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    Need for automatic stabilizers

    Fatih Özatay, PhD26 November 2009 - Okunma Sayısı: 923

     

    On 29 September, TEPAV, the World Bank and UNICEF held a press meeting to introduce the report based on a survey carried out jointly. The findings of the Turkey Welfare Monitoring Survey as discussed in this press meeting were quite provoking. Adverse effects of the crisis were not limited with the rise in unemployment.  Majority of the workers, especially those in informal jobs and in self-employment, stated that they experienced a drop in their income. Survey conducted in Adana, Ankara, Istanbul, İzmir and Kocaeli provinces indicated that households reported various mechanisms to cope with the outcomes of the crisis. For instance, almost half of the parents in poor families stated that they had to reduce the amount of food for their children.

    I have talked about a report the IMF published in July. The report examined and analyzed the measures implemented by G-20 countries to eliminate the negative effects of the crisis on production and employment. Fiscal sector measures were constituted of the rise in public expenditures and budget transfers to certain sectors while financial measures were composed of liquidity and capital transfers to the financial sector. According to this, nominal monetary value of the measures implemented by developed countries was highly above that implemented by developing countries. One of the main reasons behind this was certainly that the countries in the former group had the economic structure allowing the implementation of such measures with comfort and ease. For instance, developed countries are not afraid that risk perception against them rises and real interest rates climb up due to these measures.

    Developed countries have another advantage in terms of limiting the devastating effects of the crisis. Laws and other legal regulations in these countries ensure that in such periods where production falls and unemployment rises, sectors affected negatively by the crisis are provided with direct income transfer from the public budget or through funds devised for this purpose without requiring an additional authorization or procedure. Such measures are called "automatic stabilizers". As the mentioned IMF report suggests, the ratio of the monetary value of automatic stabilizers implemented in developing countries along with the crisis to total national income of those countries is 4.9 percent. This reflects the projections for 2009 and 2010. On the other hand, for the rest of the G20 countries, this ratio stands at 2.3 percent.

    Turkey also has automatic stabilizers in effect: for instance, unemployment benefits.  However, in order to be entitled to receive unemployment benefits, you have to overcome a series of barriers. The number of such barriers must thus be reduced. What is more, such benefits are not provided for those who were employed in informal sector and then lost their jobs. The report reveals that even a significant part of the workers who did not lose their jobs faced a considerable fall in income.  Children, for instance, are affected severely by this. An automatic stabilizer mechanism must be designed taking into account such and similar welfare losses.

    These are the requirements of being a social state. As a side benefit, such income transfers limit the tightening in domestic demand in the face of the crisis. Therefore, it is also beneficial for other sectors of the society as well. So, how will these expenses be covered? So, we turn back to square one: Mexico and Turkey ranks at the bottom among OECD countries in terms of the ratio of tax revenues to national income. We know why:  the high prevalence of informal economy. Turkey has to expand the tax base and improve tax revenues. This cannot be achieved overnight; but the reform must be launched immediately.

    Issue of insufficient domestic saving ratio also locks at the low level of tax revenues (lack of public savings). In periods of above-average growth, economy gives high current account deficit. If foreigners do not provide the funds to finance this deficit, then growth rate drops. In this lens, the issue once again locks at low tax revenues issue (insufficient funds). As budget means do not allow, we have difficulty in implementing measures to combat the rise in unemployment in crisis periods. So, we come back to the low tax revenues issue (limited budget means). We fail to provide sufficient support to sectors affected most severely by the crisis. And again we come back to the low tax revenues issue.

    Turkey needs a series of reforms. However, none of them has such a high priority. I wish happy holidays for all of my readers.

     

    This commentary was published in Radikal daily on 26.11.2009

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