Turkey in deadlock

In the last two years I wrote two academic papers published in Germany and the US on the economics of the 2002-2011 decade. In these papers I discussed the factors behind the success of the Justice and Development Party (AKP) rule, which can be summarized in two points: good economic governance and democratic reforms.
Good economic governance can be explained by a fiscal discipline that was not seen in decades, respecting the independence of the central bank, which was an unexpected gift given the historic command economy tradition in Turkey, and sound supervision of the banking system in the aftermath of the meltdown which occurred with the 2001 disaster. These factors allowed for a dramatic decrease in the two-digit inflation rate raging for more than 30 years as well as in real interest rates and they pushed growth rates up. The high economic growth based on booming private consumption and investment fueled by an abundance of international liquidity filled the state's coffers, enabling the AKP government to conduct vast social programs without jeopardizing the public sector balance. At the same time we witnessed important democratic reforms, the two main achievements being the start of membership negotiations with the European Union and ending the statuary interference of the army in politics. The start of membership negotiations in 2005 immediately had an effect on foreign direct investments (FDI), which made an impressive jump from $3 billion to $15 billion within a year. Moreover, EU membership negotiations became an important source of confidence with investors regarding the future of Turkey's democratic and economic stability. Solutions to historic problems like the Kurdish issue appeared to be within Turkey's reach. However, in concluding my papers, I argued that the next decade would not be as easy as the previous decade for the AKP because of three events: Real interest rates having reached their limits of around 1 percent are likely to only increase from now on; economic growth based exclusively on domestic demand as well as on an appreciation of the lira caused a huge and unsustainable current account deficit (CAD); and the international liquidity glut is ending. Thus, I wrote that the AKP faces harsh challenges. Pursuing economic growth, at least at a respectable level, and improving the social conditions of the poor will depend on the implementation of politically difficult reforms in the labor market, the fiscal system, etc. The electoral success of June 2011 -- receiving almost 50 percent of the vote -- originating from the achievements cited above pushed Prime Minister Recep Tayyip Erdoğan and his friends to claim more and exclusive power. Unaware of the challenges, they focused all their energies on a presidential system that would make Mr. Erdoğan the uncontested ruler of Turkey. Economic reforms were postponed, a new constitution process was blocked and the solution to the Kurdish problem reached a deadlock. The changes in AKP policies as well as in the global economic environment did not delay having adverse effects on the Turkish economy: Real interest rates increased, the lira depreciated and economic growth decelerated -- the average growth rate in the last two years has been limited to 3 percent -- while the CAD is still unsustainable despite its decline to some extent. As though these existing problems were not enough, the AKP added on to them. The so-called “interest rate lobby” discourse and political pressure on the central bank have undermined the bank's independence. Now we are witnessing an open authoritarian shift by the AKP. I don't want to detail the contents of this shift since readers of Today's Zaman should be well informed of the different anti-democratic laws voted in urgency by the AKP majority in the last few weeks as well the threats against freedom of the press. Furthermore, an alleged corruption scandal has definitely made the legitimacy of AKP rule questionable. The EU anchor is no longer guaranteed. Last but not least, the future of democracy has become uncertain. In this context the economic situation will further worsen. Admittedly, Turkey is in a deadlock. How is it possible to get out of this deadlock? I don't believe there is an easy answer. We have to wait for the results of the ballot boxes on March 30 to be able to see clearer.

Çıkış sandıkta

Bugün AB’deki gelişmeler ve Türkiye’nin muhtemel üyeliği üzerine yazmaya karar vermiştim. Ama Pazartesi akşamı patlayan ses kayıtları bombasını görmezlikten gelmek mümkün değil. AB konusuna kısaca deyinip sadete geleyim.  AB’nin yeniden kurulması gündemde. Avrupa Parasal Birliği’nin (Euro Alanı) federal bir yapıya dönüştürülmesi siyasal liderler ve uzmanlar tarafından açıkça savunuluyor. Federal yapı demek ekonomide ve siyasette ileri düzeyde bütünleşmiş bir birlik demek. Başta İngiltere olmak üzere her AB üyesi Para Birliği’ne dahil olmayacağından, federal çekidek ile bu çekirdeğin dışında kalan üyeler arasındaki ilişkileri düzenleyecek yeni bir sözleşme gerekiyor. Yeni sözleşmenin Türkiye’nin üyeliği açısından yeni bir paradigma oluşturacağına kuşku yok. Daha fazlasını merak eden okurlar blogumdaki “Remaking Europe and Turkish membership” yazıma göz atabilirler.

            Gelelim Başbakan ile oğlu Bilal arasında geçtiği iddia edilen ses kayıtlarına. Herkes gibi “tapeleri” ben de okudum. İnanılır gibi değil. Bu kayıtların doğruluğunun ya da Başbakan’ın iddia ettiği gibi “montaj” olduğunun yakın gelecekte kanıtlanabileceğini sanmıyorum. Türkiye böyle bir kanıtlamaya elverişli hukuk sisteminden yoksun. İlerde birgün belki gerçeği öğreniriz. Bu köşede ancak bu şokun ekonomik ve siyasal etkilerini tartışabilirim.

            Şokun piyasa üzerinde abartılı bir etki yapmadığı görülüyor. Bu satırların yazıldığı  sırada döviz kurundaki artış yüzde 1’in biraz üzerinde, borsadaki düşüş de yüzde 2,5 civarındaydı. Yüzde 11 düzeyindeki gösterge faizde ise hemen hemen hiç değişiklik yoktu. Bu rakamlar yabancıların panik halinde çıkmadığını gösteriyor. Ancak yabancı yatırımcıların, özellikle kurumsal yatırımcıların karar almaları  gecikmeyle oluyor. Şokun piyasalar üzerindeki etkisini görmek için biraz daha beklemek gerekebilir. Yine de ekonomik kurumlarımızın siyasal şoklara direnci takdire şayan.

