Economy and voting behavior

On Thursday, just ahead of local elections which have transformed into a referendum on the incumbent party, I participated in a very interesting workshop on the various determinants of voting behavior.
Four papers were presented during this workshop, organized by the Turkey Economy Foundation (TEK), at Boğaziçi University: “Elections and Public Sector Pricing” by Ercan Uygur; "Political Knowledge and Voting Behavior in Turkey" by Deniz Salman; "Economic Voting in Turkey: Some Recent Findings" by Cem Başlevent; and "What Outcome Should be Expected on March 30 and How the Outcome Should be Interpreted?" by Ali Akarca. Professor Uygur, the president of TEK, questioned if from 1980 to 2014 the prices of public goods like coal, petroleum, natural gas, electricity and water controlled by the government are raised before elections and released soon after. His answer is affirmative and this is a rather expected answer. However, what is less expected is the fact that the Justice and Development Party (AKP) government followed exactly the same pricing policy as the various governments in power from 1980 to 2003. That said, as Turkey became an open market economy from the 1980s, governments avoided creating a long-lasting deviation trend between prices of public goods and average inflation. In other words, they respected market rules except for short periods preceding elections. Salman, a political scientist from Boğaziçi University, tries to understand to what extent Turkish voters vote “correctly” using data from a survey conducted just after the June 2011 general elections. In political science jargon, “correct voting” means a vote that matches the political position of the voter defined by his/her thoughts on various issues -- captured by 19 questions in the survey -- with the party line expressed in the party program. One of the interesting findings in the paper is that only 53 percent of Turkish voters vote “correctly.” This average figure is 87 percent for the AKP and 41 percent for the Republican People's Party (CHP). Here we have, for sure, a political culture problem that deserves further research. Başlevent, an economist from Bilgi University, questioned to what extent voters hold the government responsible for changes in their economic conditions and to what extent this affects their votes. The paper uses very fresh data from a Konda survey on voting intentions done in February. The paper's econometric regressions show that worsening economic conditions negatively and sizably affect votes for the incumbent party. According to the survey, 31 percent of voters said their economic conditions had worsened (22 percent said their conditions had improved) and 80 percent of this 31 percent hold the government responsible. Nevertheless, the share of voters who voted for the AKP in the last elections who said their conditions had worsened was limited to 18 percent. The bottom line, in my opinion, is that we should not expect a sizable fall in the share of AKP votes (50 percent in June 2011) because of economic factors, though we do not know what the effect of the corruption scandal will be. The paper by Akarca from the University of Illinois, Chicago, is more ambitious since it predicts the share of votes for the incumbent party on March 30. Years ago, Akarca developed quite a sophisticated econometric model based on the data of 27 elections held in Turkey since 1950. I have no room to go into details but recommend readers the articles published by the author on this topic. Let me just say I am impressed by the prediction powers of the model. The model considers the credit or blame the government receives due to economic conditions, advantages and disadvantages of incumbency, political inertia and realignments. It also takes into account strategic voting by the electorate caused by election thresholds and their desire to balance the power of the government. According to Akarca, “the AKP should receive about 45 percent of the vote in the upcoming elections.” This limited loss of votes is particularly due to the fact that economic growth slowed but there is no recession. Taking into consideration the error margins for each determinant, Akarca adds that “a 95 percent confidence interval constructed puts the vote share somewhere between 42 and 48 percent.” I must warn that this prediction does not include the impact of the corruption scandal as pointed out by the author. It is up to your personal opinion to decide how much you have to reduce the share of votes as predicted by Akarca.

Ekonomik istikrarı kim tehdit ediyor?

AKP’nin yolsuzluklara karşı birinci savunma hattı olan “başarılı Türkiye’yi tökezletmek için paralel devlet ve uluslararası güçler komplo kurdu” iddiasının hemen ardından ikinci bir savunma hattının oluşturulduğuna şahit oluyoruz: “AKP iktidarı zayıflarsa ekonomik istikrar güme gider, 1990’lara geri döneriz.”

Başlıktaki sorunun yanıtı: Bizzat Başbakan

            Bu iddiayı baştan ciddiye almamıştım. Ama son bir kaç hafta içinde çeşitli vesilelerle partinin demir çekirdiğine mensup olmayan nispeten bağımsız AKP seçmenleri nezninde “ekonomik istikrarsızlık” argümanının etkili olduğuna şahit oldum. Sadece yerli ve yabancı yatırımcılar değil, geçen on yılda refahında önemli artşılar elde eden düşük gelirli sıradan vadandaşların da böyle bir endişe taşıdığı anlaşılıyor. Dolayısıyla ciddiye almaya ve tartışmaya değer bir iddia ile karşı karşıyayız.

