but this cannot be a pretext to neglect the economy, all the more since the economy is not doing well. Readers of this column are familiar with my worries, which are shared by most of the economists who are watching Turkey closely. A robust revival of domestic demand that would boost the sluggish growth is still not in sight. The leading indicators of the first two months were not very encouraging. The estimation of Bahçeşehir University's Center for Economic and Social Research (BETAM) for the yearly growth rate of the first quarter was 2.4 percent. (See my April 8 column, “A modest revival in sight”) Since then, the capacity use and real sector confidence index for March have been published. They are not encouraging, either. Another bit of bad news is in regards to the evolution of the real exchange rate. It had already entered the red zone, as defined by the Central Bank of Turkey, before the last interest rate loosening by the Monetary Policy Committee (PPK) a week ago. It had been expected that this strong loosening would prevent the Turkish lira from continuing to appreciate through a smooth nominal exchange rate adjustment. Nevertheless, the expected effect has not seemed to be produced, since the exchange rate of the currency basket, half of which is formed by the US dollar and the other half by the euro, continues to be under TL 2.10. International liquidity is still abundant, and the interest rates of Turkish Treasury Bonds, despite their historically low levels (around 5.5 percent), are still attractive for hot money. Yesterday, the most popular economic title in the press was: “5.6 billion USD capital inflows within a month.” Now, Turkish exporters desperately look after restoring competitiveness through a real exchange rate adjustment. Is further loosening of monetary policy needed? And if yes, is it possible? Let me first remark that the expected real interest rate is already in the negative zone, as inflation expectations are still well over 6 percent. I do not think that there remains too much room for the monetary policy cabale to contribute further to the domestic demand revival. More loosening could conflict with the fight against inflation. Under these circumstances, a balanced growth based on domestic and, at the same time, external demand seems pretty much impossible. There is still some hope to have a growth rate, say something between 3 and 4 percent, but it will be only an emanation of the domestic demand. So, we will be back again at the start -- an increasing current account deficit with, as a bonus, indomitable inflation. How to get out from these dilemmas? The only way, I believe, is a shock of reforms. All reform projects, such as severance pay reform, tax reform, etc., which are already finalized but postponed for political reasons, should be implemented as soon as possible. Other reforms aiming for things like more flexibility in the labor market and more fiscal autonomy for the universities must be designed and implemented. The only good news on the reforms' front is the recent admission by Parliament of a new electricity law which is able to make electricity production and distribution more competitive and more efficient. However, the Turkish economy, admittedly, needs more reforms as soon as possible.

Material deprivation among children

Today, Turkey celebrates the 93rd anniversary of the opening of Turkey's parliament that took place on April 23, 1920 in Ankara at the beginning of the War of Independence. This important national holiday is dedicated to children and it is celebrated as National Sovereignty and Children's Day.
During the festival's parades organized all over Turkey, we admire thousands of children dressed in beautiful clothes observe the adults on the pavement proud of the achievements of the Republic. Of course, the real condition of the children in this country, as is the case in most countries, differs from the impression that a foreign spectator would get from seeing the happy children in parades. But how big is the difference? Bahçeşehir University Center for Economic and Social Research (BETAM) published on Monday a report that gives a partial answer to this question. Using Turkish Statistics Institute (TurkStat) micro data from the Income and Living Standards Survey available for 2006 to 2010, BETAM calculated the number of households that are not able to meet three basic needs adequately: nutrition, warmth and clothing. In these surveys, TurkStat and the EU statistical agency, Eurostat, asked nine questions regarding the accessibility of some capabilities in the sense defined by Indian philosopher and Nobel prize-winner in economics, Amartya Kumar Sen. BETAM chose the three following questions out of nine: Do your family members eat meals with red meat, chicken or fish every second day? Are you able to keep the home warm enough? Do family members buy new clothes, except second-hand ones? BETAM defines as poor or materially derivate, children living in households answering “no” to these three questions. According to this criterion, there were almost 7 million children materially derivate in 2006 out of a total of approximately 19 million in Turkey; so, one child in three did not have these basic needs satisfied adequately. The number of children in this pitiful situation decreased to 4.5 million and the share to approximately to 25 percent in 2010. Obviously, the rapid increase in the income per capita in the last few years improved poverty statistics in general and child poverty in particular, but one child out of four is still suffering from severe material deprivation nowadays. The situation item by item is even worse. The share of children living in households answering “no” to the first question regarding the nutrition was 69 percent in 2006 and it decreased only to 67 percent in 2010. These shares in response to the second and third questions (about warmth and clothing) decreased respectively from 45 to 40 and from 60 to 41 percent. It clearly appears that most of the overall improvement in poverty has been in better clothing, which might be explained by the decline in the relative price of clothing during the period considered. As could be expected, the distribution of child poverty across regions is quite unequal. The lowest poverty rate is observed in West Anatolia at 13.6 percent, while the highest rate belongs to Southeast Anatolia with 42 percent. Let me remind readers that that the average rate of child poverty in the country is 24.4 percent. For the sake of curiosity, I would like to note that the poverty rate for Istanbul is 24.5 percent, almost equal to the national average; Istanbul, as in other fields, faithfully seems to represent the national average in poverty, too. These findings evidence that the picture is not as rosy as it might be imagined. The problem of child poverty must be addressed seriously if Turkey wants to achieve its highly challenging goals, like an increase of per capita income from TL 13,000 to USD 25,000 USD for the centenary of the Republic to be celebrated in 2023. These claims necessitate huge efforts in a number of areas, but the fight against poverty emerges as one of the most important priorities in BETAM's research. Indeed, the educational level and skills of the labor force should be radically improved in order to raise labor productivity, which is key to high and sustainable economic growth. On the other hand, one cannot expect more schooling years and better education results from children suffering from severe material deprivations. Academics have to spare more time for research on poverty and the government must consider the issue of poverty among its foremost priorities.

