Güven Sak, PhD - [Archive]

An unmanaged economy accumulates risks 04/01/2011 - Viewed 1708 times

2011 will be the year to avoid behaving like Procrustes. Administrators had better be cautious.

2011 will be a year requiring cautious economic administration. As everyone is giving a name to the year, let me add my own. I think 2011 will be the year to avoid behaving like Procrustes. Let me tell you why.

Procrustes is a figure from Greek mythology. He is said to have been a good host. He invited people passing by his house to eat and spend the night. As night came, he would tell his guests that he had a comfortable bed that fit everyone perfectly and give them a comfortable night's rest. As the story goes, during the night Procrustes would amputate the legs of  those taller than the bed and stretch those of the people shorter than the bed. Thus, none of his guests could leave the house in the morning.

The moral of the story resembles a quote from Keynes from decades ago: if the data do not support your arguments, you will have to change how you think. There is no sense in manipulating the data to fit your argument, or as in our example, to make the guests fit the bed.

Pragmatism is necessary

Another lesson to be learned from this story is that pretending you know something when you do not does more harm than good. When you pretend that you know something, you exclude from the analysis the part which has not yet been observed. That part does not fit into the story in your mind and your views backed by earlier observations. This is the biggest challenge in comprehending any new phenomenon. For our administrators, it is vital to comprehending the "new" notion in the new normal. This is even of greater importance for 2011. Why?

The reason is simple: In 2011 the performance of Turkey's economy will be determined by external factors. Here there are three elements to note. The first is to what extent the crisis in Europe will deepen. The second is how the crisis in Europe will affect the recovery process in the US. The third is how the oil and raw material prices will change. In developing countries, the recovery process has the potential to push oil prices up to $100/barrel, for instance. This is what the current outlook implies.

Such potential developments seem to influence Turkey through two channels: fund flows, and structural and external-driven price shocks. In such a milieu inflation will always be a top agenda item. Both fund inflows and structural price shocks involve changes for which we are not prepared. For an evaluation of the unaccustomed impact of fund flows on the balance sheets of banks, please see the evaluation note "Short Term Fund Flows Harm Banks" by TEPAV analyst Sarp Kalkan. The step you take to deal with the current challenge of fund flows might cause problems with respect to price hikes. The outlook of the monetary policy is already like this.

So from this perspective, 2011 is primarily and particularly a year in which to avoid behavior like Procrustes is important. We must put aside all ideological biases and thoughts and act like pragmatics. On the other hand, it is difficult to be pragmatic in the face of a certain target; it necessitates discipline. 2011 will be the year in which the abilities of the economic administration will be tested.

Of course, inaction is still an option, as was chosen in 2010. If you targeted 4 percent growth and constructed the balance on this target, can 8 percent growth be deemed a success? No, it cannot. The experience in the last year should have taught us one thing: As the current outlook shows, an unmanaged economy accumulates risks.

This commentary was published in Radikal daily on 04.01.2011