The June 7 general election results have put an end to the 13-year one-party government of the Justice and Development Party (AK Party), putting Turkey in position to have a coalition government. Well, what kind of an impact will a possible coalition have on the economy? With the major economic steps and reforms that it launched during its 13 years in power, the AK Party improved the public economy, lowered the ratio of public debt to Gross Domestic Product (GDP) far below the euro convergence criteria - the Maastricht criteria - achieved the lowest inflation rates in its history and ensured a relative improvement in income distribution. Now, Turkey wonders whether the reforms, which will rapidly improve the investment environment, will be maintained by a coalition government. Improving Turkey's investment environment, ensuring a well-functioning market mechanism and deepening currency and capital markets are possible with a powerful government that makes prompt decisions and reduces bureaucratic transactions.
At present, Turkey is at an economic threshold. The latest economic data reveals that growth, which has slowed since 2012, has gathered momentum in the first quarter of 2015. GDP growth has been realized above the expectations at 2.3 percent in the first quarter of 2015 while industrial production is on the rise. It is forecasted that the economy will grow by 3 percent in the second quarter of 2015. The high increase in the import of capital goods in April indicates that investments will rally once again. The AK Party governments did not pursue a populist budget policy in any election periods. In this election period as well, the central administration budget had a surplus of TL 1.64 billion ($600 million) in May. It must be underlined that noninterest budget surplus was TL 25.6 billion between January 2015 and May 2015.
Turkey needs a new growth program and reforms that will further improve the investment environment in order to transform all this healthy data into rapid development. However, a coalition is not a good option to achieve this as Turkey's recent economic history shows. As of the late 1980s, Turkey's coalition governments pursued a growth model, that put simply, renounced its monopolistic economic position, transferred it to monopolist private capital holders through privatizations and these capital circles adhered to the strategy determined by global structures with which they had partnerships abroad. The liberalization of financial markets was ensured in a superficial way that would transfer funds to the outside. Industrial and financial markets were created in this way since the late 1980s, however, this method ignored technological productivity in industry and market depth in financial reconstruction, which was a political preference at the same time. Investing your capital in low and medium technology in industry merely enables you to switch to production areas that the West leaves behind and to be complementary to high-technology areas. Some inevitable consequences of this are a process of intense outsourcing, rigidity in labor market and labor abuse. The financial aspect of this congestion in industrial growth is even more striking. The decision No. 32 was issued to protect the value of the Turkish lira in 1989. Since then, the irregular and facile liberalization of financial markets was created, in addition to the mechanism that was based on high interest rates and transferring funds to the outside. All of these baseless steps taken in the industrial and financial markets gradually paved the way for the 1994 crisis, the postmodern coup of Feb. 28, 1997, which was also an implicit military coup, and finally to the 2001 crisis. This process, beyond any doubt, accompanied monetary and fiscal policies that would complement itself and ensure continuity. The monetary policy model, which was pursued in the process that led to the 2001 crisis, strove to ensure financial stability with a covered currency targeting valuable Turkish lira and used interest rates as a major weapon against exchange rates and inflation. The monetary policy model, which pursued a floating exchange rate regime after the 2001 crisis, made an inflation targeting an interest rate that was above the world average. In this way, it attracted hot money in the short run by keeping an overvalued Turkish lira, however it transferred intensive funds to the outside in the same way. There is not a clear distinction between the two models.
Turkey needs to abandon this nonmarket monetary policy. Obviously, Turkey cannot continue with a monetary policy that finances the current account deficit with short-term capital inflows and that curbs inflation merely through an interest rate that is above the world average. Turkey also needs to attract long-term and permanent investments. To this end, reforms that will improve the investment environment should be rapidly carried out, the banking system should be renewed to continue in a healthier way and bureaucratic barriers to industrial investments should be removed. This cannot be achieved by weak coalition governments in countries like Turkey, as seen in the case of South Korea. A weak coalition government will never satisfy foreign investors who will face bureaucratic obstacles that will cause them to make hard decisions about investments. As such, reforms will halt, the economy will withdraw into its shell once again and market entries will be difficult. By extension, Turkey will be a market that will cause its investors to lose instead of win. I would recommend viewing coalition discussions from this perspective as well.