TÜSİAD on domestic savings

Turkish Industrialists and Businessmen's Association (TÜSİAD) President Muharrem Yılmaz said on Friday that the quality of economic growth will carry significant importance in the coming years, echoing recent comments by Deputy Prime Minister Ali Babacan.
Yılmaz added that Turkey's growth model needs to be reconsidered and that Turkey needs to take bold, determined steps in three areas: boosting domestic savings, successfully completing the settlement process with the Kurdistan Workers' Party (PKK) and making structural reforms. The settlement process is widely commented on every day by the columnists of Today's Zaman. Let me focus on domestic savings, which has multiple links with structural reforms.  TÜSİAD President Muharrem Yılmaz worried on savings and reforms The ratio of domestic savings to gross domestic product (GDP) has declined dramatically since 2000, from more than 20 percent in the 1990s to 12 percent in 2012. Low domestic savings is certainly the most important obstacle but not the only one to balanced, satisfactory economic growth. A sizable increase in domestic savings is a necessary condition for the growth regime to change, but it will not be sufficient alone. The Turkish economy must at the same time be able to export the surplus of goods that will not be consumed in the domestic market due to the increase in savings. If not, the economy will go into recession due to insufficient aggregate demand. We know this because of the “paradox of thrift” popularized by John Maynard Keynes. This paradox would be mitigated by Turkish industry strengthening its competitiveness, which would require radical reforms in education, innovation, etc., as stated by Babacan and reiterated by Yılmaz. The TÜSİAD president said that at least three percentage points must be added to the current domestic savings rate. This effort would not be enough, but it would certainly be welcome. Yılmaz noted policies in a five-year plan that aim to increase domestic savings: fighting the informal economy, strengthening the social security model, enhancing insurance systems and facilitating access to financial tools. I must say that even if these goals are achieved, they will hardly increase the domestic savings rate by three percentage points. Indeed, the first two policies aim to increase public savings. Public savings constitutes approximately 3 percent of GDP. Even if different aspects of the informal economy are addressed, such as the non-registration and under-registration of wage earners in the social security system, public income would only rise 0.3 percentage points at best, according to my estimations. If serious income tax reform to widen the tax base is implemented to complement the fight against the informal economy, then public savings would certainly increase further. Nevertheless, even a one percentage point increase in GDP -- which would mean more than a 30 percent increase of public savings -- would be a great success. That said, do not forget that increasing the average tax rate would also adversely influence the savings of households and companies through the crowding out effect. The remaining two percentage points should come from the savings of households and companies. Here we have a basic problem. In the case of household savings, I should remark that it would be very difficult to change the current consumption patterns of Turkish households. They have started to consume more, thus save less thanks to the credit glut and much lower interest rates than in the 1990s. Households are also much less worried about unexpected health expenses thanks to improved and extended social coverage. The two policies in the five-year plan aiming to boost private savings only “enhance insurance systems and facilitate access to financial tools.” These policies may well be helpful, but only marginally. The best tool in this area would be radical severance pay reform, but this reform project continues to rot in the drawer. So, what about the savings of companies? Nobody talks about this burning issue. Turkish corporations can save more if profits increase and are then invested instead of distributed to shareholders. The most straightforward way to increase profits would be to decrease wages, but this can hardly be done. The cost of labor may be lowered, but this would require difficult labor market reforms. Another option is the depreciation of the lira as this would boost export profits, but this has its limits because of high inflation. Indeed, the most effective option would be to increase productivity. This is possible if comprehensive productivity-enhancing reforms in education, technology and innovation are realized, as was underlined by the TÜSİAD president. We are impatiently awaiting them.