Güven kaybı

Buna karşılık tüm ekonomik aktörlerin Hükümet’in ekonomiyi yönetme kabiliyetine dair zaten sarsılmış olan güvenlerinin iyice düşeceğini tahmin ediyorum. Yıl başında ilk çeyreğin kaybedildiğini dillendirmeye başlamıştım. Artık şüphem kalmadı. Ama esas tartışılması gereken konu Başbakan ve yakın çevresine yönelik rüşvet ya da kara para, her neyse, iddialarının orta vadede yapacağı etkiler. Türkiye ekonomisi FED’in dayattığı yeni koşullar altında zaten yeterince sorun yaşamaya başlamıştı. Büyümenin en az bir kaç yıl düşük kalacağı konusunda geniş bir görüş birliği vardı. Oysa şimdi büyüme hızının daha da düşmesi gündemde. Bu yıl için yüzde 2,5 civarında bir büyüme tahmin ediyordum. Bu saatten sonra aşağısı benim için sürpriz olmaz.  AKP hükümetinin Dünya ekonomisi ile bütünleşmiş bir ekonomiyi şeffaf, hukuk devletine ve demokrasiye bağlı kurallar çerçevesinde yönetebileceğine dair yerli ve yabancı yatırımcıların derin kuşkulara kapılmaları işten bile değil.

Bu kötü ve tehlikeli gidişattan bizi ancak sandık kurtarır. Ortaya çıkan vahim ve ciddi iddiaların doğruluğuna ya da uydurulduğuna inanıp inanmamak sağduyuya, daha çok da siyasal pozisyonlara kalmış görünüyor. Çoğu seçmen neye inanmak istiyorsa ona inanacak. Yine de iddialar AKP’nin demir çekirdeği dışında kalan ve halen neye inanacağını bilemeyen seçmenleri üzerinde etki yaratabilir. Bu seçmenlerin bir kısmı daha muhalefet partilerine yönelebilir, bir kısmı da sandığa gitmemeye karar verebilir. 30 Martta sandıktan çıkacak sonuçlar raydan çıkan demokrasiyi ve ekonomiyi tekrar rayına oturtacak bir süreci başlatamazsa, siyasal savrulmalarla bezenmiş uzun erimli bir durgunluğa hazır olun.  

Remaking Europe and Turkish membership

The eurozone has been in crisis for four years now. Despite some light appearing on the horizon, the structural problems that pushed the bloc to the brink of breakdown have been only partially addressed.
Hundred of billions of euros in fines paid by taxpayers have been spent in order to keep countries in deep turmoil as well as the European banking system afloat. The belt-tightening programs of the Troika -- the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) -- aiming to curb rising public debt caused sharp gross domestic product (GDP) contractions. Unemployment rates have reached 25 percent in Greece and Spain. The future of the “rescue” programs is still uncertain in Portugal and very problematic in Greece. The supervision of eurozone banks by a banking union is certainly an important achievement; this new institution, however, may merely prevent future banking crises without being able to contribute to economic growth. Current account deficits decreased dramatically in southern Europe thanks to the collapse of domestic demand, but the structural reforms implemented in the recent past are insufficient to establish an export-led growth regime. Southern countries continue to suffer from a lack of competitivity despite decreases in real wages. Germany continues to have large current account surpluses and if domestic demand in southern countries picks up, macroeconomic imbalances will start worsening again. In short, the eurozone is unable to get out of its slump without redesigning its rules of governance.  It is clear that these rules must aim for more economic and political integration -- that is, a federalist eurozone. Obviously, a new eurozone inevitably implies a new European treaty that will allow some members to remain outside of this federal union. In recent months, German and French leaders have spoken of the need for a new treaty. “In my personal view, the eurozone should become the United States of Europe,” said EC Vice President Viviane Reding, calling for full fiscal and political union for the 18 eurozone countries. British Prime Minister David Cameron insists on a new treaty as soon as possible since Great Britain decided to remain out of the eurozone; GB needs new rules to play by. The need of a new treaty has been voiced recently by two think tanks, the German Glienicker Gruppe and French Eiffel Group, which gather prominent academics, lawyers and managers. Glienicker Gruppe published a letter in October, “Towards a Euro Union,” which, after underlining that “none of the fundamental problems underlying the euro crisis have been solved -- not the banking crisis, nor the sovereign debt crisis, nor the competitiveness crisis,” argues that “the monetary union needs deeper integration.” This integration must include a transfer mechanism, the letter says, like a common unemployment insurance system, more labor mobility and debt write-offs in southern countries for a fresh start. According to Glienicker Gruppe, to achieve this political agenda, a new treaty establishing “a Europe of different speeds" in which an economic government for the eurozone, having its own budget and an elected parliament restricted to member states, must be drafted. Needless to say, in exchange, eurozone members will transfer most of their economic sovereignty to the federal government. The Eiffel Group develops almost the same arguments and suggestions in its article “For a Euro Community,” published in February. To quote the last words of the article: “Our wish is to enable the Community and the European Union with 28 Member States to cohabit, as harmoniously as possible, as the raison d'être of the EU has not disappeared. The Euro Community will be open to those who accept the obligations which go with it; on the other hand, Member States who make the sovereign decision to not share the currency must bear all the consequences.” It is sad to observe how we are left out of this debate in Turkey. It is true that we have other urgent preoccupations (!); nevertheless, the redesigning of the EU is highly relevant to Turkey's membership bid. Well-defined requirements for eurozone membership would dismantle many barriers to our joining the bloc. Indeed, Turkey will not be participating in a European federation, which means that it will not take part in this body's parliament, in other words, in its decision-making process on economic governance and foreign policy. In this case, Turkey would no longer be considered a competitive power or even a burden by Germany and France. On the other hand, quasi-independent status, like that of Great Britain, could be preferable for Turkey, given its jealousy about its sovereignty.

