Fatih Özatay, PhD - [Archive]

Economic opening 07/09/2009 - Viewed 1481 times

In a meeting last week, a businessman said "We also need an economic opening." This sentence is a nice summary of the current economic situation. There exists an important problem. If we do not fight with it, it will grow and will be excess baggage for Turkey's future. It is necessary to fight with the problem; but how? What if we make the problem more complicated trying to solve it?

For a while I am trying to discuss why it is necessary to fight with the problem. Yesterday, I mentioned the picture to arise for the future as of September. This picture suggested that for the couple of years ahead, the pace of growth would depend on the developments in the rest of the world. If developed countries, in particular the EU countries who receive 50 percent of our exports recover and if people living there start making consumption, we will export to them. Second, if the foreign credit channels woks, the problem will ease as much and firms and banks will reach funds more easily.

TEPAV studies indicate that when the high possibility that the recovery in the external conditions will be limited is considered and given that the mentioned recovery is expected to lose pace in the first half of 2010, Turkey can grow by around 4 percent in 2010 and that the rate of growth will be lower in 2011. It is not 'low', it is 'lower than low'. In short, it is a high possibility that the pre-crisis growth rate cannot be achieved even at the end of 2011. This means that unemployment rate will remain high. Fundamental questions are: How can we reduce the pessimism of the pessimistic picture? And how can we turn the picture in an optimist one in time?

A year ago, the answers for this question could be posited in a framework that contained both medium term and immediate measures. But current level of budget deficit eliminated that policy options. Therefore, we need to set a framework that makes everyone believe that the medium term will be 'bright'. This way, we can reestablish the climate of confidence. This is the first point.

Second point is: In order to turn the medium term into a 'bright' picture, the new opening first has to reverse the process of deep budget deterioration. This means reducing municipality expenditures, the transfers to social security system and the burden of public enterprises in electricity sector on the general budget. Of course this is not a pleasant opening given that the economy is contracting drastically. But this is inevitable as we cannot go on disturbing the budget balance.

And the third point: If the opening is to be based on measures to heal the budget, it will not have an effect on employment. So, the other elements must be designed and implemented in a way that will give hope about growth performance. We have to set forth the budget balance on a reliable framework that we will stick to. This is possible with a medium term fiscal rule the operation of which will be controlled by independent authorities and the results of which will be conveyed to the public. Here, the critical point is guaranteeing that the rule will be complied to; so legal arrangements are needed.

If in the past these two elements were present, this would be enough for ensuring the climate of confidence. But, now it is not. The crisis showed or must show us that while the economy is contracting drastically, there must be steps we can take. A highly passive approach that counts on the recovery in the rest of the world who will transfer funds and buy goods from us must not be our destiny. Here arises the most important element of the opening: We have to achieve a budget structure which will allow us increase budget expenditures 'fearlessly' when necessary. The way to do this is increasing tax revenue by expanding the tax base. I am talking about a significant expansion in the tax base. This cannot be achieved solely by audits and charges. This is a multidimensional issue. For instance, even moving supermarkets out of town center or regulation of the tourism sector is closely related with this issue. In short, we need a serious program that will fight with the informal economy. It does not seem possible for Turkey to ensure sustainable high growth, more clearly to take even a short distance unless this reform is made in the medium term. Let me remind you something: Current level of industrial production is below the level in May 2005! We could not take the slightest distance in four year between 2005 and 2009!

Fifth point: One element of the immediate measure package is indispensible: Skill improvement programs. New medium term reform must consider skill improvement programs within the scope of a general education reform. Turkey cannot achieve a 'bright' future in the medium term with the current education system and particularly under the current structure of the Higher Education Council.

This commentary was published in Radikal daily on 07.09.2009