Limits of monetary policy

The Monetary Policy Committee (PPK) of the Central Bank of Turkey decided to cut interest rates by more than expected during the monthly meeting held on Tuesday. The one-week repo rate (the policy rate) has been lowered from 5.5 percent to 5 percent, while the upper limit of the interest rate corridor (the lending rate) and its lower limit (the borrowing rate) have been cut, respectively, from 7.5 percent to 7 percent and from 4.5 percent to 4 percent. The size of the cuts surprised the business community as well as market players and provoked a hot debate among economists regarding the goals pursued by the central bank and its ability to reach these goals through these strong interest rate cuts.
Governor Erdem Başçı I think there is a large consensus regarding the main goal: The central bank wants to prevent further appreciation of the Turkish lira which has already crossed the red line set by itself. The central bank announced recently that the real exchange rate index would be entering the alarming zone over 120. The index is already there. Moreover, it will certainly be continuing to increase since the Turkish inflation rate is higher than its trading partners. The appreciation of the Turkish lira threatens the so-called “balanced growth” and the financial stability that is so intensely desired by the central bank through losses in the competitiveness of Turkish exports and excessive credit expansion. The following assertions from the MPC release should be underlined: “Recently, there is a reacceleration in capital inflows and credit growth hovers above the reference rate. The committee indicated that, in order to balance the risks on financial stability, the proper policy would be to keep interest rates low while increasing foreign currency reserves via macro prudential measures. Accordingly, it was deemed appropriate to further increase the reserve options coefficients, while delivering a cut in the short-term interest rates.” I fully agree with the central bank on the balanced growth goal. Economic growth exclusively based on domestic demand would unavoidably have an adverse effect on the current account deficit (CAD). The last figures show that the CAD-to-gross domestic product (GDP) ratio, which fell to 6 percent from 10 percent started widening slightly again. So, the desired revival in domestic demand must be kept under control while the supplementary growth must come from net exports. Doing so, exports have to rise more than imports. Now, it is not easy at all to achieve these double goals. Keeping domestic demand under control necessitates a rather tight monetary policy and the pursuit of fiscal discipline. The last cuts in the central bank's interest rates pushed the expected real interest rate in the negative zone; the indicative Treasury Bond rate went down to 5.5 percent while expected inflation remained over 6 percent. I do not think that there is further room for interest cuts. If this happens, credit expansion would be out of control, jeopardizing the credibility of the central bank in its fight against inflation. As for fiscal discipline, it is as solid as a rock according to the latest budget figures; the primary surplus is higher than that of last year in the first quarter. However, the actual macroeconomic framework does not seem to be able to produce growth close to 4 percent, which is targeted in the Medium-term Economic Program (OVP) and constitutes the minimal rate required to prevent unemployment to increase. Let me note that the unemployment rate, at 9.4 percent, is actually 0.4 percentage points over its level of last year. If the growth rate remains weak, admittedly the increase in unemployment will become more apparent and then more threatening for the government as electoral days are approaching. It would be worth noting at this point that the International Monetary Fund (IMF) forecasts only a 3.4 percent growth for the Turkish economy in its latest survey released this week. Balanced and at the same time sufficient economic growth seems quite elusive. The central bank would certainly prefer relatively low growth but sufficiently safe to secure economic and financial stability, while the government prefers robust growth enough to prevent an increase in unemployment. I do not think that the government cares about the source of the growth. This dilemma is capable of creating a serious rift between the central bank and some Justice and Development Party (AK Party) ministers in the coming months. By the way, the split is already quite visible. Mr. Zafer Çağlayan, minister of economy, reacted to the interest rate cuts by saying, “Good, but not enough.”

Para politikasının sınırları

Bu hafta başında ekonomide iki önemli gelişme yaşandı. Pazartesi günü TÜİK Ocak dönemi işgücü piyasası istatistiklerini açıkladı. Dün de Para Politikası Kurulu hem politika faizinde hem de faiz koridorunun alt ve üst limitlerinde şok indirime gitti. Bu iki gelişme doğrudan bağlantılı olmasa da ekonomik gidişata dair bir durum saptaması yapmaya izin veriyor.

            Düşen büyümeye rağmen işsizlik cephesinde gidişat korkulduğu kadar vahim değil. Mevsim etkilerinden arandırılmış işsizlik oranları ılımlı bir yükselişin ardından bir kaç dönemdir yatay seyrediyor; Toplam işsizlik oranı yüzde 9,4, tarım dışı işsizlik oranı da yüzde 11,8 düzeyinde. Bu oranlar 2012 Ocak döneminde sırasıyla yüzde 9 ve yüzde 11,2 düzeyindeydi.  2,5 milyonun altına gerileyen işsiz sayısı da 3 milyona yaklaştı.

İşsizlik bıçak sırtında

            Herhangi bir iktisatçıya sadece işsizlik ile büyüme oranlarının gelişimi ile bilgi verseniz ve “ne düşünüyorsunuz” diye sorsanız, size vereceği yanıt, “bu çok normal bir gelişme, işsizlik düşük büyümenin sınırladığı istihdam nedeniyle artmıştır” olacaktır. Oysa tam böyle değil. Bu köşede son aylarda sık sık vurguladığım gibi düşük büyümeye rağmen istihdam artışları yüksek seyretti ama aynı zamanda işgücü artışı da yüksek oldu. İstihdam artışları çok büyük ölçüde hizmet sektöründe gerçekleşti. Ne ki, son rakamlar hizmet sektöründe istihdam artışının durduğunu gösteriyor. Bu kez artış uzun süredir durgun olan sanayi istihdamında meydana geldi. Kesin yargıda bulunabilmek için bir iki dönem daha beklemek gerekiyor ama son manzara bana iki şey düşündürüyor: Bir, hizmetlerdeki olağandışı yüksek istihdam artışının sonuna gelinmiş olabilir. İki, sanayi üretimi artsa da, gelecekte bu sektörde yüksek istihdam artışları beklememek gerekir. Bu da rekabet gücü açısından iyidir.