Where I agree and disagree with Babacan

No way out without reforms Last Monday, in an interview on TV, Deputy Prime Minister Ali Babacan made some important assessments of the hot issues that Turkey is trying to handle.These assessments are worth discussing since they are rather realistic and not pure political propaganda. I saw five major topics in Babacan's assessments: the policies of the Central Bank of Turkey, the state of unemployment and its future in terms of economic growth, the sustainability of the current account deficit (CAD) and, finally, the need for reforms.
Minister Babacan started by saying there is no crisis; thus there is no need for a comprehensive economic package. So we can now stop fretting ourselves by trying to guess what kind of measures may come with the famous “Plan B and Plan C” announced by Prime Minister Recep Tayyip Erdoğan just after the central bank decided to increase interest rates. Erdoğan said last month that an "out of the ordinary" economic package alternative to interest rate hikes could be announced. He added that work on a Plan B or Plan C may be announced in the coming days or weeks. We have heard nothing but rumors circulating about these mysterious alternative plans so far. Regarding monetary policy, Babacan reiterated his support for the unconventional policies of the central bank. He argued that the interest rate corridor instrument (multiple and varying interest rates) had prevented inflows of large quantities of short-term capital. As a result, he said, the impact of the US Federal Reserve's policy and the Dec. 17 corruption scandal on outflows had been mitigated, since there was no great quantity of hot money in Turkey. I agree. This point is often missed in the debate about the central bank's monetary policy. That said, I do not agree with Mr. Babacan when he says that the central bank was not wrong in delaying its interest rate decision. Indeed, the Monetary Policy Committee (MPK) refused to move on the issue during its meeting in January, but it was obliged to increase interest rates a few days later in an extraordinary meeting because investors had started to sell their Turkish Lira denominated assets in a panic, causing a dangerous shift in the exchange rate. Mr. Babacan argued that this panic was due to the serious turmoil that had occurred in Argentina and Russia two or three days after the MPK's meeting. This argument is hardly convincing. Personally, I think the political pressure on the central bank was so stifling that the MPK was not courageous enough to increase interest rates earlier, hoping that this omission would not affect investors' behavior. It was a great mistake. However, I fully agree with Babacan's assessment of the evolution of unemployment. He was right in pointing out that the rate of unemployment had been on an upward path, but that during the last two months of 2013 it leveled off. He added, “It is too early to make a comment, but if we see our growth in gross domestic product [GDP] below 4 percent, then the jobless rates could be relatively higher.” So the critical issue is expected growth this year. On this point, the deputy prime minister was rather cautious. After saying that growth performance will depend both on domestic demand and exports, he indicated that it is still too early to make a projection on domestic demand, but expectations on exports to the EU market are promising. Unlike Mr. Babacan, I am almost certain that domestic demand, particularly demand for investment and durable consumer goods in the first quarter, will be very weak. But Babacan is right to expect that there will be more exports to the EU. Last year, these exports grew for the first time since the eruption of the economic crisis. This year, the EU economy seems to be in better shape. So we can count on exports to the EU market. I wrote in a previous column that my growth-rate forecast for this year is around 2.5 percent. Since then, many other predictions have been published. Even the most optimistic ones do not predict a rate over 3 percent. If these turn out to be correct, the Justice and Development Party (AK Party) will be faced with increasing unemployment and stagnating well-being. The deputy prime minister is certainly aware of this challenge. As he pointed out, the Turkish economy is unable to have 4-5 percent growth without lowering its CAD to a sustainable level. Mr. Babacan thinks that this level might be 4-5 percent, but the deficit must be even lower in the long run. Let me point out that the CAD/GDP ratio is actually over 7 percent. Admittedly, the challenge is a difficult one. This may be the reason why Babacan insisted once again on economic reforms during his interview. The fact that he insisted on reforms shows great virtue in these days of political madness.

Başbakan Köşk’e çıkar mı?

Bu sorunun yanıtı AKP’nin 30 Martta alacağı oy oranına bağlı. AKP yeni anayasa ile birlikte Türkiye koşullarına uyarlanmış bir tür Latin Amerika başkanlık sistemi getirmek, bu sistemin ilk başkanının da lideri Tayyip Erdoğan olmasını istiyor. Düne kadar hesap şuydu: Cumhurbaşkanlığı seçimlerinde Erdoğan yüzde 50’yi aşan bir seçmen desteğiyle Köşke mevcut sınırlı yetkilerle çıkar. Sonbaharda yapılacak erken seçimde AKP referandum çoğunluğu olan 330 sandalye sınırını aşar. Başkanlık sistemini içeren kendi anayasasını yapar ve referanduma götürür.

            Ne var ki evdeki hesabı çarşıya uymaktan çıkaran gelişmelere tanık olduk. AKP nüfuz skandallarıyla sarsıldı. Gülen cemaatiinn desteğini tümüyle yitirdi. Ekonomik kriz yok ama Haziran 2011 seçim zaferinin temel öğesi yüksek büyüme, düşen yoksulluk yerini düşük büyüme duran refah artışına bıraktı. Artık AKP’nin 30 Martta oyu ne kadar düşeri tartışıyoruz. Seçmen desteğinin düzeyi AKP’yi zor seçimler yapmaya zorlayacak. İki temel senaryo sözkonusu: AKP’nin oy oranı yüzde 45’in altına inerse Erdoğan cumhurbaşkanlığı seçimlerinde aday olmaktan vazgeçer. Buna karşılık, AKP oy oranını herşeye rağmen yüzde 45’in üzerinde tutmayı başarırsa, kimi risklere rağmen Tayyip Erdoğanlı başkanlık sistemi kurgusunda ısrar edeceğini tahmin ediyorum.

Başbakanlığa devam

            Birinci senaryoda başbakanın cumhurbaşkanlığına talip olması doğasına aykırı. AKP’nin oy desteği yüzde 40’a dahi düşse Tayyip Erdoğan ikinci turda cumhurbaşkanı seçilmesine seçilir ama başkanlık sistemi de hayal olur. AKP seçim sistemini değiştirse bile yüzde 45’in altında referandum çoğunluğunu elde etmesi olanaksız. Bu kritik konuya birazdan döneceğim. Başbakan’ın partisiz ve sınırlı yetkili bir cumhurbaşkanı olarak kendini Çankaya’ya hapsetmesini herhalde bekleyemeyiz. Bu durumda başbakan başbakan olarak devam etmek isteyecektir. Yegane sorun 3 dönem kuralı. AKP şimdiden bu kuralı gerekirse iptal etmek için zemin oluşturmaya başladı bile.

            Bu senaryoda kritik soru AKP’nin cumhurbaşkanı adayının kim olacağıdır? Sanırım Abdullah Gül iktidar partisi açısından en az riskli çözümdür. Sayın Gül’ü dışlayarak başka bir aday çıkarmak AKP’nin bölünme riskini arttırır. Ayrıca böyle bir adayın kazanma şansı da tartışılır.

