We started to talk about the dynamics of Turkey's economy. First of all in the last week, we addressed low savings rates. The step to be taken in this regard was to introduce a strong fiscal rule and a monitoring mechanism that will ensure its credibility. This week let us talk upon another issue regarding Turkey's economy. Do you think the fact that Turkey is a big economy affects negatively the possibility of building the growth process upon innovations and discoveries? The answer is, yes it does. Or to put it more cautiously, it might. Let us take a look at the existing problem.

First, let me state more clearly what I am trying to say. Rise of China should have given us as well as many other countries the message that you will have hard times in sectors in which you survive upon keeping labor costs low. Why? First, today, it is not possible to keep labor costs below the level in China. This is not even imaginable. Second, since in China there are almost thirty million people who can become industrial worker over the coming decade, competition based on cheap labor is not sustainable. In this aspect, the conclusion to be made is obvious: In order to maintain their competitiveness, Turkey and similar countries should improve the quality of labor force and create a new realm of activities by climbing up on the value chain. Those who cannot survive upon the existing economic activities had better define a new scope of activities.

At this point, the first thing to come to mind are innovations that enhance productivity in a given business branch. For instance, introducing computer technology in the business processes secures productivity gains in the case of any sector. In that case, a country willing to compete with China has to change the way it conducts business; realize the importance of owning a higher-quality labor force; and prioritize developing new technologies in the sectors it operates. For instance, two weeks ago, a firm resident in Israel was advertising a device that 'seams' deep wounds without a stitch or suture. Doctor McCoy from the Star Trek used to use this method. Those around their fifties would remember. Now this technology is made real. Therefore, either you will introduce an innovation in your business processes using the technology or invent something.

The founder of the process of creative destruction driven by innovation is Joseph Schumpeter.  In his book titled "Can Capitalism Survive?" he redefines the process of creative destruction and says 'I, like Marx, believe that capitalism will be replaced by socialism.' Anyone to make an innovation or invention defeats his precedents and waits for the next inventor to push him out of the market. This is how free market works; this is the virtue of the free market economy. There are no "perfect markets" or "diffusion of information in the markets through prices." As Stiglitz insistently tries to explain since 1980, "Markets are disabled by information asymmetry." And a disabled market cannot be efficient but require state regulation.

What is the main problem with the creative destruction process or innovation driven growth? Making an innovation implies making a sacrifice from today's production for future production gains. Research and development activities require funds. Moreover, it makes you walk on a route end of which is not definite. Change does not happen by itself. Bigger and more instantaneous the need is; higher the system's search for innovation will be. In the case of Turkey, we are talking about a large economy which has a huge market for televisions, refrigerators, and automobiles. We had better not wait for this market itself to tell the corporate sector: 'Make an innovation or you will be destroyed.' We should be aware of the existing dilemma. On the one hand, if someone makes a successful innovation; he cannot seize all of the profit as the technology will be imitated immediately and imitators will also enter the market. On the other hand, if the innovation proves unsuccessful, all the costs will be shouldered by the innovator himself. The result of this dilemma for Turkey's case is potential innovators will make fewer innovations than the optimal. Therefore, the "creative destruction process" does not necessarily work in time. Maybe this is why capitalism is full of crises. It cannot shift from one phase to another as easy as a pie; it cannot secure change without posing lots of pain. After all, it is destruction as evident in the name.

Nowadays, I think through to figure out how Israel managed to demonstrate a process of innovation driven growth and go through such a comprehensive economic transformation over the last two decades. They do not have a "large economy." I believe this is an advantage. Large economy actually means you can find a buyer for anything you sell. In such an economy, public intervention plays a crucial role in ensuring change. On the one hand, you will open the economy to foreign competition as much as possible. After this first stage, you will make an assessment at sector level and decide which steps to take in each sector. As in each reform, this task requires "a bunch of heroes."

Let me finish with this point: Turkey cannot be the star of its region in the absence of a comprehensive economic policy framework. We cannot even mention sustainability.

We are at the eve of the third election; but we still do not have a growth strategy.

A state which does not have a specific economic policy cannot have a specific foreign policy.

This commentary was published in Referans daily on 02.02.2010