Ekonomi-siyaset ilişkisi

            Önce şu gerçeği teslim etmekte yarar var. 2002 Kasımında AKP’yi iktidara taşıyan 1990’ların birbiriyle içiçe geçen siyasal ve ekonomik krizleri oldu. Temmuz 2007 seçimlerinde AKP oy desteğini 12 yüzde puan arttırarak iktidarını sağlamlaştırmasını önemli ölçüde ekonomik istikrarla birlikte belirgin ölçüde artan refah seviyesine bağlı. Aynı şekilde Mart 2009 yerel seçimlerinda kaybetiği 8 puanın da ardında ekonomik kriz var. Mart 2009 bir raslantı sonucu işsizliğin tavan, milli gelirin de taban yaptığı aydı. 2009’un 2. Çeyreğinden itibaren hızla toparlanan ekonomi Haziran 2011 seçimlerinde AKP’nin oy oranını yüzde 50’ye yükseltmesinde etkili oldu.

            Bugün ekonomik krizden söz edemeyiz. Bu noktada sorulması gereken ilk soru şudur: Gelecekte ekonomik istikrar tehdit altında mıdır? Yanıtım evet. Öyleyse ikinci soruya geçelim: Peki ekonomik istikrarı kim tehdit ediyor?. Bu soruya yanıtım iktidarınkinden çok farklı. Bana göre ekonomik istikrarı bizzat Başabakanın artık iyice belirginleşen otoriter yönetim şekli tehdit ediyor. Gerekçem oldukça yalın: Ekonomik istikrar tehdit altında çünkü otoriter yönelim bizzat ekonomik istikrarın temellerini çürütüyor.

Ekonomik istikrarın çürüyen temelleri

            Ekonomik istikrarı başlıca iki etkene borçluyuz. Birincisi, AKP iktidarının onlarca yıldır görülmemiş ölçüde mali disipline sadık kalması. Bu seyede enflasyon ve reel faiz büyük ölçüde düştü. Aynı zamanda kamu borç oranı yüzde 70’lerden yüzde 35 civarına gerilerken, faize giden kaynaklar da alt yapıya ve sağlık hizmetlerine yönlendirildi. AKP iktidarının ekonomide ikinci başarısı, 2001 krizi ertesinde vücut bulan başta Merkez Bankası olmak üzere BDDK, Rekabet Kurumu gibi bağımsız-özerk ekonomi kurumlarına gösterdiği saygıdır. Sermaye akımlarına açık, küresel ekonomi ile büyük ölçüde bütünleşmiş bir piyasa ekonomisinin istikrarının birinci temel dayanağı özetle ifade etmeye çalıştığım bu iki öğedir.

Ekonomik istikrarın ikinci temel dayanağı Kopenhag kriterlerini asgari ölçüde yerine getirmenin sayesinde yürüyen AB üyelik müzakereleri ve bu müzekerelirin sağladığı yatırımcı güvenidir. Bu dayanağa kısaca AB çıpası diyoruz. Yerli ve yabancı yatırımcıların gözünde bu çıpa Türkiye’de Hukuka saygının ve demokratik işleyişin teminatıdır. AB çıpası sayesinde doğrudan yabancı sermaye miktarının 3 milyar dolardan birden 15-20 milyar dolarlara fırladığını hatırlatmak isterim.

Şimdi soralım: Yaklaşık son bir yıldır Başabakan’ın para politikasına, bağımsız kurumlara yaptığı mesnetsiz müdaheleler, çeşitli işadamı çevrelerine yönelttiği ağır suçlamalar ve tehditler, yargıyı kontrol altına alma çabaları, hukuka meydan okumalar, kısacası Türkiye’yi otoriter bir tarzla yönetme çabası ekonomik istikrara  tehdit midir, yoksa ekonomik istikrarın teminatı mıdır? Yanıtı size bırakıyorum. 

