Regarding the so-called weaknesses, a couple of ramifications should be given here in order to provide reliable proposals to the new government. First of all, it would not be fair to blame the current IMF program for all the semi-finished, incomplete or failed achievements. Some of them stem from structural rigidities of our political and economic systems. Obviously their solution requires a long-term horizon, stability, more conscious and concrete efforts and a rational sequencing of the issues.
As a matter of fact, priority initially had to be given to the elimination of budget deficits (16.5 percent of the gross domestic product (GDP) in 2001), alarming levels of public debt (97 percent of the GDP in 2001) and a chronic inflation which stabilized around 70 percent for more than two decades.
According to numerous academic studies of the budget deficit, the manner of its finance and extreme monetary emission are the significant factors in explaining persistent consumer inflation in Turkey. I agree with the classical monetarist arguments for inflation which indicate that whenever and wherever there are problems with inflation, it means there is a problem with money management (i.e. printing too much money). However, I would also argue that Keynesian theories have a strong explanatory power in the case of Turkey. Keynesian ideas simply give reference to imbalances between (aggregate) demand and (aggregate) supply. Either demand pressure or lack of supply (or both) are responsible for the rise of chronic inflation. An acceptable synthesis of both the classical and Keynesian arguments would suggest that, even if the increased inflation in Turkey could be explained by the so-called disequilibrium in the demand and supply mechanism, inflation would be normalized only if there is no monetary adjustment.
The reason I put such emphasis on inflation is that the budget deficit, public debt as an accumulation of this deficit and the resulting inflation reflect the resource constraints against the rise of unfulfilled expectations of a relatively young population.
One of the more well known definitions of economics gives special reference to the scarcity of resources as opposed to unlimited desires and wants. This means we are limited by a severe problem of choice. That is why the initial objective of the current stabilization program was to establish basic macroeconomic equilibrium first. In fact, Turkey’s achievements in this regard are quite satisfactory. In line with these achievements the problem of choice due to resource constraints would be eased for many reasons.
First of all, parallel to reforms in the public sector reform (i.e. social security reform), both the public deficit and public sector borrowing would continue to decline. Therefore the public sector will start positive saving for the first time in many decades and the current pressure on the financial market will be removed. Practically this means that the crowding-out effect on private sector investment behavior will decrease and more fresh, abundant and less expensive resources will be left to the private sector to finance their investment activities.
Moreover as macroeconomic fundamentals improve and the policy environment becomes more investment-friendly, net foreign investment (NFI) will continue flowing into the domestic market. As a matter of fact, this process has been an ongoing story for the last couple of years. However, the inflow of NFI (i.e. short-term portfolio investment, foreign direct investment (FDI), long-term credits, etc.) into Turkey is not only because of higher real interest rates as compared with other emerging market economies. The business outlook and long-term profit motive in a stable growth environment is also a significant factor. Therefore as inflation pressures weaken, the Central Bank of Turkey should take this chance to start cutting interest rate for the first time in more than a year.
What I am trying to say is that, as macroeconomic balances are preserved, the current savings-investment gap (now around 6-8 percent of the GDP) would be effectively financed by NFI. This is another way of eliminating severe resource and choice constraints.
The last, though not least, factor in overcoming the problem of choice is obviously related with a revolutionary rise in total factor productivity. This is to be achieved by a continued high-quality capital fixed formation for at least more than a decade. Also continued and well-managed human capital formation and infrastructural investment are two extremely important agenda items waiting for the new government.
In short, the current government and IMF-based program has been quite successful in the relatively easier stage of achieving stability. Now it is the obligation of the coming government to focus on the greater challenge of achieving the above-mentioned post-stabilization development goals.