Başkanlıkta ısrar

            AKP 30 Martta yüzde 45’in üzerinde oy alırsa durum farklı. Mevcut seçim sisteminde referandum çoğunluğu için AKP’ye yüzde 50’nin de yetmediğini son seçimden biliyoruz. Ancak seçim çevreleri AKP’nin düşündüğü gibi daraltılırsa, benim simülasyon modeli yüzde 46’dan itibaren AKP’nin 330’u aşabildiğini gösteriyor. Şu sıralar gündemde değil ama AKP seçim sistemi reformunu zulada tutuyor. Barajın yüzde 5’e düşürülmesi karşılğında seçim çevrelerinin 5 miletvekili ile sınırlandırılması AKP açısından riskli ama izlemeye değer bir strateji gibi duruyor.

            Bu senaryoda Başbakan cumhurbaşkanlığına aday olur ve Çankaya’ya mevcut kurallarla çıkar. Ancak başkan olarak Türkiye’yi yönetmeye başlaması için bir yıldan fazla beklemesi gerecektir. Seçim yasasında değişikliğin geçerli olması için genel seçimden en az bir yıl önce yapılması şart. AKP Seçim yasası değişikliğini en erken Nisan sonunda yapabilir. Genel seçimler de en erken Mayıs 2015’te yapılabilir. Bu arada AKP bir dizi riski de göze almak durumunda kalacaktır. Bu ara dönemde başbakan kim olacak? Referandum çoğunluğu elde edilse bile başkanlık sistemini içeren yeni anayasa referandum sınavını geçebilir mi? Tabi bir de şu soru önemli: Hangi senaryo Türkiye demokrasisi için daha hayırlı olur? Tartışmaya bir başka yazıda devam ederiz. 

Assessing the state of the Turkish economy

Last week Bahçeşehir University's Center for Economic and Social Research (Betam) published its latest “Economic Outlook and Forecasts” report, and yesterday, the Turkish Statistics Institute (TurkStat) released its 2013 labor market figures.
We are now in a position to make an accurate assessment of last year's employment figures and make the first comments for this year based on the recently published indicators by Betam. Overall, 2013 was a fairly good year, both in terms of economic growth and the continued decline of the current account deficit. However, unemployment increased – albeit only to a limited extent -- while some difficulties can be seen on the horizon for 2014. Betam did not change its 2013 prediction of economic growth, maintaining it at 4.2 percent. TurkStat will publish gross domestic product (GDP) statistics in March, but it is almost certain that the growth rate will be very close to 4 percent. This is rather a good achievement, all the more so because the economic growth will have been achieved without jeopardizing the current account deficit. The last point may seem controversial, since the current account deficit was expected to increase from just over 6 percent at the end of 2012 to 7.9 percent by the end of 2013, according to Betam's forecast. However, when one excludes imports of gold and exports from foreign trade accounts, the picture becomes very different. The fact that this decrease would be obtained while there is an increase in economic growth, from 2.2 percent in 2012 to around 4 percent, should be emphasized. This is proof that the increasing growth has been fairly balanced since the gold trade is not related to the contributors of economic growth like domestic demand and net exports. If the achievement is repeated this year, one can conclude that the Turkish economy is still capable of growing, but moderately; meanwhile, the current account deficit will steadily diminish. Developments in the labor market are not as positive as economic growth figures. According to November figures, the nonfarm labor force increased approximately by 600,000 and nonfarm employment by 450,000 from the previous year. As result, the nonfarm unemployment rate increased slightly from 11.7 percent to 12 percent. As for the seasonally adjusted figures, they show a stagnating rate at 12.1 percent. Those figures suggest that the Turkish labor market is on the way to normalization -- meaning, the period of strong increases of over 1 million per year for both labor force and employment has finished. Economic growth still continues creating a lot of jobs, but labor productivity has finally started going up. In 2012 employment increased by 3 percent while GDP grew only by 2.2 percent. When the final figures for 2013 are released, employment is expected to have risen by around 2.5 percent with GDP growth will be around 4 percent. I would like to add to this picture that the labor force participation rate (labor force by working age population) decreased from a high of 51.2 percent in April 2013 down to 50.7 percent in November of the same year. The growth performance as well as the decline in unemployment this year will be dependent on three major factors: the value of the Turkish lira, the changes to monetary policy and the future direction of the current political uncertainties. The high depreciation the Turkish lira suffered in recent months due to the US Federal Reserve's monetary policy and the adverse effects of the Dec.17 corruption scandal on the economy will probably cause negative growth from quarter to quarter. The first leading indicators seem to confirm this prediction: Capacity use in manufacturing as well as consumer confidence dropped in January. Loan interest rates continued to rise given interest increases decided by the Central Bank of Turkey. At the moment they stand at 12-14 percent, while inflation expectations are around 8 percent. One can easily predict that tight monetary policy will be maintained throughout 2014 because inflation is well over the target of 5 percent. As for the political uncertainties, they are not going away any time soon. Given this outlook, I expect economic growth to be well below 3 percent this year. Even though economic development will be balanced -- the current account deficit will still be narrowing -- unemployment will go up. I do not think that this mediocre economic outcome will satisfy the rulers of the Justice and Development Party (AK Party).

