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What kind of a thinking shall be employed about the crisis?
We are in the middle of the biggest economic crisis of the era and we are still confused. There are two dominant approaches: The former desperately argues that there is not enough internal space of action to overcome the disaster that originated externally. A deep "no way embarrassment" can easily be observed in this approach. It assumes a sort of "who we are to deal with this huge disaster alone" attitude can be noticed. The second approach on the other hand assumes a much more hopeful attitude. It first enumerates what can be done. Then, it serves that evil question: "Do we have the resources to accomplish those?" and a deep silence spreads around. Again the "no way embarrassment" takes the lead. The way to overcome the crisis is to overcome this dilemma. There are measures to take. Each hour wasted diminishes the effect of the measures to be introduced and increases the cost of the crisis. And Turkey has at least wasted six months. We all see the bleeding. So, which path will we follow as we overcome the dilemma?
World economy is in an interim period. First, the meaning of this interim period shall be defined clearly. The challenge in this period is not liquidity shortage. The problem is that the channels that transfer the liquidity to countries like Turkey are collapsed. The problem is that the channels carrying, perhaps after multiplying it to a certain extent, the liquidity to the real sector and consumers are destroyed. Let me repeat it: The problem is not liquidity shortage. It is that the existing liquidity is not flowing towards the people that are willing to spend it. The problem is about the transfer channels. The mechanisms that used to fulfill their function silently without any complaint are not working anymore. This is the first point.
So what shall be done? In this case, interest rate cut by the central bank does not and will not work. The thing to be done is to ensure the flow of liquidity towards people willing to spend. If the market mechanism cannot ensure this flow, state shall intervene. The purpose of state intervention is not building socialism. The people thinking so neither acknowledge the reality of the period we are in, nor know what socialism is. The purpose of state intervention is to ensure the survival of the system. If there are no mechanisms, an inter-system mechanism shall be built. Thus, intervention is an obligatory option.
Then, what shall the government do? It is quite simple: It will first collect the resources accumulated in certain points via borrowing and then distribute the resources. The whole world does so. By this way, the state in a way replaces the financial markets. No matter how you define it, this is the current reality. What is the challenge here? The challenge is to be able to determine those "who are literally willing to spend" when distributing resources. If the first issue is transfer of the resources, the second is proper transfer of resources.
But, what will this state intervention ultimately enable? It will ensure that the Turkish economy contracts less in 2009 and 2010. Let me state the first point right away: 2009 will be a historic contraction period for the Turkish economy. Figures for last quarter of 2008 imply so. 0.4 percent contraction expectation in the central bank surveys is quite unrealistic. If the spending channels are decided correctly, the economic activity ensured by collecting resources at the hand of the public sector and redistributing those resources will limit the contraction. Otherwise, contraction expectation figure in the expectation survey will remain unrealistic. This is the third point of the day.
So, what is the formula? In this transition period, it is necessary to increase public expenditures in line with the dynamics of the period. But, how can this be accomplished in a credible way? To accomplish this in a credible way, a new multi-year fiscal discipline concept shall be made the creed of the fiscal policy. Otherwise, it is not possible to establish credibility with a budget already fallen into pieces.
What is the source of credibility? The third point we stated today, i.e. a comprehensive public expenditure program with a solid target shall be introduced. The program shall emphasis the second point we stated: First, debt of the corporate sector to banks shall be reconstructed. Second, resources shall be transferred to low-income groups. To ensure fiscal discipline, a convincing multi-year fiscal rule that can end the unreasonable budgetary conducts beginning from deficits of municipalities shall be introduced. The public agency that will embrace and implement the fiscal rule, for instance the Revenue Administration, shall be made autonomous. This is the formula regardless of the Honorable Prime Minister likes it or not.
Otherwise, please fasten your seat belts; a free fall is coming.
It is incompetence that is going to kill us.
This commentary was published in Referans daily on 26.02.2009