In times of high growth and high current account deficit, we at least knew what we were faced with.

It used to be that the high growth-high current account deficit duo would cause us anxiety. We wrote a great deal about it. And today, we are anxious about the possible outcomes of the low growth and high current account deficit combination. The second issue of the Economic Conditions Report prepared by the TEPAV Finance Institute has been released. The best part to me is the warning about this new combination. Why? It’s quite simple: it is a new phenomenon for Turkey. So, we want to know, first, if it is a transition period phenomenon, and second, how it can be managed. It is now better understood that economic policy management is a sort of juggling process. You have to juggle five balls at a time. Let me tell you how.

Such is humankind: it fears of what it doesn’t understand. In times of high growth and high current account deficit, we at least knew what we were faced with. Turkey had encountered this temporary equilibrium several times before and had had the chance to observe how they had gotten along. We had an idea about how and when this equilibrium would end. The low growth -high current account deficit duo, however, is brand new to us. Now, we are in a period in which we will learn how low growth–high current account deficit phenomenon will end up. So, this is a process that is good for economists, challenging for economic policy management, and precarious for politicians. I guess this is the first thing to stress.

Second, let me present the picture more concretely: Turkey’s economy has been slowing down. For a long period, the economy grew so rapidly that it almost knocked the spots off China. Since the beginning of 2012, however, the growth rate has been in decline; the annual growth rate has fallen from 9 percent to 3 percent. In just a year, from 2011 to 2012, Turkey’s economic growth rate will have slipped by almost 70 percent. In 2012, current account deficit also have declined. Remember that once the deficit had reached a record-high with 10 percent of the GDP, as Turkey had failed to take precautions in a timely fashion. Today, the current account deficit is easing along with the economic slowdown, but at a slower pace. In the first seven months of the year, the current account deficit, that is, the foreign finance deficit, decreased by 30 percent against the 70 percent drop in growth rate. Let’s admit that the current account deficit has not eased despite the steep decrease in growth.

Is the slowdown bad for Turkey’s economy? No, it is not. The disease was diagnosed and prescribed. Now, we are taking the pills. Yet, the symptoms have not disappeared. And this is bad. What is the meaning of a high current account deficit despite the weakening of growth? It means that Turkey’s economy is still in need of foreign finance. What was the criterion of those who have lent to Turkey so far? Rapid economic growth. Today, however, the economy is not growing as strongly as it used to, and this phenomenon will continue for some time more. Then, we are at the brink of a critical turning point. If you like, you might tell the story to a foreign investment banker to test the scenario.

Is it possible to turn everything around and reignite growth? No, it isn’t. The present economic slowdown is the outcome of intentional policy preferences in the right direction. Is it possible to accelerate the decrease in the current account deficit? No, it isn’t. The challenge is a structural one, any way you slice it. Then, in order to secure rapid growth in the medium-term, Turkey must crack open the door to structural reform. Turkey needs a new growth story. I think that the AK Party congress last Sunday did not give us a marketable growth story.

What we need now is not to note down reforms to make and steps to take. To name, design, and discuss reforms one by one would cause a clash and disturb political stability. It is not the time to get bogged down in details; it is time to convince all parties about the presence of a general commitment for democratization via a new constitution. The first critical issue today is to emphasize that a new constitution is the key to any reform. The second is to enable a healthy constitution-making process. The third is to make a new constitution focused on individual freedom and free from details.

Steps to this end will help the economy management to deal with conjunctural challenges. Otherwise, the low growth–high current account duo will keep bothering us.

This commentary was published in Radikal daily on 02.10.2012