Two political scenarios

The incumbent Justice and Development Party's (AKP) share of the vote in the local elections to be held on March 30 has become a critical issue for the future of the political scene in Turkey.
The way of presidency is quite problematic This share will have a decisive outcome on Prime Minister Recep Tayyip Erdoğan's decision to run, or not, in the presidential election this summer. Since the prime minister would not become a president with limited executive power, which is the case at present, his decision will depend not only on comfortable electoral support for the AKP on March 30, say above 45 percent, but particularly on the possibility of winning a referendum majority (more than 330 seats) in the general elections that will follow the presidential election. Indeed, the only possibility of transforming the current parliamentary system into a presidential or semi-presidential one that will allow the president of republic to become the head of the executive is to have a referendum majority in Parliament that will enable the AKP to change the constitution. We know that this is not possible with 50 percent electoral support. In the general elections of June, 2011, the AKP with a share of 49.8 percent could only take 327 seats, lacking a few seats for the referendum majority. Obtaining more than 330 seats within the rules of the existing electoral system requires electoral support of over 50 percent. Given the impact of the probe scandals as well of the current economic turmoil on the AKP's electoral support, a share of over 50 percent seems out of reach. Actually, the most favorable surveys predict electoral support of 47-48 percent, while this support decreases to 41-42 percent in other surveys. Nevertheless, there is an alternative way for the AKP to obtain the referendum majority. If the current electoral system is reformed by narrowing the constituencies (maximum five seats), my simulation model predicts that the referendum majority threshold would decrease from 50 percent to roughly 45 percent. This electoral reform is not politically difficult to implement, all the more since the electoral threshold for seats in Parliament will be at the same time decreased from 10 percent to 5 percent, as suggested by Erdoğan. So, the political scenario in the aftermath of March 30 has to be designed according to the AKP's share of the vote. One can consider two basic scenarios. Let's assume that the AKP's electoral support decreases to below 45 percent. In this case, Erdoğan will hesitate to run in the presidential election. Admittedly, he may be sure about winning the presidency in the second round, but he cannot be sure about winning the referendum majority in the general elections. In this scenario it is probable that Erdoğan will be obliged to abandon his ambition for a presidential system. This could open the way for a new strategy for the AKP in which the key item will be a compromise between the AKP and the main opposition party over a new constitution. Certainly, some important uncertainties would remain. If Erdoğan decides to continue as prime minister, he is obliged to make a U-turn on his insistence on a three-term limit. This is not easy, but still possible. Another issue is who will run for the presidency on behalf of the AKP: the current president, Abdullah Gül? Why not? The second scenario will be on the AKP's agenda if its share of the vote remains above 45 percent on March 30. I predict in this case that Erdoğan will decide to run in the presidential election. However, this decision must be unavoidably complemented by reforming the electoral system, as explained above. If not, there is no guarantee that the AKP will win the referendum majority in the general elections. However, do not forget that in this case the AKP making its own constitution with a presidential system must also win the referendum. I think this is doable. The critical issue in this scenario is the rule requiring one year for a change in the electoral system before its implementation. General elections must be held at the latest in June 2015. So, electoral reform must be done by this May at the latest. This is possible, but the option of early elections in autumn will be off the agenda. This will oblige Erdoğan to wait over one year before becoming head of the executive power. We assume, of course, that the new constitution forged by the AKP would be accepted in the referendum. Let's finish this article with another vital question: Who will be prime minister in the meantime?

Kişi başı gelir artışı durdu

On yıldır iktidarda olan ve en az bir on yıl daha iktidarda kalmayı planlayan Adalet ve Kalkınma Partisi’nin (AKP) en önemli övünç kaynağı ekonomik başarıydı. AKP’nin her genel seçimde oyunu arttırmasının ardında da büyük ölçüde bu başarı yatıyordu. Dili geçmiş kipini bilerek kullanıyorum çünkü bundan böyle iktidarın ekonomik başarıdan sözetmesi kolay olmayacak. Önce Sezar’ın hakkını Sezar’a verelim. 2002’den 2011’e kişi başına gelir kabaca 4000 Dolardan 10.500 Dolara çıktı. Bu çarpıcı artış sayesinde Türkiye bölgesinde ekonomik bir güç olarak temayüz etti. Bu arada gelir eşitsizliğinde bir miktar iyileşme, yoksullukta ise daha belirgin bir iyileşme yaşandı.

 Bu başarının verdiği gazla iktidar geçmişte ne olduysa gelecekte de olacak inancıyla 2023 için kişi başına gelirin 25.000 Dolara yükseleceğini iddia etmeye başladı. Bu hedef daha baştan ulaşılması olanaksız bir hedefti ama yüzde 5 civarında bir büyüme ile birlikte Türk Lirasın’da ılımlı bir değer artışı kişi başına geliri 2023’te 20.000 Doların biraz üstüne taşıyabilirdi. Bu da hiç kuşkusuz büyük başarı olurdu. Ne var ki, ne yüzde 5 büyüme ne de Türk Lirasında on yılda yüzde 30’a yakın bir reel değer artışı mümkün görünüyor.

2002’den 2011’e 2,5 kattan fazla artan kişi başına Dolar geliri  son iki yıldır 10.600 Dolar civardında çakılı kalmış durumda (bkz. Şekil). Bunun başlıca iki nedeni var: Bir yandan GSYH reel büyümesi yüzde 6’dan yüzde 3 civarına geriledi (2012: Yüzde 2,2, 2013 tahminen yüzde 4 civarı) öte yandan TL değer kaybetti. Oysa geçmişte gerçekleşen 2,5 kat artışın kabaca yarısı yüksek reel GSYH artışından (GSYH reel endeksi 100’den 160’a yükseliyor. Bkz Şekil) diğer yarası da TL’nin reel değer kazanmasından kaynaklanmıştı.Tamamen iç talebe dayalı reel büyümenin dışardan gelen yakıtı büyük ölçüde azaldı. Bu koşullarda yüksek cari açıkla yola devam etmek olanaksız görünüyor. Türk Lirası’nın değer kaybının ardındaki temel mekanizma bu gelişmede yatıyor.

Ekonomik reformlar şart

Bu yıl dolarla kişi başına gelir en iyi ihtimalle yerinde sayar. Büyümenin yüzde 3’ü geçmesi zor. TL’nin Ocak ayında maruz kaldığı değer kaybının tümüyle geri alınması da bir o kadar zor. Dolayısıyla 2014’te kişi başına gelir dolar bazında gerilerse şaşırmayın. Reel TL cinsinden kişi başına gelir de üç yılda sadece yüzde 6 artmış olacak. Yılda yüzde 2’lik kişi başı gelir artışı gelir eşitsizliğini ve yoksulluğu azaltmak için yetersiz. Henüz son iki yılın tüm verileri elimizde yok ama en azından 2012’de göreli yoksuluğun 2011’e kıyasla değişmediğini biliyoruz. Son iki yılda geniş halk kesiminin geçmişte elde ettiği yüksek refah artışından mahrum kaldığını tahmin ediyorum.

2015’ten sonra durum değişir mi? Eğer AKP iktidarı büyüme rejimini dengeli bir hale getirir, diğer ifadeyle ılımlı iç talep artışını net ihracat artışı ile desteklemeyi başarırsa, yüzde 5’e yakın bir büyüme, dolayısıyla yüzde 4 civarı kişi başına reel gelir artışı mümkün olur. Ancak TL’nin bundan böyle büyük ölçüde değer kazanması olanaksız görünüyor. Bu senaryoda kişi başına Dolar geliri 2013’te 16-17 bin dolara yükselebilir, ki bu da iyidir. Ancak büyüme rejiminde değişim köklü yapısal reformlar gerektiriyor. Bu reformların hazır olanları bile 2015 sonrasına ertelendi. Ondan sonra akıbetleri ne olur? Tahmin yapmayı size bırakıyorum.