            Şimdilik göründüğü kadarıyla büyüme oranı henüz yüzde 3’e ulaşabilmiş değil. Bir miktar daha güçlenmesi bekleniyor. Bununla birlikte düşük büyüme-yüksek istihdam mucizesinin önümüzdeki dönemde tekrarlanacağını sanmıyorum. İşsizlikte artışın daha belirgin hale gelmesini bekliyorum.

Negatif faize merhaba

Merkez bankasının şok faiz indirimi negatif faizi gündeme getiriyor. Gösterge faiz yüzde 5,5’a geriledi. Para Politikası Kurulu açıklamasında, faiz indirimini iç talebi canlandırmak için değil, hızlanan sıcak para girişlerine set çekmek için yaptığını ima ediyor. Reel kur düzeyi alarm veriyor. TCMB Türk Lirasının bir miktar değer kaybetmesini istiyor. Kredi genişlemesi ise açıklamada belirtildiği gibi çizilen sınırın üstünde seyrediyor. Bu koşullarda yıl sonu enflasyonun yüzde 6’nın altına inmesi zor. Beklenen reel faiz negatif alana geçmiş durumda. Kredi faizleri daha da gevşerse kredi artışı daha da güçlenebilir ve artan talep fiyatlar üzerinde baskı oluşturabilir.

 Mevcut makro ekonomik görünüm para politikasının sınırlarına gelindiği izlenimini veriyor. Kredi gerilmesini dizginlemek için sıcak para girişlerinin dizginlenmesi yetmeyebilir. Merkez Bankası’nın elindeki aletlerle bir yandan reel kuru bir miktar aşağıya çekmesi, diğer yandan da kredi genişlemesini ve enflasyon artışını frenlemesi zor. Haziran 2011’de olduğu gibi BDDK’nın devreye girerek kredi artışını doğrudan frenlemesi gerekiyor. Gelecek günlerde bu yönde bir hamle sürpriz olmaz.

Türkiye ekonomisi dar bir alana sıkışmış durumda. Büyüme dengeli olmak zorunda. Ama aynı zamanda dengeli büyüme büyüye oranının işsizlik artışını kontrol altına alacak düzeylere çıkmasını engelliyor. Bana göre bu ikilem mevcut gidişatın özüdür.

The gas of the east Mediterranean

You are certainly aware that Nobel Energy from Texas recently discovered important natural gas reserves in the territorial waters of first Israel and later Greek Cyprus. The Israeli gas has already started flowing into the Jewish state, and the Greek gas is expected to be ready within a few years. While these discoveries were being made, a breakdown occurred between Turkey and Israel over the May 2010 Mavi Marmara incident in which eight Turks and one Turkish-American were killed in an Israeli raid.
Israeli and Cyprus natural gas reserves The worsening of relations between the two countries, considered to be strategic allies in the past, pushed the Jewish state to sign economic cooperation and defense agreements with Greek Cyprus. Moreover, the Greek Cypriot economy recently collapsed due to the failure of its hypertrophied banking system, the main source of income for the island. Last but not least, Israeli Prime Minister Benjamin Netanyahu offered an apology to the Turkish people aiming to restore relations between the two countries. These dizzying developments have produced a new geostrategic game in the Middle East. The economic features, as well as the political ones, of this game are mutually interfering, pulling the main players like Turkey, Israel, Greek Cyprus and the EU, and not to forget Nobel Energy, into a new order. The fate of this new order will depend on many factors, such as developments in the Israeli-Palestinian and Cyprus conflicts, the nature of the new regime in Syria and the course of the economic problems the main players are facing. The Greek Cypriot gas reserves, of which Nobel Energy has a 36 percent share, hold trillions of cubic meters, surpassing local needs for 100 years. The Texan firm, quite naturally, would like to produce the maximum amount and as soon as possible. This goal is obviously shared by Greek Cyprus. In a recent article published by the Robert Schuman Foundation, French economist Sebastien Richard asserted that the Greek Cypriot economy can no longer count on revenue from the finance sector and that it can only get out of the debt trap by exporting gas to Europe. He adds that an independent study made in 2009 shows that the unification of the island would contribute to economic growth of 3 percent for five years. When it comes to Israel, it is not as simple as it is in the case of Greek Cyprus and Nobel Energy.  Tülin Daloğlu from Al-Monitor expressed in a recent article the Netanyahu government's point of view about the gas issue. I quote, “They highlight two points: Israel has not yet decided whether it will export any of the gas, and if so, how much, and Israel takes the issue of safety seriously, noting that any pipeline between Turkey and Israel must cross through the territorial waters of Lebanon and Syria.” I will come back to the safety issue, but let's first explain the hesitations of Israel regarding gas exports. I don't know if readers have heard of the “Dutch disease.” When natural gas reserves were discovered in Holland in the 1960s, a strong appreciation of the Dutch guilder followed, eroding the competitiveness of Dutch industry, the pillar of this export-led-growth country. Since then, this adverse effect was termed the “Dutch disease” in economic literature. The case of Israel, an export-led-growth country, is quite similar to the Dutch case in the 1960s. Let me add that the Israeli shekel has already appreciated against hard currencies in recent years, so Israel is not in a hurry. However, the EU is in a hurry. It has quadruple interests in this gas game: First, the Cypriot gas can save the island's economy and repay the billons of euros lent by the EU. Second, it can alleviate Europe's energy dependence on Russia. Third, it can be used as leverage to push Greek Cypriot President Nicos Anastasiades into a constructive attitude during negotiations with the Turkish Republic of Northern Cyprus (KKTC). And finally, a serious peace process, if it happens, will remove the main thorn in the membership negotiations between Turkey and the EU. Another important issue is, of course, how the gas will be transported to European markets. There are two alternatives: either by a pipeline through Turkey or by tankers after liquefying the gas. The CEO of Nobel Energy, Charles Davidson, said in an interview with Today's Zaman that they have “already started to work on possibilities to launch an energy project between Turkey and Israel.” However, Davidson added that “the company prefers to first liquefy the natural gas in plants on the island.” The liquefaction requires an investment worth $10 billion. Private investors will think twice before making such an investment because it is not yet confirmed if the liquefied gas will be as competitive as Russian and Caspian gas. The cheapest way is, for sure, a pipeline. Nevertheless, the security issue comes into the picture at this point. The precondition of a pipeline from Israel to Turkey necessitates at least the implementation of a sustainable peace process between Israel and Palestine and also the involvement of Syria and Lebanon. Yossi Beilin, a former Israeli minister and one of the negotiators of the Oslo Agreement, told Today's Zaman that “Netanyahu is not ready to pay the price for peace.”

