Güven Sak, PhD - [Archive]

Where can Turkey go with this zero-reform policy? 30/12/2010 - Viewed 3116 times

There is a big difference between pre and post-2007 Turkey. Leaving behind the politically and economically unstable country image, Turkey started the second millennia with an ambitious reform program that stabilized most macroeconomic parameters. Add to this the European Union accession process that brought a series of political reforms aimed at strengthening democratic standards as well as free-market institutions. Then came the general elections in 2007, closure case against the AKP in 2008, local elections in 2009, and of course the global financial crisis. We have seen no major structural reforms in the Turkish economy ever since 2007. Global crisis has led the government to basically a period of wait and see. The only reform attempt that has started and been completed is the ban on smoking in indoor public spaces. Even the constitutional reform that passed through a contentious referendum in 2010 is still pending. None of its secondary legislation has been completed.

At the same time we keep hearing the big goal: being one of the first ten economies in the world by 2023, the Republic's hundredth anniversary. To achieve this rather ambitious target, Turkey needs a large set of structural reforms to sustain economic growth based on productivity gains. Yet the government has effectively postponed all the major structural reforms to the end of the queue -- thanks to the zero-reform policy. It appears that such reforms are not found to be politically feasible by the government, with little or even negative impact on votes in the short run. There is a general election in 2011. Then a possible presidential election in 2012. In between, there might be a debate for another constitutional amendment that will move Turkey towards a semi-presidential system like France. 2013 is the year of municipal elections. Then in 2015 Turkey is going to have another crucial general election to set the political scene. And so on. Even though political stability may remain under this electoral agenda, it is obvious that policy uncertainly will be a major bottleneck for the economy, with a neglected reform agenda.

What are these waiting reforms about?

For instance, structural budgetary reforms to improve the tax system and the revenue agency is waiting. In a country where rising current account deficit is the major problem, a tax reform to increase the public savings could contribute to economic stability. Labor market reforms bringing flexibility and skills transformation might be useful but still waiting. An overhaul of the university system to improve the innovation environment is good but pending.  Turkish students are still at the end of the line in OECD PISA reforms, there is the need for a detailed educational reform, but no time. Infrastructure is an issue to be addressed from roads to ports and electricity network, still no definitive action. Public administration system is not helpful for overcoming regional competitiveness problems, but we have to wait for action. Informality is still a big problem; corporate sector has a dual structure: There are modern companies with productivity levels that are around 60 % of that in the United States companies of the same industry; while the traditional firms that work informally are stuck at around 20% of the U.S. productivity levels. There lies a large space for productivity gains.

Yet since 2007, we have had an extensive period of no-reform policy, with almost no progress whatsoever on the above-listed fronts. The international financial crisis also played a role in this, first creating urgency in crisis-prevention efforts instead of structural reforms; and second making Turkey relatively look good vis-a-vis many developed economies, and hence creating a bullish attitude in the global financial markets for Turkey that has quite limited underpinnings in structural fundamentals.

Can we find any lower hanging fruits in such a setting?

True, with no structural reforms in the horizon, no cross-cutting productivity gains in the Turkish economy. Yet, it is possible to reap productivity gains at the firm level. Any Turkish company in any sector could be turned into a high growth company, generating higher levels of productive employment. Turkey may not have star industries, but there is potential for having star companies in every industry. Look at the flourishing private equity industry. Since 2006, around 30 Turkish and international private equity funds have invested in around a hundred companies in more than 40 industries - manufacturing and services alike. Private equity funds not only invest in companies, but also get actively involved in their management and create value by restructuring often traditionally managed companies. The trend in private equity is evidence that, even without large-scale reforms, the financial sector is aware of the potential in individual companies; and returns in the private equity industry is quite instrumental in realizing it.

For this trend to accelerate, the new Commercial Code might have a crucial role. The agreement in the Parliament to pass this new 1500-article long system for corporate activity is a big opportunity in a no-reform setting. The new Code is a positive step to remove many obstacles in the private equity field and corporate restructuring to transform from traditional to modern activities. Many of these obstacles are related to the regulation of shares, divestiture rules, merger and acquisition rules, and are dealt with in the new Code. The new system will certainly bring costs to the corporate sector, but its long-run benefits will for sure outweigh the costs. The benefit will be productivity gains that will improve the competitiveness of the Turkish economy.

So the new commercial code is the only hope for picking the lower hanging fruits in a no-reform environment. If we sacrifice it to political bickering, then it will be the last tribute of this Parliament to zero-reform policy.