Draft law on prep schools

The draft law intended to close down prep schools that was prepared by the incumbent Justice and Development Party (AKP) was recently sent to Parliament.
Despite a furious debate last autumn, the AKP decided in the end to take the political risk related to the detrimental consequences of this law. I will try to summarize these consequences in this column, but let me first note that the date of implementation of the law has been postponed until September 2015. That is, once the election period is over. What does the draft law say? No prep schools -- the establishments that help Turkish students prepare for high school and college entrance exams -- will exist when the entrance exams are held in 2016. Until September 2015, existing prep schools have the option of transforming themselves into private schools. In order to encourage this conversion, but also to avoid brutal closures, the state will be providing subsidies -- not just to the new, transformed private schools, but to all of them. Otherwise, the law is at risk of being declared unconstitutional on the grounds of unequal treatment and unfair competition. The wording of the draft law is quite confusing, but let me try to explain what I understand it to say. The subsidies will be paid according to the following principle: The government will set a minimum class size as well as a maximum one. The subsidies will be given according to the lack of enrollment between the minimum and maximum number of students. Thus, for each private school, the amount of the subsidy will be determined according to the number of classes available and the number of students that enroll in between minimum and maximum. For each school year, private schools will receive a subsidy for the places that are unfilled and then given to students incapable of affording the school fees. In other words, the existing private schools whose good reputation allows them to fill all their available places will not receive any subsidy. The others, including, the private schools that were converted from prep schools, will receive subsidies in accordance with the number of poor students accepted to fill the remaining empty places. It is expected that many low income families will decide to send their children to a private school of their choice thanks to the subsidy. Furthermore, the precise amount of the individual subsidies will be decided according to geographic region, the income level of the student's family, the total number of students in the region and the performance of the school, as well as of the student. But in any case, these differentiated amounts cannot be very high because of fiscal discipline constraints. Without a doubt, those principles are so complicated that it will be very difficult to set objective quantitative criteria regarding the subsidy amounts. The law, if implemented, has a great potential to cause a real mess. So I am very doubtful about the future of this law, but let's suppose that it is implemented. The consequences will be unbearable for the AKP government. The first adverse effect is related to unemployment. The AKP did not keep its promise to provide jobs at public institutions to all the prep school teachers who are not hired by the new private schools. Only teachers with six years of experience will have the chance of being hired at public schools. Thus, tens of thousands of prep school teachers will definitely lose their jobs since only the large, well-established prep schools can take the financial risks of re-establishing themselves as a new private school. Indeed, there is actually a sizable unused capacity in many of the current private schools. Tens of thousands of people working in the sectors related to prep schools as well as those providing services at these facilities will also lose their jobs. Moreover, the AKP government will also face other nasty problems. The demand for extra courses will not disappear, since the entry exams will not disappear. Each year nearly 4 million students take these exams, but only a minority of them can gain entry to the schools of their choice since the quality of high schools as well as that of universities varies significantly. The huge gap existing between the limited number of places available at the best schools and the demand for them leads to strong competition. So, we will witness a proliferation of underground individual prep schools that will be started by the unemployed prep school teachers. This will not only cause tax losses for the state but will make the education system more unfair and unequal since private tutoring prices will go up and that will diminish the number of students getting extra help for the entry exams.

USD per capita income stagnating

Readers should be aware of the 2023 economic target set by the Justice and Development Party (AKP) government, but let me bring it up again: Turkish gross domestic product (GDP) is expected to reach $2 trillion, with a per capita income of $25,000 when the centenary of the Turkish Republic is celebrated. The per capita income will have more than doubled in 10 years, making Turkey a developed country and, at the same time, a global power. Needless to say, this more than ambitious economic target constitutes a key propaganda item for the AKP, aiming to stay in power for another 10 years, if not more. However, this target is definitely in jeopardy. Let me explain.
A per capita income of $25,000 was already out of reach when it was announced two years ago but it was possible to hope for a figure close to $20,000 at least. Indeed, assuming that real GDP income growth would be as high as in the 2002-2011 period -- around 6 percent -- and also assuming that the lira would continue its upward trend in the next decade, a per capita income of $20,000 would have been a realistic target. The graph below asserts that from 2002 to 2011, per capita income rose from $4,000 to $10,000, by 150 percent. Roughly half of this increase came from real GDP growth, increasing by almost 60 percent -- the graph shows the index for real GDP increasing from 100 in 2002 to almost 160 in 2011 -- while the other half came from the strong appreciation of the lira in real terms. However, this high growth-strong lira period is definitely over because of one simple reason: The pursuit of domestic demand-led growth fueled by foreign borrowing is impossible from now on. Many factors lie behind this impossibility: The domestic demand-led growth regime coupled with low domestic savings drove the current account deficit (CAD) to unsustainable levels; an international liquidity glut easing foreign borrowing is ending; and, last but not least, total factor productivity growth, a key factor of the competitive strength of the economy, has dramatically decreased over the last few years (See my article “Turkey on the brink of middle of income trap,” Sept. 2, 2013). Under these circumstances you cannot have either high real GDP growth or a continuously appreciating lira. Thus, the stagnation of per capita income at $10,600 over the last two years must not be considered a surprise (See graph). Indeed, the average growth rate has barely reached 3 percent -- 2.2 percent in 2012 and it is expected to stand around 4 percent in 2013 -- while the lira has been depreciated sizably. This low growth-weak lira episode should not be considered as transitory. This year, one expects not only a growth rate of below 3 percent at best, but at the same time, the depreciation of the lira of over 10 percent which occurred in January will hardly be reversed. Thus you should not be surprised if we witness a decrease of per capita income in dollar terms in 2014. You can ask, “What about the remaining years?” Well, this depends on real GDP growth as well as on productivity performance. All productivity and balanced growth enhancing economic reforms have been postponed to after the general elections, which will be held at the latest in May 2015. It is difficult to predict what the electoral outcomes will be and their effect on political developments for the incumbent party. But even if the AKP government is strong enough to enhance the structural reforms required, the Turkish economy can have at best 5 percent real GDP growth (its estimated potential) along with a limited appreciation of the lira. This means that a per capita income close to $18,000 by 2023 would already be a challenging target. I recommend that AKP managers focus on solutions to existing structural economic problems rather than searching for scapegoats. US dollar per capita income and real GDP growth (2002-2013)

