Fatih Özatay, PhD - [Archive]

Time for a new discourse 03/09/2009 - Viewed 1443 times

I still do not understand how Turkey will at least grow by a rate close to historical growth rate of 4.5 -5 percent in the couple of years ahead. And I guess this is not my fault since we do not have a credible economic policy yet. If we had one, I would try hard to understand why. Turkey's Transition Program implemented after the 2001 crisis proposed a coherent framework: to rescue banking sector which is about to get drawn; to discipline the unsustainable fiscal policy and reduce public debt; to implement floating exchange regime as a shock absorber and ensure monetary discipline; to restructure and strengthen the economic institutional structure to protect the economy from similar problems in the future.

This framework had the potential to rescue Turkey at the edge of the cliff and gave hope with respect to growth because the main reasons behind the recession were sharp fall in domestic demand and evaporation of foreign finance sources. And the main locomotive of these reasons was local rather than global: During the crisis, unemployment rose quite significantly due to bank and firms' bankruptcies. Demolition of the financial sector reduced credit volume significantly. On the other hand, the belief that public debt which was both created and accelerated by the crisis period is not sustainable and thus the concerns that a new crisis is about the emerge resulted in a deep ambiguity about the future and no one had confidence in the economy.

In that case, the economic policy framework summarizes above was expected to stimulate domestic demand both by built confidence and healing the banking sector. At the same time, it was a realistic expectation that foreign fund inflows would begin. Moreover, there were no drops in foreign demand.

Why do I talk about the past? Why do I repeat these? The old economic policy discourse or the old story no more applies. It is not enough to talk about the solidness of banking sector and about the widely known and credible implementation plan of the monetary policy as well as constantly putting emphasis fiscal discipline. In this context, neither medium term fiscal rule nor tax cuts alone solve the problem. Those are required elements; but are not sufficient to ensure a satisfactory sustainable growth rate any more.

A year ago, I wrote several commentaries at this column and opened to discussion what can be done to limit even slightly the expected rapid fall in production and employment. Then, TEPAV proposed a similar recommendation package along with the calculations about the burden on the budget and the outcomes to be derived. However, since than the world has changed substantially. It does not seem possible to implement the extraordinary measures came to agenda back then. Those measures which would have seemed sympathetic when the financial markets were on fire and everyone was introducing unprecedented measures will not hold with today. Though the essence of those recommendation packages is still valid, now there is a need for a new discourse.

There are two elements that should be considered when forming a new framework: First, there is an optimist belief (shall I call it a wish?) that the recession in developed countries is about to end; but we should not count on that much. There is a consensus that even the trough of the recession passed, recovery will be painful and will take a long time. Moreover, there is a considerable risk that with the fiscal stimulus packages are omitted and inventories accumulate to old levels, even the weak rise in production that might be enjoyed in the second half of 2009 cannot be secured. Thus, we should not rely much on the possibility that foreign demand for Turkey's exports will rise and thus the recession will be overcome.

Second, we need an economic structure like that of developed countries which will allow injection of fiscal stimulus when necessary. This cannot happen overnight; but if we can show that we are working on this and we started to take steps to this end, we can have the chance to compensate for the fall in foreign demand to a certain extent.

This commentary was published in Radikal daily on 03.09.2009