Confessions from the finance minister

I am aware that readers of this column, which is mostly reserved for economic issues, may not have much interest in another article on economics because the local elections will be held this Sunday and extreme political tension is dominating the campaign.
Most readers would perhaps prefer I write again about the possible outcomes of March 30, but I already said what I think about them. I will just reiterate the main points of my personal thoughts on the electoral debate before discussing an assessment of the Turkish economy made last Saturday by Finance Minister Mehmet Şimşek. I think this assessment is worth being discussed, whatever the final result of March 30 may be. VPM Babacan & FM Şimşek, trying to be realistic  To be brief, I think that on March 30, for the future of our democracy as well as for economic stability, a sizable fall in the Justice and Development Party's (AKP) share of votes is crucial. I do not expect a clear defeat of the ruling party for many reasons. Nevertheless, a share of votes at around 40 percent nationally seems plausible to me, and this outcome would be sufficient to put in motion new political dynamics for getting the country out of the nightmare in which it is living nowadays. As for the finance minister, what he said last Saturday at the Uludağ Summit, a kind of local Davos Summit, goes beyond the impacts of the current political tension on the economy. Mr. Şimşek spoke on four points: current account deficit (CAD), budget performance, interest rates and economic growth. The key points of his speech were growth performance and, to some extent, the actual interest rate level. So, let's start with those. The finance minister claimed, "Maintaining [key] interest rates at just over 11 percent while the inflation rate is above 8 percent is a great success.” Alright! Due to the new monetary stance of the US Federal Reserve, expected real interest rates increased in developing countries, including Turkey. Given the slow but determined increase of the US Treasury Bond's interest rates and given the increased risk premiums for Turkey -- thanks to the authoritarian approach of Prime Minister Recep Tayyip Erdoğan regarding the biggest graft scandal of the republican era -- the actual interest rate level might be revealed as insufficient to stabilize the exchange rate and the inflation rate. What I understand when our finance minister says “great success” is that the central bank could be obliged to increase its policy rate in the near future. I'll let you guess what might be the reaction of our prime minister, the greatest enemy of high interest rates. The nominal and particularly the real interest rates are much higher nowadays than before, and this is, of course, not good for domestic demand. However, before the interest rate could increase, the AKP government took some restrictive measures on the use of consumer loans. It is aiming to discourage the import of consumption goods as well as take control of domestic demand. These measures started to have their effects felt in February. Şimşek said that businessmen are not happy with these measures, but the government had to take them because of the necessity to decrease the CAD. Finally, high interest rates coupled with restrictions on bank loans are expected to lower economic growth. Mr. Şimşek did not make any prediction about growth perspectives in Turkey, but he admitted that “developing countries have entered a period of low growth and the next decade will not be better than the last decade.” Nevertheless, Mr. Şimşek implicitly recognized that the growth rate will be lower than the planned 4 percent in the medium term, since he confessed that it would be very difficult to reach budget targets this year because of lower tax receipts due to weak domestic demand. The only good news he pointed out is the decreasing CAD, thanks to low domestic demand, low economic growth and decreasing imports; exports will receive an extra push due to a moderate revival in the European market. Well, given the finance minister's summary of the economy, what may be said regarding the AKP rule? At least two things: First, once low economic growth becomes apparent so close to the general elections, Erdoğan will strongly react to the tight monetary policy as well as to the loan restrictions, breaking the already fragile balance existing between him and those who govern the economy. Second, the low growth rate, around 3 percent, will start to show its adverse effects on the social conditions of the poor.

Who threatens economic stability?