Rekabetçi kur - Enflasyon açmazı

Ocak ayı enflasyon rakamları belli oldu. TÜFE 0,1 puan artarak yüzde 7,5’ta kaldı. Ne var ki çekirdek enflasyon belirgin ölçüde artarak yüzde 7,1’den 7,6’ya çıktı. Ama daha önemlisi, salt sanayi fiyatlarını içeren yeni üretici fiyat endeksinde aylık artış yüzde 3,3 ile büyük sıçrama kaydetti. Yıllık artış da yüzde 10,7’ye yükseldi. Hızla yükselen döviz kurunun ithal fiyatları aracılığı ile önce üretici fiyatalarına, ardından da tüketici fiyatlarına yansıdığını biliyoruz. Önümüzdeki aylarda tüketici fiyatlarında artışlar kaçınılmaz. Üstelik Türk Lirasıdaki değer kaybının tümü fiyatlara yanısımış değil. Döviz kuru geri gelir umuduyla zamlar geciktiriliyor.

Kur direnç gösteriyor

            Döviz kuru geri gelir mi? Doğrusu kuşkuluyum. Dolar kuru 2,25-2,30 bandına demir atmış görünüyor. Güçlü bir yabancı sermaye girişi olmadığı takdirde bu kur seviyesi kalıcı olabilir, hatta FED’in para musluğunu kısmaya devam etmesi durumunda kur yeniden tırmanışa geçebilir. Sanırım Merkez Bankası’nın yüzde 10’a yükseltttiği faizin ve buna bağlı olarak yüzde 11 civarında seyreden piyasa faizinin sıcak para açısından yeterince cazip olmayabileceğini artık düşünmeye başlayabiliriz. Kur gevşemediği takdirde enflasyon açısından bu yılın da kaybedileceği açık. Merkez Bankası’nın daha yeni yüzde 6,6’ya yükselttiği enflasyon tahminin dörtte biri (yüzde 1,7) Ocak ayında gerçekleşmiş durumda. Yıl sonu enflasyonunun hiç olmazsa yüzde 7 civarında kalabilmesi için kalan 11 ayda ortalama fiyat artışının 0,5 puanı geçmemesi gerekiyor.

            Bu çok düşük bir ihtimal. Merkez Bankası bir kez daha “kur arttı böyle oldu” diye mektup mu yazacak? Bu mektup yazma işinin suyu çıkmak üzere. Bu bakımdan Merkez Bankası’nın kuru baskılayacak ek faiz artırımları yapmaktan başka çaresi kalmayabilir. Bunun siyaseten ne kadar zor hale geldiğini sanırım uzun uzun anlatmama gerek yok. Enflasyonu yüzde 5’lik hedefe yaklaştırmakta Merkez Bankası’nın çaresiz kaldığını kabul etmek zorunda kalabiliriz. Böyle bir çaresiziliğin tescilinin sonuçları vahim olabilir.

Düşük değerli TL ile büyümek

            Konuya bir de rekabetçi kur açısından bakabiliriz. Nominal kurun mevcut seviyesi reel kuru hemen hemen 2003 düzeyine indirdi. Bu seviyenin, kalıcı olduğu takdirde, saniyeye gerek ihracat gerek ithal ikamesi açısından güçlü rekabet desteği vereceği açık. Mevcut reel kur düzeyinin kalıcı ve istikrarlı olabilmesi için bundan böyle nominal kurun ılımlı bir tempoyla ticari ortaklarımız ile aramızdaki enflasyon farkına paralel gitmesi gerekiyor. Bunun hangi politika araçları ile yapılabileceğini doğrusu bilmiyorum. Ama yapılabilirse, geçmiş yıllarda Türk Lirası’nın büyük ölçüde aşırı değerli seyretmesi nedeniyle sanayinin maruz kaldığı tahribatın zamanla telafi edilmesi mümkün olabilir. Böyle bir telafi süreci aynı zamanda büyüme rejiminin de daha dengeli bir patikaya oturmasını, bu sayede de cari açığın sürüdürülebilir düzeylere çekilmesini mümkün kılar.

            İki haneli enflasyonun tek haneye indirilmesinde Türk Lirası’nın geçici kur şoklarına rağmen düzenli değer kazanması önemli katkı yaptı. Ancak bu katkının bir bedeli de oldu. Reel kur sanayimizin verimlilik düzeyinin üzerine çıktı. Son iki yıl hariç büyümeyi iç talep sürekledi. İç talebin yakıtı da dışardan alınan borçlarla sağlandı. Bu çark son iki yıldır tekliyor. Eğer işgücü piyasasında, vergi sisteminde, eğitimde, enerjide rekabet gücünü arttıracak yapısal reformlar yapılabilseydi kur üzerindeki rekabet baskısı daha hafif hissedilirdi. Oysa şimdi bir açmazla karşı karşıyayız: Ya enflasyonu fazla azdırmamaya özen göstererek rekabetçi kurla dengeli büyümeye sancılı bir geçiş yapacağız ya da enflasyonda ipin ucu kaçar korkusuyla kuru baskılamak için daha yüksek faizlere razı olacağız.

