New development plan seems too optimistic

The new five year development plan covering the period of 2014-2018 was published last week by the Ministry of Development without causing the debate it deserves. Obviously, the 10th Development Plan has been overshadowed by the heated debates on the Gezi Park protests as well as fluctuations in the exchange and interest rates caused by sudden capital outflows. Now, there is a new development plan that constitutes the road map for the Turkish economy. Its success or failure will be decisive for the achievement of the ambitious goals set by the Justice and Development Party (AK Party) for 2023.
Cevdet Yılmaz, Minister of Development Before going through a critical analysis of the internal consistency of the plan, in other words, before discussing if the means proposed are suitable with respect to the goals, let's summarize the main targets. From 2013 to 2018 the plan foresees a Gross Domestic Product (GDP) average growth of 5.5 percent. In real terms, that means Turkey will have a 30 percent higher GDP in 2018 and in dollar terms, 50 percent higher -- from the estimated $850 billion in 2013 to $1.3 billion in 2018. The difference between the two GDP targets, in real Turkish lira and in US dollars, implicitly assumes a quite important appreciation of the lira. Indeed, even considering a 2 percent USD inflation, the difference still implies an appreciation of 10 percent at the end of the period. Moreover, the current account deficit would be decreased, despite this appreciation, down to 5 percent, from its actual level of 6 percent. Thus, the planned growth is not only rather high but also balanced. Many times in this column I have talked about the fact that the potential growth of the Turkish economy is estimated by a large consensus of economists at 5 percent, given the existing structural constraints like low domestic savings and a high current account deficit, a lack of competitiveness and weak productivity gains and high inflation, when compared to those of our main trading partners. Also, since my first article in this column, I questioned if the Turkish economy is capable of realizing this potential growth, since no serious policies have been implemented in order to overcome these structural constraints. What does the new plan foresee regarding these constraints? The critical intermediary target is, of course, domestic savings. Indeed, the domestic savings ratio to GDP will rise from 14.4 percent in 2013 to 19 percent in 2018. More than 5 percentage points in five years! One percentage point is expected from public savings, thanks to fiscal discipline. A tax reform encouraging public savings and a campaign against waste are also mentioned. Let me just recall that the recent tax reform was far from satisfying in this respect. The remaining extra savings must come from private saving increases. How will this enormous effort be achieved? Hopes are pinned only on financial incentives for households. Encouragement of female participation in the labor force is mentioned as factor, but nothing comprehensive is foreseen in order to foster a radically higher number of working women. The “three children goal,” which is also incorporated into the plan, will certainly not help promote women's entry into the labor market. The savings strategy is far from convincing, all the more because real interest rates are actually in the negative zone and nothing is foreseen for corporate savings. Now, research on the determinants of corporate savings indicates that the main factor is profitability and this depends on wage moderation coupled with rapid productivity gains and with an undervalued Turkish lira. The recent depreciation of the lira shows clearly that an exchange rate of TL 1.83 to the dollar, assumed in the plan for 2013, is already null and void, since the new floor seems to be at 1.90, at least. Many economists continue to insist that the lira's value is misaligned and further depreciation is needed in the future. That said, what about the productivity gains? From the supply side, a 1.1 percentage point contribution from total factor productivity (TFP) growth is planned. The past experience of the Turkish economy shows that this rather high contribution of TFP occurred only during comprehensive reform periods. However, the new plan does not appear to be strongly reformist. For example, regarding labor market reforms, the important severance pay reform that was cancelled last year at the last moment by the prime minister is mentioned, but without any precision about its controversial basic principles. I believe, the new development plan targets are hardly achievable but they are perfectly in line with the 2023 targets. It could not be otherwise.