A modest revival in sight

Recent Industrial Production Index (IPI) publications, as well as the February current account balance allow us to see a bit more clearly now in the debate about an economic revival.  The growth in the Turkish economy has greatly decelerated in the last quarter of 2012 due to weak internal demand and sluggish exports. The monetary loosening introduced by the Central Bank (CBRT) in the autumn did not produce the expected signs of revival until February. However, these signs became more apparent with the February figures, keeping the 4 percent growth forecast in the medium-term economic program (OVP) still in range.
Central Bank Governor Başçı and Ministers Babacan and Şimşek  The seasonally adjusted IPI increased by 1.5 percent compared to January. This is rather a robust increase, signaling that the long-awaited revival is underway. Nevertheless, we should note that demand for consumer durables is still weak. The increase is due to a stronger demand for non-consumer durables and investment goods. But this modest revival had its expected impact on the current account balance without delay. The foreign trade deficit rose by $1 billion, reaching $6.9 billion and the current account deficit increased, for the first time since October, to $48.4 billion in February. Given these developments, Bahçeşehir University Center for Economic and Social Research (BETAM) revised its quarter to quarter gross domestic product (GDP) forecast for the first three months from 0.5 percent to 0.7 percent, computing the yearly growth at 2.4 percent. The İstanbul Stock Exchange (İMKB) leapt by an astonishing 2 percent within a day on the heels of the recent positive approach of Moody's to Turkey's grading based on advances in the so-called “peace process” and following the upgrade of Standard & Poor's two weeks ago. I expect a better growth performance in March compared to February. So, the yearly growth rate could approach 3 percent if this expectation is realized. However, I would like to underline that even in that case, we will be still far from the 4 percent growth rate that is admittedly the minimal level acceptable to the Justice and Development Party (AK Party) government, for obvious political reasons. The first electoral challenge is approaching, since the local elections will be held in March 2014. Moreover, as noted above, a revival only based on domestic demand will automatically raise the current account deficit. BETAM forecasts a ratio of 6 percent deficit to GDP for the first quarter, but this ratio would certainly increase with domestic-led growth. In the absence of radical structural reforms, the only remaining way to have more balanced growth would be the depreciation of the Turkish lira. Let me recall that the real exchange rate has already entered the danger zone as defined by the Central Bank (CBRT). The Bank will certainly try to prevent further appreciation of Turkish lira in the near future by lowering its interest corridor and even its policy rate, but at the same time it has to curb the credit expansion which has also entered the danger zone, according to the CBRT's criteria. As I mentioned in my article last Saturday, the CBRT is facing unpleasant trade offs. A further loosening of the monetary policy aiming to smoothly depreciate the real exchange rate could put the inflation target in difficulty and then the credibility of the CBRT would be at risk. Otherwise, a relatively high and at the same time balanced growth would be difficult to achieve, if not impossible. So, the Turkish economy seems to be squeezed between a low but safe growth and a decent growth, socially and politically acceptable, but threatening macroeconomic stability. This dilemma shows once again the limits of monetary policy to try to achieve multiple goals. I supported the new policies of the CBRT from the beginning and I believe that they have done a good job thus far in the implementation of the so-called “rebalancing process.” The current account deficit has been reduced to a controllable level, however economic growth could have been higher last year. But now the CBRT has difficulty launching policies on its own. The danger is that the AK Party government may make the wrong choice trying to help CBRT. It could be more inclined to loosen fiscal policy instead of pushing the structural reforms that have been put on hold for a while.

Çalışan çocuklar

Köşe yazarlığının “günceli izle” şeklindeki temel düsturunu bugün dikkate almıyorum. Son sanayi üretim rakamları ve bu rakamların beklenen canlanma açısından anlamları tartışmasına girmeyeceğim. Yine de bir cümleyle kanaatimi belirteyim: İç talep canlanıyor. Bu sıcak konu yerine basınımızın es geçtiği bir konuya, ‘çalışan çocuklar’ konusunu ele almak istiyorum.

TÜİK geçin hafta 2012 Çocuk İşgücü İstatistiklerini yayınladı. Bu öyle her ay, hatta her yıl yayınlanan bir istatistik değil. En son 2006 yılında yayınlanmıştı. Çalışan çocuklar sorunu tüm Dünyada yakından izlenen, ekonomik olduğu kadar da toplumsal bir sorun. Normalde çocuk çalıştırmak yasak. Bu nedenle 6-14 yaş grubunda ekonomik faaliyetlere dahil olan çocuklar (ev işlerinde çalışanlar ayrıca değerlendiriliyor) özel hane halkı anketleri aracılığı ile belirli aralıklarla izleniyor.