Fears of inflation

January inflation indexes have been anxiously awaited. The critical question about the inflation is the the impact of the recent exchange rate shock on local prices through import price increases, the so-called “pass-through” effect. This effect is critical because it may push up inflation and with it inflation expectations. Such a push would obligate the central bank to overhaul its new inflation forecast -- set at 6.6 percent -- upwards and, in this case, its policy interest rate -- currently at 10 percent -- must also be overhauled upward. Given the current political debate on the monetary policy that prevents the central bank from using its interest rate as a weapon freely, properly and timely, a drift in inflation would further increase the uncertainties and complicate more the way out.
Unfortunately, the January inflation figures confirmed the existing concerns. At first glance, the rise of the head inflation, the Consumer Price Index (CPI), has been rather limited. It rose from 7.4 percent to 7.5 percent on the yearly basis. However, core inflation has been pushed up by 0.6 percent, reaching 7.6 percent. Moreover, the monthly increase has been much stronger at 1.7 percent. One quarter of the central bank's 2014 inflation forecast has already been exhausted. Otherwise, during the remaining 11 months, the average inflation increase must not exceed 0.5 percentage points per month if the 6.6 percent forecast, perceived as an implicit inflation target by the economic players, is to be taken seriously. Is such a fortunate event possible? If we consider the possible effect of the exchange rate shock on the CPI, we can hardly be optimistic. Indeed, the new Domestic Producers' Price Index (DPPI), excluding agricultural prices and limited to industrial prices, made an impressive jump in January, increasing by 3.3 percent from December. The annual increase of the DPPI reached 10.7 percent. The impact of the pass-through is obvious. We know that this jump in cost inflation will also push the CPI up in the coming months. Furthermore, the bad news is that the whole pass-through effect has not fully shown up yet. If the exchange rate does not decrease sizably in the coming days, producers' prices will continue to increase strongly in February and the CPI will also increase along with in the coming months. Currently, we do not see any signs in this respect. The exchange rate between the US dollar and the Turkish lira seems to have been anchored around 2.26 since the interest rate reaction of the central bank last week. Admittedly, this reaction prevented a drift in the lira, but it has been revealed as insufficient to give the expected strength to it. It has become obvious that the central bank cannot overcome the difficulties alone. An additional increase in the central bank's policy rate might be envisaged but such a decision seems very difficult politically, and even if it happens, it is not certain that it would be able to attract demand for lira-denominated assets again. So, what can we hope for? Well, politics must intervene. A few days ago Prime Minister Recep Tayyip Erdoğan spoke about plans "B" and "C." We do not yet exactly know their content. However, considering the rumors, I do not believe that those plans contain convincing items able to encourage capital inflows, except for a massive offer of Treasury bonds by the Treasury. These bonds being, of course, kept in a public found and thus not spent, would push the market interest rate up and may encourage portfolio investments, opening the way for an appreciation of the lira. If not, the only remaining way to help the central bank would be a political step forward regarding the reorganization of the judiciary and of the so-called democratization package about to be announced by the government. We desperately need a compromise between the incumbent and main opposition parties on reshaping the Supreme Board of Judges and Prosecutors (HSYK) on a radical reform of the Turkish Penal Code (TCK), as well as on basic reforms regarding the settlement process. Only a compromise on these hot topics can dissipate political uncertainties and may allow the return of confidence with respect to political stability. If a path to compromise is not forged quite soon, I'm afraid the economic situation might get worse.

Fears of recession and contagion

While I was surfing the Internet this morning (Friday), trying to get recent information and the latest on economic events before discussing the probable consequences of the recent tightening of Turkish monetary policy, I discovered a column written by Paul Krugman, the Nobel Prize-winning American economist, titled “Talking Troubled Turkey.” Krugman seems quite concerned about the current state of the Turkish economy.
Paul Krugman concerned by Turkish economy He argues that in case of “a sudden stop,” i.e., a stop in short-term capital inflows from abroad, a recession cannot be avoided in Turkey. Then the contagion risk to other weak countries would be very serious, given the weaknesses of Western economies that make “these troubles scary.” Finally, the whole world economy might end up in a mess triggered by a Turkish crisis, as happened at the end of the 1990s in East Asia and in the recent past in Europe because of troubled Greece. Krugman is right. In the case of a sudden stop, the Turkish economy could go into a recession caused by a continuous depreciation of the Turkish lira. As for the contagion, I will leave it to you to agree or not with Professor Krugman, who has more authority than I do on the matter. So, the critical question is, does the risk of a sudden stop remain, despite the interest rate increases decided by the Turkish Central Bank on Tuesday evening? Before trying to answer this critical question, I would like to reiterate, once again, that without this decision a recession was absolutely certain. I have already explained the reasons many times in this column. I do not want to exhaust my limited space repeating them, but will just mention the statement of Murat Ülker, chairman of Yıldız Holding, which owns food manufacturer Ülker. Ülker is also a person who is very close to our prime minister. On Thursday, Mr. Ülker declared, “I would have never thought that I would be waiting for the interest rate decision and be happy to see an increase.” Since Wednesday, the USD-Turkish lira parity has gone below 2.30 while it was pushing 2.40 before the dramatic interest rate decision. But the exchange rate is still very volatile and there is no clear signal regarding a trend of appreciation. Since Dec. 17, the date the probe scandal became public, the Turkish lira lost 12 percent of its value. This loss must be added to the loss of 8 percent that occurred since last June. Thus, the overall depreciation of the local currency reached 20 percent. Even if the current level of the exchange rate, say at around 2.26, is maintained in the coming weeks, disastrous consequences for the economy cannot be avoided. The balance sheets of the Turkish companies having high debt denominated in hard currencies will be dramatically deteriorated. This is very bad news for investment. Furthermore, the inflation forecast of the central bank, recently revised from 5.3 percent to 6.6 percent, will still be out of reach, since the pass-through from import prices to inflation will be much higher than what the central bank assumed when making its new forecast. This means that the actual level of the central bank policy rate at 10 percent would not be enough to encourage capital inflows, in other words, to avoid a sudden stop. At first glance, the recent interest rate increase seemed to be quite harsh and thus sufficient to revive the appetite for assets denominated in the Turkish lira. In fact, the interest rate increase has not been that harsh. The bottom line of the story is that the cost of the liquidity given by the central bank rose from 7.75 percent to 10 percent. This new level of the basic interest rate pushed up the expected real interest rate from zero to 2 percent, since the inflation expectation in the last survey is close to 8 percent. Nevertheless, the expectations may rapidly worsen if the Turkish lira does not appreciate to some extent in the near future. Admittedly, political uncertainties as well as the discourse of the prime minister about the place of the interest rate in an open market economy, a discourse that defies the basics of economic theory, caused significant damage in terms of confidence with respect to economic governance. The central bank cannot reverse the threats the Turkish economy is facing alone. A few days ago, government officials started talking about Plans B and C, Plan A probably being the recent move by the central bank. We don't have enough details to comment on these later plans, but it seems that new rules about corruption are envisaged as well as incentives for foreign capital. We'll see. In the meantime, Turkey will continue to give Mr. Krugman some shivers.