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    2010 and 2011: Scenario of spinning

    Fatih Özatay, PhD02 July 2009 - Okunma Sayısı: 1183


    National income figures for the first year of 2009, for which everyone expected a serious contraction, has been announced last Tuesday. Figures were as expected: economy contracted by 13.8 percent compared to the same period last year. The said contraction was encountered despite the significant rise in public spending and investment.

    This development takes us to that highly important point: Short term growth cannot be assessed in the context of the models told in the first half of the economics textbooks. That is to say, if you say "fiscal policy is too tight, we have to relax it a bit in 2002" as was done at the end of 2001 or say "interest rates must be cut, taxes must be reduced and public expenditures must be raised" as was done during this crisis; it means that you have a highly incomplete approach toward the problem. Under some certain conditions, such measures might fail to increase the pace of growth unlike what is targeted. Moreover, such conditions were ample in i2001 and are ample currently. What is of importance in that case is to improve the confidence of investors and consumers in the economy, make them believe that things will get back on track, and reduce the risk premium.

    If you fail to do those, you deteriorate the budget balance but get no worthwhile result as is currently done. I will touch upon this issue in more detail soon. Today I would like to switch back to 2010. What type of scenarios can we construct for 2010? First, let me restate one thing. International fund flows toward countries like Turkey will remain very low over a couple of years ahead. It will be higher than 2009, but lower than previous years. And a possible improvement in the export performance will be dependent on the recovery of the countries we export to, in particular of the EU.

    Under these circumstances, we have to construct a new economic program. Main questions are: What type of reforms we can implement to reduce our dependence on foreign resources to scale up the sustainable growth rate, which stood around 5 percent before the global crisis? It is obvious that this is a question for the medium-long term.

    The question for the short term is: Considering that these reforms will not have effect in the short run, what must be done to keep growth rates in 2010 and 2011 at least within the 4-5 percent interval? How can the steps to be taken and the reform roadmap to be drawn now ensure the accomplishment of both short and medium-long term targets?

    Yes, once more we are faced with an important design problem. What we have known so far is not valid because we are at an important turning point. Things will not work in the way they used to. At that point, it is time to ask another important question. Are we able to make this design? Of course, everyone has an answer to this question. But, to build this answer on more solid grounds, let us examine the economic policy design performance of Turkey as of 2006, as the past can shed light on the future. So, what do we see?

    In fact, the answer to this question is quite obvious: We ensured stability and thus paved the way for the reforms that will raise the level of income per capita and push Turkey up to the major league; but we did nothing. We were locked on the double elections that pushed up the polarization among the society in 2007. We discussed that constitutional amendment, which was a necessity, under an unproductive framework. And then came the global crisis, which we approached with geometrical concepts. That is, we closed our eyes and tried to ignore what happens. And even if we tried to make a precaution, we were too late.

    Now taking a look at this performance, I cannot be hopeful about the future. Therefore, my basis scenario for the future at the national level is the 'scenario of spinning'. It implies: If the global crisis does not get severer in 2010, Turkey's economy will grow even if we do not do anything. We are not talking about a kid rapidly falling down and starting to run again. It is obvious that, compared to the minute he fell down, he would be better off when he looked around himself thinking 'what happened to me' and then crouched up. However, our kid has not start walking yet.

    Let's assume that we made it do in 2009, for example we ensured 3 to 4 percent growth. Does this make us be hopeful about 2011? Not at all. The reason lies on the economic policy design performance I mentioned above. What is more, there will be elections in 2011. Remember our performance in 2007. Take a look at the operations of the current administration in the area of economics despite being by far ahead according to the surveys. Moreover, note that unemployment rate in 2010 and 2011 will be far higher when compared to the 2007 period. Note that, therefore panic decisions will be made. This is what I imply with spinning: We are entering a tough period.


    This commentary was published in Radikal daily on 02.07.2009