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)