As the day of local elections -- which have been transformed into a de facto referendum on Justice and Development Party (AKP) rule -- is approaching, the AKP's spokespeople have added a new argument to the ruling party's defensive repertoire, besides the infamous plot allegations. According to this new argument, if the AKP's power is reduced following a low share of the vote on March 30, the days of economic instability will return.
Who really threatens economic stability? The first question that must be raised regarding this argument is: Should we take it seriously? To ask in another way: Should the millions of people who voted for the AKP in June 2011 be afraid of the loss of economic stability? My answer is yes. Economic stability is threatened and we should be afraid of this, but who is really threatening economic stability? It is true that after the lost decade of the 1990s, rocked by recurrent political and economic crises, Turkey experienced a decade of political and economic stability under AKP rule. During this period, per capita income has increased by an average of 3.5 percent per year, meaning a real increase of 46 percent per capita over 11 years. Moreover, this increase has particularly helped the poorest 40 percent of households. This impressive per capita increase has ensured a sizable drop in poverty, whatever measure we use. I assert this with full knowledge of the facts, as one of my current research priorities is poverty in Turkey. We must add to the drop in poverty the improvement in public services, particularly in the health sector, which is not included in poverty measures. So, the new defense line of AKP could be persuasive for the electorate. Unfortunately, the mass of ordinary voters are unable to perceive where the real danger lies. This is understandable. What is less understandable is that even foreign investors, who should be better informed and capable of making a sound analysis, have a similar approach to the economic stability issue. The other day, watching an economics program on TV, I was shocked to hear an investment consultant saying that her foreign clients believe that if the AKP receives over 45 percent of the vote, this will be perceived as a guarantee of economic stability, since the AKP would preserve its strength and political uncertainties would be obviated. Such silly nonsense. The economic stability was due to two basic factors: first, a well-functioning open market economy, thanks to a sound fiscal policy and respect for the autonomy of key economic institutions such as the Central Bank of Turkey, the Banking Regulation and Supervision Agency (BDDK) and the Turkish Competition Authority; and second, the existence of a pluralistic democracy respecting -- to at least a minimal degree -- the Copenhagen criteria, under which Turkey is pursuing membership negotiations with the EU. These two pillars provided a crucial contribution to the fairly high economic growth by encouraging investment and maintaining the inflow of foreign capital, filling the gap between low domestic savings and high investment -- in other words, financing the huge current account deficit. However, erosion in these pillars is now jeopardizing Turkey's economic stability. Since the Gezi Park protests of last year -- and even more acutely since the graft scandal erupted on Dec. 17 -- neither a well-functioning open economy nor a pluralistic democracy that respects the rule of law can be assumed in Turkey under the rule of the AKP, as long as Erdoğan leads the party. The prime minister's criticism of the so-called “interest-rate lobby,” his strange approach to fighting inflation with low interest rates, his open defiance regarding the conduct of monetary policy by the central bank and his growing interference in other economic institutions must be construed as leading indicators of an imminent change in economic policies if the AKP emerges from the March 30 local elections with a comfortable support. However, the biggest threat to economic stability comes from the dangers of Erdoğan's drift toward authoritarianism. A strong electoral show of support will certainly encourage him to continue with a revitalized conviction to interfere in the judiciary, the press and in stigmatizing various business communities accused of being “traitors” and “plotters.” This atmosphere is certainly not propitious for investment and therefore economic stability and growth. It could also be asked if a low share of the vote for the AKP would better serve economic stability. This is not something we can be sure about. Nevertheless, I can assert that if this comes to pass, we can at least hope that important changes will occur in the ruling party, making it capable of returning to the old days when rationality and modesty were held in higher esteem than madness and arrogance as is the case nowadays.

Türkiye'nin üzerine demir perde yavaş yavaş iniyor

Merhaba,

Bu blogda şimdiye dek yazılarıma yer verdim. Koyduğumu yazıları ayrıca tweet'liyordum. Dün gece yarısına doğru başbakanlık açıklamasını gördükten sonra son bir tweet atayım dedim ama heyhat...! Erişimi çoktan engellemişlerdi. Şimdi bu kısa notu tweet'lemeye çalışacağım bir işe yarayıp yaramayacağını bilmiyorum. O tweet'de şunu yazmıştım: Türkiye'nin üzerine demir perde iniyor. Zor bir döneme giriyoruz. RTE'nin bu ülkeyi uzun süre yönetebileceğini hiç sanmıyorum. Ama bu arada hüzünlü günler bizi bekliyor.

İşsizlikte sert düşüş

Geçen hafta Çarşamba yazamadım. Pazartesi günü düşüp sol ayak bileğimi kırınca yazacak zaman olmadı. Bu kaza olmasaydı TÜİK’in yeni açıkladığı yıllık 2013 istatistiklerini kullanarak bölgesel işsizlikte öne çıkan ilginç bulguları yazacaktım. Yerel seçim öncesi ilginç bir konu olurdu. Bugün için yazarım diyordum. Ama Pazartesi günü açıklanan Aralık dönemi HİA rakamlarında işsizlikte beklemediğıim ölçüde sert düşüş olduğunu görünce konuyu değiştirdim.

            Önce şunu belirteyim: İşgücü piyasasındaki güncel gelişmeleri mevsim etkilerinden arındırılmış tarım dışı verilerle takip etmek en doğru yol. Çünkü tarımda istihdam oldukça oynak olabiliyor. Örneğin, Kasım döneminden Aralık dönemine tarım istihdamında 50 bin kadar artış olmuş. Arızi olduğunu düşünüyorum. Uzun süredir tarım istihdamı düzenli azalıyordu. Bu son artışa rağmen tarım istihdamının geçen bir yılda 180 bin kadar azaldığını not edelim.