Kırda artış, kentte düşüş

Türkiye’de durum nedir? İlk bakışta pek parlak görünmüyor. Son altı yılda çalışan çocuk sayısı yaklaşık 300 bin civarında sabit kalmış. Hızlı ekonomik gelişmeyle övündüğümüz bir dönemde çalışan çocuk sayısında belirgin bir azalmanın olmaması şaşırtıcı. Oysa “şeytan ayrıntılardadır” özdeyişini doğrularcasına rakamların ayrıntısına inildikçe daha farklı bir manzara ile karşılaşıyoruz. Toplamda çalışan çocuk sayısı değişmese de bileşiminde önemli değişikliler söz konusu. 2006’da 152 bin olan tarlada çalışan çocuk sayısı 2012’de 200 bine yükselmiş. Buna karşılık sanayi ve hizmetlerde çalışan çocuk sayısı da 113 binden 92 bine gerilemiş. Dolayısıyla günümüzde çalışan çocukların üçte ikisisin tarlada çalışanlar oluşturuyor. Bunların hemen hemen tümü “ücretsiz aile işçisi” statüsünde. Bunlar tarla işlerinde yetişkin aile fertlerine yardım eden çocuklar.

Tarımda çalışan çocuk sayısının artması sürpriz sayılmaz. 2008’den 2011’e tarım istihdamının 1 milyon 200 bin kadar arttığını, 2012 yılında da artışın durduğunu biliyoruz. Bu şaşırtıcı gelişmenin nedenleri henüz tam olarak açıklığa kavuşturulmuş değil. Merkalısı kısmi bir açıklama için geçen Nisan’da Betam’ın yayınladığı çalışma tebliğine bakabilir ( Why is Agricultural Employment Increasing in Turkey?”). Çok büyük ölçüde aile işletmelerinin çerçevesinde gerçekleşen bu istihdam artışına paralel olarak tarlada çalışan çocuk sayısının artmış olması normal. Bu vesileyle kentlerde çalışan çocuk oranının yüzde 1,6’dan yüzde 1’e düştüğünü, kırsal kesimde ise yüzde 4,4’den yüzde 5,6’ya yükseldiğini belirteyim.

Hem çalışırım hem okurum

Çalışan çocuklardan söz açılınca akla ilk olarak “peki okul ne oluyor?” sorusu geliyor. Rakamlar ekonomik faaliyette bulunmanın okula devamı engellemediğini gösteriyor.  2006’da yaklaşık 11 milyon 400 bin olan 6-14 yaş arası toplam çocuk sayısı 2012’de hemen hemen aynı. Okullaşma oranı ise yüzde 92’den 97’ye çıkmış. Bu oran kentlerde yüzde 94’den 98’e, kırsal kesimde ise yüzde 89’dan 96’ya çıkıyor. Sonuç olarak okullaşma kırda kente kıyasla daha hızlı artarak kente yaklaşmış. Nitekim, 2006’da kırda okula devam etmeyen çocuk sayısı 60 binden 37 bine düşmüş.

Kuşkusuz, az da olsa ( 92 bin) sanayide ve hizmetlerde çalışan çocukların varlığı önemsenmesi gereken toplumsal bir sorun. Gelecek yıllarda bu sayının sıfırlanması için özgün politikalara ihtiyaç var. Ancak çalışan çocuk olgusunun memleketimizde büyük ölçüde tarımsal bir sorun olduğu da kabul edilmeli. Tarımda aile işletmeleri var olduğu sürece tarlada çalışan çocuklar görmeye devam edeceğiz.  

Çalışan çocuklar

Köşe yazarlığının “günceli izle” şeklindeki temel düsturunu bugün dikkate almıyorum. Son sanayi üretim rakamları ve bu rakamların beklenen canlanma açısından anlamları tartışmasına girmeyeceğim. Yine de bir cümleyle kanaatimi belirteyim: İç talep canlanıyor. Bu sıcak konu yerine basınımızın es geçtiği bir konuya, ‘çalışan çocuklar’ konusunu ele almak istiyorum.

TÜİK geçin hafta 2012 Çocuk İşgücü İstatistiklerini yayınladı. Bu öyle her ay, hatta her yıl yayınlanan bir istatistik değil. En son 2006 yılında yayınlanmıştı. Çalışan çocuklar sorunu tüm Dünyada yakından izlenen, ekonomik olduğu kadar da toplumsal bir sorun. Normalde çocuk çalıştırmak yasak. Bu nedenle 6-14 yaş grubunda ekonomik faaliyetlere dahil olan çocuklar (ev işlerinde çalışanlar ayrıca değerlendiriliyor) özel hane halkı anketleri aracılığı ile belirli aralıklarla izleniyor.

Kırda artış, kentte düşüş

Türkiye’de durum nedir? İlk bakışta pek parlak görünmüyor. Son altı yılda çalışan çocuk sayısı yaklaşık 300 bin civarında sabit kalmış. Hızlı ekonomik gelişmeyle övündüğümüz bir dönemde çalışan çocuk sayısında belirgin bir azalmanın olmaması şaşırtıcı. Oysa “şeytan ayrıntılardadır” özdeyişini doğrularcasına rakamların ayrıntısına inildikçe daha farklı bir manzara ile karşılaşıyoruz. Toplamda çalışan çocuk sayısı değişmese de bileşiminde önemli değişikliler söz konusu. 2006’da 152 bin olan tarlada çalışan çocuk sayısı 2012’de 200 bine yükselmiş. Buna karşılık sanayi ve hizmetlerde çalışan çocuk sayısı da 113 binden 92 bine gerilemiş. Dolayısıyla günümüzde çalışan çocukların üçte ikisisin tarlada çalışanlar oluşturuyor. Bunların hemen hemen tümü “ücretsiz aile işçisi” statüsünde. Bunlar tarla işlerinde yetişkin aile fertlerine yardım eden çocuklar.

