Turkey's new economic path

Published 28.09.2017 20:03

The recently announced Medium-Term Program (MTP) disclosed the road map that Turkey will follow in the economy until 2020. As I stated in the previous article, the MTP is a realistic, innovative text that acknowledges opportunities, challenges and advantages lying ahead of Turkey. In this framework, the latest MTP sees Turkey's growth potential for the next three years, and it does not have a wrong perspective to consider this potential to a problem for inflation and current account deficit. In fact, it has determined what will be the state's position on the economy and what it will do in this sphere in a realistic way. To explain it from another perspective, the state sees further ahead of markets in an open and competitive economy and taking institutional steps to pave the way for them and eliminate uncertainties.

We can basically address the state-economy relationship in Turkey in three periods: The foundation of the Republic and one-party period, the planned period that started after the May 27, 1960 military coup, and "outward opening" period that started with the Jan. 24, 1980 resolutions and continued into Turgut Özal's era. In the last one, the state rapidly withdrew and Turkey's economy administration was left to the institutional initiative of the global system. However, as opposed to what is thought, the state had almost no role as a supreme regulatory authority in the planned period, too.

Economic plans, which were put into effect three years after the May 27, 1960 military coup as part of the "planned period," were based on saving-investment equality of the traditional Keynesian growth theory. They were built on models that established mechanical relationships among production factors that cannot be maintained theoretically even in closed national economies. Therefore, all the plans and objectives set in this period remained in cold storage as "academic" texts prepared by the State Planning Organization (DPT). After all, it was not likely to practice these models and plans in an economy that rapidly opened up to the world after 1980.

Until ending standby agreements with the International Monetary Fund (IMF) in 2008, Turkey aimed to minimize the impacts of the 2001 crisis and took steps to re-regulate the public sector and banking system. Especially after 2008, Turkey began highlighting policies that would create externalities in infrastructure investments and the economy that would boost exports and that would minimize developmental gaps among regions. However, this didn't evolve into a holistic development program, supported by monetary and fiscal policies that would regulate markets in line with the new period.

Despite shifting to a floating exchange rate regime, the Central Bank of the Republic of Turkey's (CRBT) efforts to ensure financial stability through high interest rates and the overvalued Turkish lira, and its thought that this policy was the only way to fight inflation, as well as fiscal policies that focused merely on primary surplus, caused Turkey to follow an up-and-down path in growth in this whole process. For instance, the rapid growth rate in 2010 and 2011 could have turned into a permanent, stable, new growth path. However, Turkey geared down in 2012 for the reasons you can guess and lost great time. With incorrect economic policies, inflation and current account deficit will rise along with the gross domestic product (GDP). Conversely, with monetary and fiscal policies that highlight production-oriented, efficient, export-based growth, inflation and the current account deficit will decline as the economy grows.

The current MTP considers high growth rate - above the global average - to be a dynamic that does not trigger basic problems such as inflation and current account deficit, but will reduce them if the proper steps are taken.

Here, I must underline that the MTP is highly "shy" because of the impact of the "past." For instance, the issue of financial stability will not be limited to low inflation and financial markets alone, and an approach that ignores capital markets and does not aim for institutionalization and deepening in this market will not ensure financial stability in the medium and long run. I wrote in the last column that reducing unemployment must be much more important than reducing inflation. After all, any step to be taken to reduce unemployment in the medium term is considered a step to reduce inflation.

There is a need for intense infrastructure investments to boost Turkey's exports over the next three years and to support the competitive small and medium size enterprise (SME) economy based on medium-high technologies. So, a budget deficit/GDP ratio of around 2 percent is acceptable in the whole process. On the finance side, however, there is a fuss about strict policies and increasing taxes. I think this is an unnecessary rush, and tax increases on the finance side of the MTP are unnecessary and even objectionable.

Turkey has taken very important steps in the economy especially in the past two years. Turkey is one of the best countries in the world at the moment in terms of budget realizations and public debts/GDP ratio.

As a result, the state has developed a new understanding aimed at supporting a competitive market and promoting inclusive growth in this MTP. Certainly, this corresponds to a new era. Perhaps, for the first time in the Turkish economy, the state is coming to the fore as a guide for markets and a supreme regulator that removes uncertainties and practices that it has planned. This is neither an interventionist and statist understanding nor a submissive understanding that gives everything to the initiative of global capital.

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