Tarım dışı istihdamda güçlü artış

            Kasımdan Aralık’a mevsim etkilerinden arındırılmış rakamlara göre tarım dışı işisizlik oranı yüzde 12’den 11,6’ya geriledi. Bu gerilemenin nedeni tarım dışı istihdamın 156 bin artması. Bu son bir yılda gözlemlenen en yüksek dönemsel artış. Aslında işsizlikte düşüş yeni değil. Ekim ve kasım dönemlerinde de düşüş söz konusuydu. Oysa işsizlik oranları bir yılı aşkın süredir ılımlı bir yükseliş eğilimi sergiliyordu. Ekim ve Kasımda gözlemlenen düşüşün arızi olma ihtimali vardı.  Ancak arda arda üç dönem düşen işsizlik oranının arızi bir durumdan ziyade düşüş yönlü yeni bir eğilimin varlığına işaret ettiğini düşünüyorum.

            Tabi akla hemen iki soru geliyor: Bir, işiszilkteki düşüş eğilimini nasıl açıklayabiliriz? İki, bu eğilim devam eder mi? Türkiye işgücü piyasasında işsizliği esas olarak iki etken belirliyor: Büyüme ve büyümenin istihdam yaratma kapasitesi. Aslında işgücü değişimleri de bir etken. Ancak şahsi gözlemlerim kriz dönemleri dışında, yani normal zamanlarda, işgücü artışlarının yapısal trendinin üzerine ancak istihdamdaki güçlü artışlar meydana geldiğinde çıktığını söylüyor. Basitçe şöyle de söyleyebiliriz: Normal zamanlarda işgücü artışını büyük ölçüde isithdam artışı belirliyor.

Kritik etken büyüme

            İstihdamı büyüme ve büyümenin işgücü yaratma kapasitesi belirlediğine göre bu ikilide durum nedir bir bakalım. Betam 2013’ün ikinci yarısında yıllık büyümeyi yüzde 4,8 tahmin ediyor. Kesin rakamı mart sonu öğreneceğiz ama fazla yanılacağımızı sanmıyorum çünkü 3. Çeyrek büyümesi zaten belli. Geçen yıl büyüme açısından zayıf bir ilk yarıdan sonra güçlü bir ikinci yarı yaşandı. Aynı dönemde ise tarım dışı istihdam artışı yüzde 3,3 olarak gerçekleşti. Büyüme-istihdam esnekliği (büyümenin istihdam yaratma kapasitesi) yaklaşık 0,7 çıkıyor. Bu oldukça yüksek bir rakam ama sürpriz değil. 2009 ertesinde büyümenin istihdam yaratma kapasitesinin hizmet sektöründeki güçlü istihdam artışları sayesinde bir hayli yükseldiğini biliyoruz. 0,7 esneklik son dört yılın ortalaması ile fazlasıyla uyumlu.

            Demek ki işsizlikte düşüş eğilimi şaşırtıcı sayılmaz. Peki bu düşüş devam eder mi? Bu sorunun yanıtını birinci sorunun yanıtında aramalıyız. Önce şunu belirteyim: Hizmet sektöründe güçlü istihdam artışlarının, dolayısıyla büyümenin yüksek istihdam yaratma kapasitesinin daha bir süre devam etmesini bekliyorum. Geriye büyüme kalıyor. Yıl başında 2014 büyümesini yüzde 2,5 civarında beklediğimi açıklamıştım. Tahminlerin çoğu da bu yönde. Dolayısıyla, işsizliğin bir iki dönem daha azalmaya devam ettikten sonra yeniden ılımlı bir artış eğilimine girmesini bekliyorum. Büyümeyi yakından takip etmekte yarar var. 

