Interesting questions on Turkish economy

Thursday evening Bahçeşehir University's Center for Economic and Social Research (Betam) celebrated its fifth anniversary with a dinner to which business journalists and colleagues from various universities were invited. At this occasion Betam launched its recently published book, “Growth and structural problems in the Turkish economy,” in which a selection of Betam's research over the past years has been gathered. During the dinner, as director of Betam, I presented an overview of the main economic problems in the Turkish economy. A live debate followed the presentation.
2023 vision of Ak Party can hardly be achieved Nowadays the hottest subjects debated in the business media are mega projects like the second nuclear plant, İstanbul's new airport and the big canal to be built from the Black Sea to Marmara Sea aiming to bypass the natural seaway through the Bosporus. These mega projects based on the Build-Operate-Transfer (BOT) model do not impress me much and I do not believe that they will help to solve the growth and structural problems of the Turkish economy. During Betam's dinner the questions were not about these admittedly massive projects, but hopes for the future of the Turkish economy. Aram Ekin Duran from Sky News started the question portion of the evening, asking if the famous 5+5+5 formula, suggested by Erdem Başçı, governor of the Turkish Central Bank, is achievable in the future. Let me refresh readers' memories about this: The formula means that a 5 percent gross domestic product (GDP) growth should be achieved with a 5 percent current account deficit ratio to GDP and with a 5 percent inflation rate, which is, indeed, the official inflation target. It was a good idea to highlight this simple formula, which finely defines the ideal mix for the Turkish economy in the next decade, giving the growth capacity of the Turkish economy and its structural particularities regarding price stickiness and its low saving levels coupled with the weak competitiveness of its manufacturing sector. Before giving my answer to the question let's recall the current figures about these three basic parameters. The yearly growth rate seems around 3 percent for the first quarter. A limited increase from this level could be expected but the GDP growth will be hardly over 4 percent for the whole year. If growth reaches 4 percent this would be at the expense of the current account balance, it will be, for sure, above its current level of 6 percent. As for the inflation, there is a large consensus among forecasters, except for the Central Bank, that it will remain above 6 percent. That being said, can we hope to have the ideal mix in the future? I do not think so because of the existence of contradictory interactions between these three goals. As long as economic growth is based on domestic demand, 5 percent growth could be realized but the current account deficit will in this case be on an increasing path. In the long run the Turkish economy can not sustain a current account deficit over 7 percent since foreign private debt is still accumulating dangerously. Turkish economy needs a balanced growth with more exports and less imports. This depends on a less valued Turkish lira in real terms as well from more rapid productivity gains in the manufacturing sector and from the lower consumption appetite among households. The depreciation of the Turkish lira will unavoidably have an adverse affect on inflation. Moreover, to keep a depreciated Turkish lira in the medium term requires an inflation rate close to the rate of our main trading partners which is around 3 percent currently. Then, the following question was quite naturally, “So, what to do?” The recipe is not very complicated but very difficult to implement. Radical reforms in the labor market, in the fiscal system, in various product markets and in all stages of education are needed in order to accelerate productivity increases, to cut production costs and to encourage savings, household and corporate. At the same time the state should spend more on research and development (R & D), more on education and more on infrastructure and less on social transfers. I said that I see no willingness for those reforms either in government or among society. The last but the most critical question was: “So, if these reforms are not implemented in the near future what will happen?” I answered simply that Turkey would be trapped in a low growth path in which the per capita income increase will be very low, making it difficult for the Justice and Development Party (AK Party) to achieve its vision.