Tarımda çalışan çocuk sayısının artması sürpriz sayılmaz. 2008’den 2011’e tarım istihdamının 1 milyon 200 bin kadar arttığını, 2012 yılında da artışın durduğunu biliyoruz. Bu şaşırtıcı gelişmenin nedenleri henüz tam olarak açıklığa kavuşturulmuş değil. Merkalısı kısmi bir açıklama için geçen Nisan’da Betam’ın yayınladığı çalışma tebliğine bakabilir ( Why is Agricultural Employment Increasing in Turkey?”). Çok büyük ölçüde aile işletmelerinin çerçevesinde gerçekleşen bu istihdam artışına paralel olarak tarlada çalışan çocuk sayısının artmış olması normal. Bu vesileyle kentlerde çalışan çocuk oranının yüzde 1,6’dan yüzde 1’e düştüğünü, kırsal kesimde ise yüzde 4,4’den yüzde 5,6’ya yükseldiğini belirteyim.

Hem çalışırım hem okurum

Çalışan çocuklardan söz açılınca akla ilk olarak “peki okul ne oluyor?” sorusu geliyor. Rakamlar ekonomik faaliyette bulunmanın okula devamı engellemediğini gösteriyor.  2006’da yaklaşık 11 milyon 400 bin olan 6-14 yaş arası toplam çocuk sayısı 2012’de hemen hemen aynı. Okullaşma oranı ise yüzde 92’den 97’ye çıkmış. Bu oran kentlerde yüzde 94’den 98’e, kırsal kesimde ise yüzde 89’dan 96’ya çıkıyor. Sonuç olarak okullaşma kırda kente kıyasla daha hızlı artarak kente yaklaşmış. Nitekim, 2006’da kırda okula devam etmeyen çocuk sayısı 60 binden 37 bine düşmüş.

Kuşkusuz, az da olsa ( 92 bin) sanayide ve hizmetlerde çalışan çocukların varlığı önemsenmesi gereken toplumsal bir sorun. Gelecek yıllarda bu sayının sıfırlanması için özgün politikalara ihtiyaç var. Ancak çalışan çocuk olgusunun memleketimizde büyük ölçüde tarımsal bir sorun olduğu da kabul edilmeli. Tarımda aile işletmeleri var olduğu sürece tarlada çalışan çocuklar görmeye devam edeceğiz.  

Working children

Last week the Turkish Statistics Institute (TurkStat) published important statistics on the state of working children in Turkey. “Child Labor Force Surveys” are not part of the routine publications of TurkStat, and before the 2012 survey the last to be done was in 2006. It is shameful that the subject of working children did not attract the attention it deserves in the Turkish media. There are still about 300,000 children ages 6 to 14 who are performing economic activities in Turkey (children participating in household chores are excluded), and the 2012 survey reveals that there has been no decline in this number when compared with 2006. The percentage of working children in Turkey's corresponding child population was almost 6 percent in 2006, and it still remains at the same level in the 2012 survey. Let me note that boys constitute the majority with 185,000 workers; the number of girls working is about 108,000. The question we should ask, quite naturally, is why the ever-so-praised economic growth of recent years did not have any positive effect on the number of working children. As the saying goes, the devil is in the details. When we look at the details of the survey, a more nuanced picture appears. Majority of these working children (68 percent) work in Agriculture and 76 percent has the status of “unpaid family workers”. Considering the dominance of the family mode of production in Turkish agriculture, these high percentages are not surprising. Nevertheless, what does stick out is the increase of working children in agriculture. In 2006 there were 152,000 children in the fields. This number rose to 200,000 in 2012, while the number of children working in industry and services declined from 113,000 to 92,000. In fact, the increase observed in agriculture is not a surprise since the agricultural employment of adults (ages 15+) has increased remarkably during the 2008-2011 period, almost by 800,000. The real surprise in this increase still constitutes a semi-puzzle. I am saying “semi-puzzle” because we hopefully have partly explained the unexpected increase in child agricultural workers through the impact of rising agricultural prices during the considered period (see the Center For Economic and Social Research's [BETAM] working paper “Why is Agricultural Employment Increasing in Turkey?” April 2012). However, further investigation is necessary in order to uncover the unexplained part. The evolution of the number of working children went in opposite directions regarding the urban-rural dichotomy. The number of working children in urban areas decreased from 120,000 to 79,000, and the percentage of them went from 1.6 percent to 1 percent. But in rural areas, the number of working children reached 214,000 and the percentage of them rose from 4.4 percent to 5.6 percent. So we can easily assert that the working children phenomenon in Turkey is largely an agricultural-rural one. This does not mean, of course, that the problem should be taken lightly, but we should admit that as long as family production is alive in Turkish agriculture there will always be children in the fields. The picture is more nuanced, as I predicted, but what about the schooling of these working children? From 2006 to 2012 the child population of Turkey (ages 6-14) remained almost fixed at a little less than 11.5 million, while the percentage of children going to school increased from 92 to 97 percent. The percentage for urban and rural areas, respectively, increased in the same period from 94 to 98 percent and from 89 to 96 percent. So, it should be underlined that school attendance has increased in rural areas more rapidly than in urban areas. The number of working children not going to school in rural areas declined from 60,000 to 37,000. Obviously, the increase in the number of working children in rural areas did not prevent them from pursuing their education. Conciliating work and school could have an adverse effect on the academic performance of these working children, but the evidence for this possibility is lacking at the moment. To sum up, the fact that the number of working children did not decline during high growth years (including the crisis period) does not indicate impoverishment; families do not send children to work because they have been empowered. On the contrary, most of these children are from families in the agriculture business -- an increasingly attractive sector -- and they simply help their parents. The increase of the number of working children is limited to rural areas, particularly to agriculture. It appears that the increasing attraction of agriculture from 2008 to 2011 has dragged some number of children to the fields along with their parents.

