We need a new story on incentives
The growth rate for 2014 was announced the other day. The Turkish economy grew by 2.9% in 2014. There is no point in dreaming: The annual growth rate of our economy in 2015 will remain even lower than that rate. The administrators of this country are in fact aware of this. The employment and incentive packages and the transformation programs appear to be announced back to back to cheer us up. And do they work? That depends on how you see the issue, in my opinion. If your expectation is for our enterprises to get by through 2015, the employment and subsidy package announced last week seems fit to do the job. The truth is, these measures will not restore our foul mood but may help repair part of the damage done in 2014-2015. But if what you have in mind is renewed enthusiasm and a new start, we’re not there yet. Let me tell you what I think.
Turkey was declared one of the “Fragile 5” in the international arena last year. Will Turkey get out of the Fragile 5 with this set of measures? I doubt it. And why not? The Fragile 5 comprised Turkey, South Africa, Indonesia, Brazil and India. What was termed the Fragile 5 last year is now referred to as the Fragile 3. India and Indonesia managed to differentiate themselves from the other countries and exit the list. How? Elections were held in both countries and structural reform packages were brought into effect following those elections. The Narendra Modi government in India and the new administration under the presidency of Jowido in Indonesia appear to have assured international markets. The Indonesian government started off its price reforms, which Turkey had tackled back in the 1980s, by abandoning gasoline subsidies. A structural reform, that is… We didn’t witness an approach in Turkey that we could consider as a new story. That is why we couldn’t differentiate ourselves from the others and crawl out of the list. Brazil in the meantime held an election as well but failed to differentiate itself as it couldn’t offer a different economic framework.
What is it that we could have done in Turkey in order to positively differentiate ourselves from the fragile countries in our league? I think it’s best to pose the question from this angle. In a previous article I had included a graph of the balance of payments. What you see here is the same graph with the inclusion of January 2015. Let me start by elaborating on that. The graph demonstrates the rate of the direct investments of Turks in foreign markets (ODI-outward direct investment) to the direct investments of foreigners in Turkey (FDI-foreign direct investment). What’s the idea? Both Turks and foreigners tend to invest less in Turkey. The rate creeps up from less than 20% to more than 50%.
We can trace the fact that Turks invest less in Turkey from the domestic private investment figures in any case. We can see the national income statistics too. Turks, in the 2003-2007 period, invested heavily in the future of Turkey. They no longer do since 2012. In the 2003-2007 period, for each quarter, domestic private investments increased by 19% on an annual basis. Let’s check out the 2012-2014 period. Domestic private investments for each quarter no longer increase, but in fact drop by 2% on an annual basis. Even Turks no longer invest in the future of their own country.
Let me ask you this: What was spoilt in the country from 2003-2007 to 2012-2014 to dissuade Turks from investing in the future of Turkey? Can we reclaim what we’ve lost with employment and incentive packages? That I find unlikely with the current packages. Let me turn to my own question: What can we do to brighten our mood that turned sour in the 2012-2014 period?
It was June 2013 when Ben Bernanke, the former governor of the Federal Reserve, said the US had to reroute towards monetary tightening. This is how we found out that the outsider impact would no longer be the same. When the interest rate there began to creep up, we got the very strong impression that business would no longer be as usual here. We have seen the impact. It’s a good thing that we took a series of measures to slow down our economy in a controlled manner in advance. Or the slowdown now would have been much more rapid. But the impact came from outside. That’s the first thing.
The second thing was that we found out meanwhile things were not as they looked inside. As we lost our grasp of what we perceived as reality, we figured we were laughing on the wrong side of our mouths. For instance, the retrial of the Sledgehammer case was concluded last week. What did we see? Turkish officers who were sentenced to life imprisonment for treason were acquitted this time. The verdict came from the very same court. How many programs did we see on Sledgehammer? What happened? The court acquitted everyone. In the meantime, Turkish officers remained in prison for more than four years. The court is over for now. But so is our faith in justice. Here’s a 2012-2014 classic for you. On top of the foul mood abroad, we brought down our own house.
So what is it that we could have done but are not doing? Turkey must announce a new program to endorse direct projects in selective areas within the framework of its goal to enhance hi-tech exports. We have to transform the incentive system by leaving aside verbiage and stop providing support for just anyone, identifying instead a series of concrete cash cows and revamp the incentive system through exclusive support for them. I think we cannot proceed without a smart state that knows the hi-tech area it supports as well as the private sector does, and corrects its mistakes right away. We need three things after this point, each of them tall orders…
First of all, we need strong education reform. We cannot generate the human resources we need for hi-tech exports out of the current education system. Secondly, we need to revise our judicial system and save justice from all sorts of blemishes that spark skepticism. We can’t make do without it. Thirdly, we have to establish the principle of equal treatment, the foundation of the rule of law, once and for all. Once the rule of law is tainted, the country spins out of control.
Looking at all these, I think that Turkey cannot differentiate itself from other countries without a new political exaltation like a new constitution.
Think about it; I’m far from being able to explain why and how Turkey needs a strong fiscal policy without a moment’s pause. The primary surplus, which we perceived as strong fiscal policy, was the most fundamental parameter of another world, of the policy of Kemal Derviş for the transition to a stronger economy. Turkey has achieved the transition to a strong economy but still thinks that primary surplus is an indicator of stability. It’s not. Alas, it is typical for Turkey to assume that this is a stability indicator. It’s a fallacy, but it is what it is.
