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Why is the Medium Term Program not taken seriously in Turkey? 20/10/2010 - Viewed 3142 times

The Medium Term Program (MTP) for the 2011-2013 period announced last week was welcomed warmly by the markets. I guess the impact of the MTP, which presents the estimations and policy perspectives for a period of three years, lasts only a week. I wonder how many of you will dig into the MTP and adjust your forecasts to those of the government. Not many. The reason is that the MTP is not taken seriously in Turkey.

We should first emphasize that Turkey's experience with the medium-term program has a long history. The first MTP was prepared in 2005 as per Law No. 5018 to cover the 2006-2008 period. Last week, the sixth medium-term program was announced. The programs are prepared to fulfill two main functions. The first is about the government's sharing with the market its forecasts about fundamental macroeconomic variables.  In this way, decision makers can see the overall economic performance targeted by the government and incorporate the official expectations about economic indicators such as foreign trade volume, inflation rate, budget balance and borrowing requirement into their plans as far as they deem such forecasts realistic.

The second function of the MTP is to serve as an 'anchor' with respect to the policies to be pursued in five main areas (i.e., competitiveness, employment, human development, regional development, and quality of public services). In an ideal case, the bureaucracy and the private sector, when making their roadmaps, would shape their decisions in tandem with the policy priorities outlined in the MTP.

Then, to what extent do the medium-term programs of Turkey fulfill these two functions? To answer this question, the six MTPs prepared so far must be assessed together to identify common defects. The table below presents the estimations of the MTPs for fundamental macroeconomic variables for the 2006-2013 period and realizations for the 2006-2010 period.

Simply looking at this table, it is possible to point out four major problems:

• Timid growth targets. In all of the developing countries of the world, particularly in those with young populations, the primary target of governments is to improve economic growth rates. Similarly, in Turkey it is possible to witness the emphasis politicians place on the importance of growth. However, this is not observed in the MTPs. Each program prepared since 2005 has stated clearly that no increase in the growth capacity of the economy is targeted or expected. To say the least, the data prove that the MTPs do not assert any ambitious claims about economic growth.

• Unemployment left on its own. The lack of assertion in growth targets also can be witnessed when it comes to unemployment rate estimations. The table below shows that each MTP has targeted the unemployment rate to remain at the level realized in the year of the announcement. The first MTP estimated a 10 percent unemployment rate for 2006 whereas the last MTP forecasted the unemployment rate in 2013 as 11.4 percent.

• No intention to ease the current account deficit. The current account deficit also has got its share of the modesty observed in the unemployment rate targets. Except for the MTP announced in 2005, none of the MTPs from 2006 to 2013 has stated an assertive target to reduce the current account deficit. In fact, the target of the current account deficit as ratio to the GDP has increased from 4 percent in 2006 to 5 percent in 2013. This also validates that the current policy framework does not have a perspective for an industrial strategy that will reduce dependency on intermediate good imports.

• Missing the targets harms credibility. Stating unrealistic estimations simply to put forth an assertive target harms the credibility of the program, just like a constant failure to meet the targets also undermines the anchor's reliability. For instance, the size of the economy in 2010 was estimated to be US$ 571 billion in the 2007 program and US$ 830 billion in the 2008 program. The 2009 program, which coincided with the time when the prevalence of the crisis was acknowledged officially, expectations for 2010 were revised down to US$ 641 billion. On the other hand, the recently announced 2010 program estimates the national income to stand at US$ 730 billion as of the end of 2010. In this regard, it must be the top priority of the following MTPs not only to make assertive estimations, but also to prevent such gaps between targets and realizations.

The points above rely on the figures given below, i.e. on the macroeconomic indicators given in the MTPs. It is also possible to voice some criticisms on the basis of another critical aspect of the programs: policy priorities in development axes. In this context, three main problems can be highlighted.

• Policy priorities are not visible. The policy priorities enumerated in the MTP appears to be a review of a long list. The MTP summarizes the content of the annual programs and pre-accession economic programs, prepared in different formats and levels of comprehensiveness to serve similar purposes. It does not state policy priorities clearly Therefore, considered as a policy anchor, it is impossible to argue that the program assumes a critical function in guiding decision makers.

• Dearth of innovation. In a country like Turkey, which tries to overcome the middle income trap and struggles to initiate a process of dynamic and innovation-led growth, the MTP also has to be innovative. Nonetheless, the MTP does not demonstrate approaches that assess the earlier solutions proposed for the problems of the economy, draw policy lessons from previous unsuccessful attempts or introduce innovative solutions to overcome existing challenges. I am not sure whether it would be unfair to claim that the policy recommendations in the program are simply copied from earlier ones and pasted into the current MTP.

• Absence of a growth story and political ownership. To me, the MTP, in its present form, is a perfunctory program. When you read the document, you come across neither a medium-term growth story nor a sense of any enthusiasm about the future performance of Turkey. Of course, you can question whether or not the case was different in any other program prepared by the SPO. However, this does not legitimize the problem. If it does not stimulate any enthusiasm for the three years ahead, like its former equivalents, the MTP will be forgotten on dusty shelves instead of being a document embraced by politicians and referred to by the private sector.

In my previous commentary, I argued that Turkey's main problem is that it lacks a medium-term growth story. Unfortunately, the recently announced MTP does not remedy this problem, either.  Turkey needs more than anytime before a roadmap as to how to overcome the middle income trap. I will address the characteristics of an innovation-led growth story in my next commentary.

TABLE 1: Change in fundamental macroeconomic variables in Medium Term Programs, 2006-2013