It's good that Turkey has a medium-term plan, but I don't understand how we can increase our domestic savings rate while at the same time maintain growth based on domestic demand.

The Medium-Term Program (MTP) was announced the other day. The MTP calls for discipline for the public sector for the next three years. It's good. I went through it. But it left the taste in my mouth, like those television programs that say, "Let's both eat and lose weight." That's quite nice, actually. You both put no limits on yourself and continue to eat, and you lose weight miraculously. At the same time, all of your test levels fall to optimum levels. Wouldn't that be great? People definitely want to believe in this. You make no effort, but you lose weight. Look how I got this way.

A couple of years ago Turkey and China achieved record-high GDP growth with rates around 9 percent. From that point on a slowdown began: China’s growth has decreased a bit, to 7.5-8 percent, while Turkey's has fallen 2 percent. Then, what is the key difference between China and Turkey? It is their domestic savings rate. In the former, the domestic savings rate is around 50 percent while in the latter it is a meager 12 percent. In the 1980s, Turkey’s savings rate was around 25 percent. Just take a look at the MTP; it tells the story. Turkey’s current account deficit is as high as it is today because the domestic savings rate is low. Don’t believe the “import dependency” myth; it is all about domestic savings. China’s savings rate is so high that it enjoys a large current account surplus. In Turkey, steady growth depends on the capacity to attract foreign savings. China does not have such a necessity. With a low savings rate, growth cannot be steady. China’s economy can slow down and you don’t even notice it, while Turkey’s economy takes a nosedive. What is worse, a growth rate that decreases by three-fourths, but the current account deficit does not even decrease by half.

Over the last three decades, Turkey’s already low domestic savings rate decreased by 50 percent. This means that Turkey is now more vulnerable due to the rising current account deficit. We have been enjoying our time thanks to the expansionary monetary policies of western central banks as anti-crisis responses. The FED will start reversing the quantitative easing policies as the US economy enters back onto the growth path. Turkey will feel the impact deeply; as deep as the grasshopper feels that winter is coming after all the beach parties. What I am saying is, it’s our fault.

Reading the MTP, one gets the impression that Turkey’s economy will continue domestic demand-driven growth in the next three years, with consumption increasing so that the growth rate reaches as high as 5 percent. I will skip this detail for now. More importantly, the MTP also states that the domestic savings rate increases as consumption increases, reversing the decades-old trend. Domestic savings rate reaches 16 percent. You know, you either spend or save your annual income. In our case, however, you both consume and save more. Meanwhile, the current account deficit to GDP ratio decreases from 7.8 percent to 5.5 percent. As I don’t get how the first step works, I don’t get this second one either. But I believe that it is a “lose weight by eating” miracle on which we rely.

But we should give them their due. On paragraph 38 the MTP puts emphasis on the private pension system for boosting savings. The Treasury also has announced a new program to support the system. These are good. Yet I don’t believe that innovations based on the financial sector will succeed in increasing the domestic savings rate. Such innovations can change the composition of domestic savings, but only under meaningful yield rates. This is the first point. Financial innovations can enable a larger proportion of domestic savings to be transferred within the financial system, but it cannot increase domestic savings rate overall. The problem in Turkey is rather cultural and structural. This is the second point.

It is good that Turkey has a MTP. But I don’t understand how Turkey will grow via domestic demand and improve domestic savings rate simultaneously. I don’t see how this pattern will reduce the vulnerabilities caused by current account deficit, either. It looks more like a “lose weight by eating” fantasy to me. Maybe I should read the MTP document once again from the top.

This commentary was published in Radikal daily on 11.10.2013