Central bank facing trade-offs

Turkish Central Bank Governor Erdem Başçı did not delay reacting to low economic growth, which was recently estimated at 2.2 percent for 2012 by the Turkish Statistics Institute (TurkStat). “The central bank will continue to use all the tools in its arsenal to continue a policy of balanced growth,” Başçı told reporters after a bank meeting in Ankara on Wednesday.
Governor Erdem Başçı Başçı spoke of the need to reduce core inflation of around 5 percent by the end of the year, warning that rising inflation and a growing trade deficit could throw the economy into recession. The same day, Governor Başçı, addressing a conference organized by the Mardin Chamber of Industry and Commerce, said that a “U-turn is already apparent in the first quarter revealed by increasing imports which signals a revival in domestic demand.” He added that one should expect a slightly higher current account deficit (CAD) ratio this year over last year and gave a definition of “balanced growth” explaining that “balanced growth means a growth taking into consideration internal balance, i.e., price stability, as well as external balance, i.e., the balance of payments.” Governors of central banks are well known for their hermetic-style declarations. The above statements from Mr. Başçı could be, admittedly, evaluated in this context, but I think they reveal also some confusion in the mindset of the central bank, which is facing unpleasant tradeoffs. Let's consider at least two of them: The first trade off, a classical one, is between inflation and an increase in domestic demand. The second one is between an acceptable growth for the society and a sustainable CAD, important for the investors. Let's start with the inflation versus domestic demand issue. The yearly inflation has been estimated at 7.3 percent in February. It is quite above the central bank's target of 5 percent. This gap is the main constraint on monetary policy. The central bank will not be blamed if the year-end inflation is not getting close to 5 percent but it certainly risks loss of credibility if it is not able to curb inflation close to 6 percent since it displayed a rather bad performance on the inflation front last year. Its maneuvering space is not very comfortable. Despite low capacity utilization rates in the manufacturing sector, which authorize an increase in domestic demand, this increase should anyhow be a moderate one. The central bank is aware of this constraint since it insists on the 15 percent threshold it put on the yearly growth of banking credit volume. However, it should be noted that credit expansion has already reached 20 percent and it would be very difficult for the central bank to tighten monetary policy in the actual context of low growth. I think the main question is: Were the restrictions on bank loan expansion enough to attain the planned 4 percent growth that is based on the domestic demand? Let me remind you that the last figures show more rapidly increasing imports than exports. There is now a large consensus among economists, including Mr. Başçı, that one should not expect a positive contribution to the growth from net exports as was the case last year. Before the unexpectedly low growth is confirmed, Mr. Başçı was defending a different growth regime in which external demand and domestic demand have to contribute together. This first definition of “balanced growth” seems to have been abandoned now. The acceptance of an increasing CAD by Mr. Başçı means that despite a growth of 4 percent fully based on domestic demand its financing will not be a problem. I am not so sure. This will depend first on the strength of the increase and second on the investors' appetite to finance it. The CAD share in gross domestic product (GDP) was 6 percent in 2012, while the growth was almost fully led by net exports. This year a higher growth fully led by domestic demand can carry this ratio over 7 percent. One can admit that this will not be a drama this year, but what about next year, if the CAD continues to increase? Macroeconomic fundamentals should be kept in check if one wants to keep the investors' appetite alive for Turkish assets. Investor confidence will be key for this. Fiscal discipline constitutes the gist of this confidence. So, fiscal loosening cannot be envisaged for the domestic demand revival policy. Moreover, the central bank has almost hit the limits in the monetary loosening. “The year of balanced growth” seems instead to be the year of difficult tradeoffs. P.S. I learned after this article was sent to the editor that Prime Minister Recep Tayyip Erdoğan has declared that a 6 percent interest rate is still high and must be lowered. Political pressure on the central bank is increasing.

İniş sert oldu

Geçen yıl bugünlerde iç talebe dayanan ve cari açığı sürdürülemez düzeye taşıyan yüksek büyümeden daha dengeli bir büyümeye geçişi tartışıyorduk. İniş şarttı. İktisatçıların çoğunluğu, ki bunlara ben de dahildim, yumuşak inişin mümkün olduğunu savunduk. İyi hatırlıyorum, IMF’in yüzde 2.2 olarak belirlediği ilk büyüme tahmini yayınlandığında burun kıvırmıştık. Bahar aylarından itibaren iyimser kampı terk ettim. Bu köşede “tatlı sert” inişten söz etmeye başladım. Sonbaharda ise pek çok tahminci gibi ben de büyümenin yüzde 3’ün altına düştüğünü savunmaya başladım. Sonuçta 2012 büyümesi beklenenden de düşük geldi. İniş sert oldu.

2012 için Orta Vadeli Program yüzde 4 büyüme öngörmüştü. Yine hatırlıyorum Hükümet ve iş çevrelerinden “bu büyüme bizi kesmez” diyenler olmuştu. Bununla birlikte çoğunluk nispeten düşük de olsa, dış talep ile iç talebin birlikte dengeli bir şekilde destekleyeceği bir büyümenin en iyi strateji olduğu konusunda hem fikirdi. Ama olmadı. İç talep geriledi. Özel tüketim yüzde 0,7, özel yatırımlar da yüzde 4,5 oranında azaldı. Kamu harcamalarındaki  artışa rağmen iç talep düştü. Büyümeyi çok büyük ölçüde ihracatın ithalattan hızlı artması sonucunda net ihracat kalemi sırtladı. Yüzde 2,2 ile büyüme beklenenin oldukça altında kaldı. Tek teselli cari açık oranının yüzde 10’dan yüzde 6’ya gerilemesi oldu.

Artık kalkışa bakalım

İniş tamamlandığına göre artık kalkışa bakalım. Oyun planı değişmiş değil. Hükümet ve zımnen Merkez Bankası bu yıl da yüzde 4 büyüme öngörüyor ve bu büyümenin dengeli olmasını arzuluyor. Merkez bankası Başkanı Erden Başçı, iç talebi canlandırmak istediklerini ama dış talep ne kadar katkı yaparsa o kadar iç talep artışına izin vereceklerini ifade etmişti. Geçen yıl beceremedik ama bu yıl daha umutlu olabilir miyiz? Doğrusu karamsarım. Büyüme yüzde 4 olabilir, ama dengeli olacağından şüpheliyim.