Strong fall in unemployment

According to December labor statistics published by the Turkish Statistics Institute (TurkStat) on Monday, all forms of unemployment decreased significantly.
The annual reduction in the unemployment rate was limited to 0.1 percentage points (from 10.1 to 10 percent) because of a sizable fall in agricultural employment (179,000) while the non-agricultural unemployment rate fell from 12.4 percent to 12.1 within a year thanks to a very strong increase in non-agricultural employment (675,000). The strong performance of employment in the last period (from November to December) greatly contributed to this astonishing annual increase. Indeed, from November to December, non-agricultural employment increased by 159,000 according to seasonally adjusted figures. This is the highest increase observed by far in the last 12 periods. The fall in non-agricultural employment in the seasonally adjusted series was even stronger: It fell by 0.4 percentage points from 12 percent in November to 11.6 percent in December. In fact, seasonally adjusted unemployment had already been falling in November and October though it was on an upward trend for almost a year. I think one can now talk about the changing trend on the unemployment front. Two questions deserve our attention at this point. How do we explain this trend change? Will the fall in unemployment be a long-lasting trend or it is just an ephemeral spring in winter? I am not sure I can provide definitive answers to these questions but I can at least share additional information on this matter and give my personal opinions based on my dedicated experience in the Turkish labor market. First, how can we explain the fall in unemployment in the last quarter of 2013? The two key factors regarding changes in unemployment are gross domestic product (GDP) growth performance and the job creation capacity of this growth -- in other words, the level of growth employment elasticity. Usually, a third factor, a change in the labor force, also matters. But in the Turkish context, the labor force, particularly the non-agricultural one, has quite a stable structural trend to which a cyclical component should be added. In an economic crisis, the labor force grows more than its structural trend, causing strong increases in unemployment, all the more since employment falls during these periods of crisis. On the other hand, during, let's say, normal periods, upward shifts in the labor force depend on employment changes. In other words, mostly employment increases drive labor force increases during these normal periods. So let's focus on economic growth and the job creation capacity. Considering the fact that the impact of growth on employment experiences some time lags, I prefer to focus on the second half of 2013. We know that economic growth accelerated after a mediocre first half. Bahçeşehir University's Center for Economic and Social Research (BETAM) estimates annual growth in the second half to be 4.8 percent. As for non-agricultural employment, it grew by 3.3 percent in the same period. The elasticity of growth to employment (the employment growth rate for 1 percent GDP growth) is close to 0.7 percent. This figure indicates a rather high job creation capacity of growth but it remains in the range observed after the economic crisis of 2008-2009. We know the job creation capacity of economic growth increased significantly in the last few years thanks to strong increases in the service sector, literally populated by women. Let me note that out of the 675,000 net jobs created in non-agricultural sectors, 269,000 were held by women and most of these jobs were created in the service sector. Finally, one can assert that the relatively strong growth in the second half reinforced by high growth-employment elasticity explains quite well the fall in unemployment for three consecutive periods. Will this fall continue? The answer will depend basically on growth performance because I think the high growth-employment elasticity can last several years due to high employment increases in the service sector. Do not forget that the share of the service sector in employment is just over 50 percent, while this share is more than 70 percent in developed countries. So, the critical point is growth performance. In my last few columns I claimed that I expect a low growth rate, around 2.5 percent, this year. The leading indicators of the first quarter confirm this forecast. Nevertheless, we should realize that even in the case of a deceleration in the growth rate, a change in the unemployment trend will take some time.

What can we expect from an elected president?

In my column on Feb. 14, I suggested two possibilities of the evolution of the political situation after the local elections to be held on March 30.
President Gül & PM Erdoğan Depending on the Justice and Development Party's (AKP) share of votes, Prime Minister Recep Tayyip Erdoğan will either take on the risk of a presidential regime saga, or he will choose to maintain the existing presidential regime and retain his title of prime minister. I argued that Mr. Erdoğan would not want to become a president with limited executive powers, as is the case at present. Thus, his decision will depend 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 one is to secure a referendum majority in Parliament, which will allow the AKP to change the constitution. I claimed that if this possibility is perceived as being quite risky, Abdullah Gül, the current president of the republic, will be the AKP candidate in the presidential election. Recent events have made the second scenario more plausible. Indeed, the signs being given by AKP spokespeople, including Mr. Erdoğan himself, show that a repeal of the three-term limit which prevents Mr. Erdoğan from ruling for a fourth term is definitely on the AKP's agenda. This three-term limit has been a party rule for a long time, and Mr. Erdoğan has always defended this rule with passion. So, why this sudden U-turn? I think the AKP is expecting a share of votes below the critical threshold of 45 percent despite the optimistic declarations of its managers. I have already explained why 45 percent constitutes a critical threshold with respect to Erdoğan's decision on the presidency, but let me reiterate it briefly. If it obtains less than 45 percent of the vote, the AKP is unable to gain the referendum majority, even if it changes the electoral system by narrowing the constituencies as has been suggested by the prime minister. I think the presidential ambitions of Mr. Erdoğan seem to be over. If this is the case, and we will learn this very soon, the AKP needs another candidate for the presidential election, which will be held for the first time by popular vote. It has no other alternative than Gül, the co-founder of the AKP along with Erdoğan and the president of the republic. If Gül is elected, and it is almost certain that he will at least go through to the second round, a new era in Turkish politics as well as in the internal balances of the AKP will open up. Indeed, the powers of the president of the republic were designed in the existing constitution by the military rulers of the 1980 military coup in such a way that Gen. Kenan Evren, who led the coup, would be able to control the elected civil governments after he gave up his uniform and became president of the republic. These powers include, besides the standard power of veto of the laws voted by Parliament, the right to nominate a number of high bureaucrats in state organs, including those in the high judiciary. Moreover, the president of the republic has the right to lead the government's meetings. President Gül refrained from using this last right during his mandate as Mr. Erdoğan has been the uncontested leader of the executive power. But things may change when the president is elected by the people. Two factors allow me to believe that Mr. Gül would behave differently during his second mandate. The first factor is related to the fact that Mr. Gül as a candidate running for an election is obliged to present a program and make some promises. Since these programs and promises cannot be about the governance of the country, which remains the exclusivity of the government, they can only be about safeguarding freedoms and the rule of law and increasing democracy. Candidate Gül must proclaim how and which goals he will use his rather extensive powers for. The second factor is the fact that a president elected by the people will give the president of the republic greater moral weight and legitimacy in the balance of power within the executive and more specifically within the AKP. The existence of a president elected by the people and having rather great powers was criticized as an unsustainable regime since it encompasses two heads of the executive power. I agree. But for the time being I hope the elected president will constitute a minimal system of checks and balances against a prime minister who is not afraid of breaking the law.

