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    How to raise the savings rate?

    Fatih Özatay, PhD16 February 2013 - Okunma Sayısı: 1292

    With a longer-sighted perspective, it is clear that the way to leap to an upper league passes through anti-informality measures among others.

    It was three weeks ago when I last said “I will continue on this subject.” The subject was growth constraints and shopping lists. Now it’s time.

    In spite of the limited recovery in the recent period, Turkey’s GDP per capita is still 30 percent of the GDP per capita of the US. There remains a large gap and the average growth rate in the last decade fell short of closing it. Low savings rate is the primary impediment to raising growth rates. In comparison with the BRICs and South Korea, Turkey’s domestic savings rate is even lower than Brazil, the weakest link of the group.

    On any scale, Turkey’s savings are low in proportion to its income, and decreasing. Within this framework, the government has introduced a new individual pension system. Some countries have succeeded in stimulating private savings via economic policy. The extent to which Turkey’s strategy matches with the success stories is a separate question of analysis. But my first impression is that a new system to stimulate savings would have some degree of positive impact.

    Regular readers would agree that there are some indispensible matters this column covers. They show up sporadically, taking different forms from time to time. They are indispensible because they are critically important. Informal economy is one. Informal economy and higher sustainable growth rates are correlated for at least two aspects.

    First is about domestic savings rate. Overall savings have two main components: public sector savings rate and private sector savings rate. Due to the presence and the considerable size of the informal economy, Turkey collects taxes from a small proportion of taxpayers. If the size of the informal economy were smaller, Turkey would be able to increase tax revenues without raising taxes. And obviously, increasing tax revenues means raising public savings rate. This policy would have an adverse effect on private savings to some degree. But studies suggest that such policy can improve overall domestic savings.

    It seems quite reasonable on paper. Its political feasibility is not as strong, however. If the policy succeeds in the fight against informality, informal businesses will have smaller chances to survive as their costs will escalate. The political authority has to take into account the employment informal businesses generate. Therefore, the main impediment to eradicating informal economy is the employment losses it might cause.

    Of course, with a longer-sighted perspective, it is clear that the way to leap to an upper league passes through anti-informality measures among others.  This difference in perspectives is what distinguishes a politician who will have a place in history from a regular one, I guess.

    Anyways, productivity level marks the second correlation between informality and sustainable growth rate. Some studies suggest that the productivity gain brought about by a successful strategy against informality can ensure a leap in per capita output and income. I will address some of these as far as the agenda allows.

    This commentary was published in Radikal daily on 16.02.2013