Merkez Bankası’nın Eylül’den itibaren para politikasını tedricen gevşetmesi ile kredi faizlerinin düşmesi sonucu, gecikmeli de olsa, iç talebi bir miktar canlandırması bekleniyor. 2012 son üç ayında beklenen canlanma olmadı. Bununla birlikte bu yılın öncü göstergeleri ılımlı bir canlanmaya işaret ediyor. Tüketim, özellikle de yatırımlar ne kadar artar? Bir öngörüde bulunmak için henüz erken. Esas endişelenmemiz gereken konu net ihracatın büyümeye geçen yıl olduğu gibi pozitif katkı yapmaya devam edip etmeyeceği?

İlk iki ayın dış ticaret rakamları  bu konuda ümit vermiyor. Kabaca da olsa fikir edinebilmek için basit bir hesap yaptım. TÜİK’in mevsim ve takvim etkisinden arındırılmış 2013 Ocak-Şubat ihracat ve ithalat rakamlarını 2012 Kasım-Aralık rakamları ile karşılatırdım. İhracat yüzde 2,7, buna karşılık ithalat yüzde 10,5 artmış. Bu iyi haber değil. İç talep canlandıkça iyi bildiğimiz iç talebe dayalı büyüme patikasına geri dönüyoruz gibi duruyor. Dengeli büyüme için ihracatta hızlı ve kalıcı artışların gerçekleşmesi gerekiyor.

Bunun için kısa vadede iki yol var: Dış talepte güçlü artış ile Türk Lirası’nın reel kura rekabet gücü kazandıracak kadar değer kaybetmesi. Dış talepte güçlü artış zor görünüyor. Eski ağırlığını kaybetse de Avrupa en büyük pazarımız olmaya devam ediyor. Ama ne yazık ki Avrupa’nın bu yılda durgunluktan çıkmayacağı görülüyor. ABD daha umut verici. Ama bize etkisi dolaylı, dolayısıyla da sınırlı. Orta Doğu ve Kuzey Afrika’ya ihracat artışları devam ediyor. Ortalık karışmazsa ihracat artışına esas destek bu bölgeden gelecek. Ancak yeniden canlanan ithalatı telafi etmeye yeter mi? Çok şüpheliyim.

Hard landing is confirmed

The Turkish Statistics Institute (TurkStat) published 2012 fourth quarter and annual growth statistics yesterday. There is a surprise here. TurkStat estimated a yearly growth rate at 2.2 percent. This is lower than the earlier forecasts that varied around 2.5 percent. One year ago, economists were intensely discussing whether the Turkish economy would experience a soft or hard landing. Everybody agreed that a landing of some kind was imminent since the domestic demand-led growth had reached its limit along with a very high current account deficit (CAD)-to-gross domestic product (GDP) ratio at 10 percent. To avoid the risk of a sudden cessation of capital inflows and a strict exchange rate adjustment -- which necessarily would have followed the sudden stop -- the government and central bank had decided to cool domestic demand and push the exports in order to have a relatively lower but balanced economic growth. This new approach represented the soft landing scenario. A Medium-term Economic Program (OVP) for 2012 was projecting a 4 percent growth rate, into which net exports as well as a modest domestic demand would contribute more or less equally. During the first month of 2012, I thought like most of my colleagues, that a soft landing was possible. But when spring came, I had already joined the pessimistic camp, asserting that the growth would be lower than planned. In the summer, I wrote many times in this column that I expected a growth rate of lower than 3 percent. We now have a much lower one. We must admit that the landing has been hard rather than soft. What happened? Simply, domestic demand has declined more than planned. Indeed, private consumption decreased by 0.7 percent and investments by 4.5 percent. Despite the positive contribution of public expenditures, the domestic demand over all contribution stayed negative. The bad performance of the fourth quarter has to be particularly noted. TurkStat estimates the quarter-to-quarter growth rate at 0 percent. Consumption and investments pursued their decreasing path during the fourth quarter. This means that the loosening of monetary policy did not produce the expected impact on the revival of domestic demand. The hopes are now postponed to the first quarter of this year. The OVP still forecasts a balanced growth rate of 4 percent this year. The government and Central Bank expect the continuation of the positive contribution of net exports but also, contrary to last year's disappointment, a positive domestic demand contribution as well. Will it be possible? I am afraid that this time we risk coming back to our standard growth regime; that is, a domestic-led growth instead of a balanced one. Advanced indicators of the first three months point out a timid revival in domestic demand. Given the delayed impact of the easing of the monetary policy and the expected positive impact of the new investment incentives implemented in June 2012, I am rather optimistic about domestic demand revival, but not about the positive contribution of net exports. During the first two months of this year, when foreign trade figures are seasonally adjusted, the cumulative increase of exports of goods during January and February shows a limited increase at 2.7 percent compared with the last two months of 2012, while imports show a high increase of 10.5 percent. These figures are not a good omen for the contribution of net exports to the GDP this year; if the gap between export and import increases persists, the contribution of net exports will be negative, for sure. The fact that the European market, still being the principal destination for Turkish exports, has stayed in a recession, does not give us too much hope for exports. They can continue growing in other markets, as they did last year, but it is not guaranteed that the total increase in exports can still surpass the increase of imports, as was the case in 2012. I think the targeted 4 percent growth is still attainable, but it will not be a balanced one, for sure. Reaching 4 percent growth will depend on the intensity of the revival in domestic demand. The main handicap would be the possible ineffectiveness of the monetary policy. Monetary policy seems to be reaching its limit and I do not believe that further easing is possible. Thus, only fiscal policy remains. Nevertheless, fiscal discipline continues to be the red line for the government, given the persistent declarations of Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Şimşek about the virtues of low budget deficits. But in politics, flexibility can overcome principles when elections are at stake.