Economic growth has become a hot political issue

In my latest piece on Tuesday (“Erdoğan versus Babacan”), I discussed diverging opinions between Prime Minister Recep Tayyip Erdoğan and Deputy Prime Minister Ali Babacan regarding the conduct of monetary policy. Finance Minister Mehmet Şimşek, during an interview given to a news program on Wednesday, joined the debate by stating that the central bank is independent and that he does not like to comment on its decisions.
But his focus was rather on the expected growth rate this year. Answering a question mentioning that the International Monetary Fund (IMF) had recently revised downward its growth forecast for the Turkish economy from 3.5 percent to 2.3 percent, Mr. Şimşek said that although “the IMF is a respectable institution,” it can still make erroneous forecasts, as has been observed in the past. Şimşek added that he considers that the official 4 percent growth rate target is still possible. It is clear now that there are two opposing groups in the Justice and Development Party (AK Party) government in respect to the economic growth outlook. The first group, led by Prime Minister Erdoğan and including Economy Minister Nihat Zeybekçi, is not satisfied at all by the ongoing growth performance. I do not think they are afraid of the fact that the GDP growth rate this year might be under 3 percent as forecast not only by the IMF but by the majority of the forecasters, including the World Bank and myself -- I wrote at the beginning of January that “I would not be surprised if the GDP increase is limited to 2-3 percent” -- but by the fact that even with a growth rate close to 4 percent, the incumbent party would be facing the next elections without the help of favorable economic conditions. This second group, led by Deputy Prime Minister Ali Babacan and including Finance Minister Şimşek as well Turkish Central Bank Governor Erdem Başçı, argues that the Turkish economy still suffers from a high current account deficit -- the current ratio to GDP being around 7 percent -- and that this deficit is a source of fragility as well as a threat to economic stability. Thus, it must be lowered to a sustainable level, say below 5 percent, through “balanced growth.” The “balanced growth” means, in Turkey's recent economic terminology, a GDP growth based on exports and investment while private consumption is under control and contributes moderately to the growth. This macroeconomic setup is all the more necessary because rising inflation must be curbed at the same time as the current account deficit. In 2013, GDP growth reached 4 percent after a mediocre performance of 2.1 percent in 2012 but this rather decent rate has been obtained thanks to robust private consumption and increasing public spending while the current account deficit was at a high level. In other words, it was not balanced. This year, a growth rate close to 4 percent -- but more balanced, thanks to the sizable depreciation of the Turkish lira that occurred in January and private consumption being under control -- would be a success for the supporters of stable economic growth because higher growth can be obtained only by boosting private consumption, which would in turn widen the current account deficit. Obviously, the prime minister does not agree with this economic framework. He wants much higher growth and he is right, from the political economy perspective. Even if this year the growth rate far exceeds 3 percent, it would not be enough to prevent an increase, albeit moderate, in unemployment or to improve the welfare of the poor, as has been the case during recent years.  Now, Erdoğan faces two successive elections within a year and he needs to win them by a large majority if he would like to keep alive his dream of a system in which he would be the omnipotent president. Mr. Erdoğan and his inner circle know quite well that a slowdown in economic activity could cost the incumbent party support that would be crucial for his dream, which requires a vote share of more than 45 percent, even in the case of a change in the electoral system that would favor the AK Party. Do not forget that the nationwide vote share of the incumbent party decreased from 50 percent to less than 44 percent in the past elections held on March 30, compared to the preceding elections in June 2011. This is why the prime minister insists on loosening monetary policy in order to boost domestic demand. He seems to care neither about inflation nor the current account deficit. If sluggish growth becomes apparent in the next months, the existing fracture between the supporters of sustainable growth and the supporters of high growth at any price will deepen. The economic growth issue will from now on definitely be a hot political issue.