Unemployment distress in Southeast

Every year in March, the Turkish Statistics Institute (TurkStat) publishes the aggregate labor market statistics of the previous year. The 2013 statistics were revealed last Thursday.
In fact, these yearly figures do not give any new information about the labor market dynamics since they do not differ from the trends shown by the monthly figures. However, the release of the aggregate statistics reveals the state of regional labor markets. We know that Turkey's 26 regions differ tremendously from each other not only with respect to labor market indicators such as labor force participation, employment and unemployment, etc., but also with respect to the changes occurring in these indicators; while unemployment, for example, may increase at the national level, it may decrease in some regions. Unemployed waiting in front of the Empolment Agencey's bus    The 2013 figures have confirmed this pattern. The average unemployment rate increased moderately from 9.2 to 9.7 percent. The increase in unemployment had already been observed in monthly statistics, and I may add that this increase is perfectly in line with the increase in the labor force participation rate, rising from 50 to 50.8 percent, as well as a rather sizeable increase in employment following a gross domestic product (GDP) growth rate around 4 percent. Nevertheless, the employment increase has not been sufficient to compensate for the labor force increase. This is the brief story of the Turkish labor market over the past year. As for the regions, we have quite different stories. Let me start with the two lowest unemployment rates: The best performer has been Central Anatolia's Karaman and Konya, with an unemployment rate of 4.7 percent. This rate decreased from 6.1 percent in 2012 and, in that regard, has been one of the highest decreases in unemployment thanks to booming employment. The second-best performer is the Aegean region, with cities like Afyon, Kütahya, Manisa and Uşak having an unemployment rate of 5.4 percent, up from 4.4 percent in 2012. These very low rates mean that there are almost no unemployment problems in these regions. The two regions with the highest unemployment rates are in the Southeast, and largely populated by Kurdish people: Batman, Mardin, Siirt and Şırnak with 21.1 percent, and Diyarbakır and Şanlıurfa with 17.5 percent. They have also the lowest labor force participation rates, around 37 percent, due to very low female participation rates. This high unemployment has its origin partly in the heap of Kurdish villagers living in those cities as a result of a so-called “low-intensity war” that has devastated the region during the last two decades. That said, I have a caveat regarding Diyarbakır and Şanlıurfa: Before 2013, unemployment rates were surprisingly very low -- around 7 percent -- in this region; from 2012 to 2013 the rate suddenly jumped to 17.5 percent. This jump was due to a surprising boost in the labor force, which increased by 32 percent, and not to a decrease in employment, which has strongly increased by 16.7 percent. The astonishing jump in the labor force within a year is uncommon and I think that TurkStat had made a measurement error, particularly underestimating the labor force. The third highest unemployment rate is in the İzmir region, with 15.4 percent. This is not a novelty. İzmir is Turkey's third-largest city, and at the same time, it is one of the most modern cities, having been the main port of the European trade route for a long time. However, İzmir has been in a relative decline for decades; it receives a large number of immigrants from the east and southeast, but its economy is unable to create enough jobs because of low economic growth. The situation worsened even more last year since the unemployment rate increased from 14.8 percent to 15.4 percent. In fact, the employment increase of 6.3 percent has been more than satisfying despite the fact that the labor force increased more, to 7.1 percent. Despite the distress in the Southeast, there are some success stories all the same. While unemployment has been increasing nationwide, it decreased in 11 regions out of 26. The most striking decreases occurred in Karaman and Konya, as mentioned above, as well as in Adıyaman, Gaziantep and Kilis. The unemployment rate of this last region, situated on the Syrian frontier, decreased from 11.8 percent to 7.3 percent. This is rather unexpected, since this region, which boomed over the past years thanks to exports to Iraq and Syria, was affected harshly by the Syrian civil war in 2012. It seems that it has recovered quite well from the trauma.

