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    Short term –long term dilemma

    Fatih Özatay, PhD01 June 2009 - Okunma Sayısı: 978


    Among the important economic factors that will put its mark on the medium term the first is that there is a high risk abundant global capital seen before the crisis period evaporates. For two reasons: First, the global economy was run over by a cylinder, it will need long time to recover. Second, from this point on, supervision and monitoring will be a carried out not only for certain part of the fiscal system but for the whole system and will be more detailed.

    This is a significant problem for countries like Turkey where domestic saving rate is quite low. Domestic savings is not sufficient to enable rapid growth; we need to make use of foreign savings. However, if the global capital will tighten, it means that we will not be able to find as much resources before.

    It is obvious that the main structural problem in the medium-long tem will be answering the question how to increase the domestic saving rate. Otherwise, we have to settle for growth rates below the historical average 4.5-5 percent. But, this is not we want as it is not enough to close the welfare gap between Turkey and the developed countries. In other words, it is not enough to limit the unemployment rate which currently is at high levels.

    Let us skip the medium-long term structural framework and get back to our principal problem in the short term: Unemployment rate will be extremely high in 2009 and 2010 as the economy will contract considerably in 2009 and will face the risk of contraction as well in 2010.

    This principle short term problem cannot be eliminated completely. However, it can be eased: We need to try buoying the credit market as much as possible reducing the risk perception on the one hand while stimulating domestic demand on the other. And this implies that savings will be less in 2009 and 2010. It is apparent that the solution of the main structural problem in the medium-long term conflicts with the principle problem in the short term.

    Is there a way out from this dilemma? There is one we can give a shot: We will not focus solely on the difference between the current budget revenues and expenditures. We will mind this difference for each year involved in our medium term horizon. We will try to ensure that the sum of the differences (in their present value) has a plus sign.

    What does this mean? First, we can increase budget deficit to stimulate demand today; I am talking about a limited increase of course. But, we can target budget surplus beginning for instance from 2011. Therefore, we can limit short term economic contraction and prevent unemployment rate from rising to unprecedented levels together with other economic measures widely discussed in this column before.

    Second, if the sum of the mentioned difference has a plus sign, i.e. if sum of budget revenues exceed sum of budget deficits, it means that the public sector has been pushing up the savings. This implies that, public sector fulfills its duty for medium-long term main target of increasing domestic saving rate. So in that case, the mentioned dilemma will be eliminated.

    However there are two important problems. First is, we live today, but we can only give promises about tomorrow. We have to believe those words when we are told public revenues will be kept above expenditures. If we don't, current fiscal loosening will increase the risk perception leading to outcomes opposite to our short term targets. Second, in 2011 elections will be held; so who embraces budget tightening?

    The first problem can be solved by adopting a medium term fiscal rule under a credible framework. Here credibility lies in promulgating the sanctions for violating the rule by enacting a law. The problem can also be solved by signing an agreement with the IMF.

    The point to be respected is that there exists a political choice problem: Either high unemployment rates in 2009 and 2010 and to a certain extent in 2011, or increasing election expenditures for instance asphalting some roads knowing that it will be eroded away in a couple of months...


    This commentary was published in Radikal daily on 01.06.2009