Central bank facing new challenges

Consumer prices published yesterday indicate a rise in the momentum of inflation. Annualized inflation increased from 7.75 in January to 7.9 percent in February; this may be considered quite moderate, but we have observed dangerous increases in the core inflation indicators (H and I indices).
Indeed, in February, the H inflation index increased from 7.7 to 8.6 percent and the I increased from 7.6 to 8.4 percent on a yearl basis. These results are clear signs of increasing inflation in the coming months. In its last quarterly report on inflation, the Central Bank of Turkey was already obliged to increase its year-end inflation forecast from 6.2 percent to 6.8 percent. A second revision is now unavoidable. We will know the new forecast in April, when the second inflation report will be published. But we can almost be sure that the new forecast will be over 7 percent. Inflation is not getting closer to its target of 5 percent; on the contrary, it is moving away from it. One can say that this is not a new thing since this has been the case for years. The central bank will, once again, have to write a letter to the government, as the law requires, explaining that the culprit for increased inflation is the depreciation of the Turkish lira. I am not sure that the rise in inflation is that simple and won't affect our lives. Repeated failures concerning inflation put the credibility of the central bank at stake. Furthermore, open political pressure on the central bank's management, exerted by Prime Minister Recep Tayyip Erdoğan himself and by some other ministers criticizing interest rate increases, have established an unhealthy environment. The central bank cannot escape from its main duty: price stability. In Turkey, this means lowering the inflation rate close to the targeted 5 percent and keeping it there until a new target is set. Notes from the Monetary Policy Committee (PPK) extraordinary meeting of Jan. 28 indicate that this reality was clearly brought up: “In order to contain the deterioration in inflation expectations and pricing behavior, the committee implemented strong and frontloaded monetary tightening. … A tight monetary policy stance will be maintained until there is significant improvement in the inflation outlook.” Well said! However, there is a problem. Paradoxically, this tightening occurs in the context of low economic growth. Usually, monetary tightening is implemented when demand exceeds potential growth, in other words, when the economy grows too much that it leads to an increase in prices. Now, in our case, inflation is actually rising because of rising import prices due to the recent depreciation of the Turkish lira and, to some extent, because of the rise in food prices. One can claim that the depreciation is pushing inflation up, but this is a transitory effect and if the exchange rate is stabilized and the tight monetary policy is maintained, the rise in inflation would be reversed within a few months. That is true. The exchange rate seems to be stabilized, at least for this moment, but at a rather high level. This is good news for export-led growth. We may expect a positive contribution of net exports (exports growing more rapidly than imports). Nevertheless, it is not sure that the positive contribution of net exports would be sufficient to compensate an eventual decline in domestic demand. All leading indicators in this respect are in the red. The central bank's management is aware of this eventuality. One can read in the committee's meeting notes: “There is a gradual slowdown in loan growth stemming from the tight monetary policy stance, the recent macro-prudential measures and weak capital flows. The data regarding the first quarter of 2014 indicate some deceleration in final domestic demand.” I believe pursuing tight monetary policy in the context of low economic growth would not be an easy task at all for the central bank. The Justice and Development Party (AKP) government will test its popularity very soon -- in local elections on March 30. If the results from the ballot boxes are not satisfying for AKP rulers, they will be all the more worried for the presidential and general elections to follow, since the low economic growth will become more apparent and its adverse consequences on the social front will be felt even more. Given the approach of Erdoğan and his inner circle to the monetary policy, we can easily predict that they will not accept being simple spectators who simply wonder what the central bank is going to do. Frankly speaking, I am worried about the central bank in terms of the political pressures it will be facing in the near future.