Main potential vulnerability, however, is CA deficit projected at 7-8 percent of GNP in 2007. Therefore, maintaining export and productivity growth is critical.As a matter of fact, a new striking observation on the growth performance of Turkey is that although there has been record level of foreign capital inflows, of which almost 20 billion is composed of FDI in 2006 and 2007, growth performance in 2006 and 2007 will be significantly below the average annual growth rate since 2002. To clarify my point, in parallel to the improvements in macroeconomic performance, economic stability and progresses in investment climate, Turkey has been quite successful in attracting the required financial resources so as to eliminate the bottlenecks in financing growth performance. Under this observation, it could be expected that not only growth performance would be higher in the last two years, but also the rate of inflation be lower.
What I am trying to underline is that the economy is bounded by supply side dynamics rather than monetary factors, both in terms of growth and struggling with inflation. If this observation is correct, it can be argued that the existing tight monetary policy is unlikely to create the desired results in our disinflation program. Therefore, rather than giving extreme emphasis on management on monetary front, we must focus on supply side dynamics in 2008 and after that.
In that regard, in order to further clarify our topics today, I want to make reference to a recent activity. Ankara-based TEPAV (Economic Policy Research Foundation of Turkey) and the World Bank have already announced the results of Turkey Investment Climate Assessment Report in Istanbul, on Nov. 11th. 2007. In my understanding, this report is a clear and quite impressive document on the required roadmap for policy-making authorities in Turkey to struggle with inflation as well as achieve a sustainable high growth path with an acceptable current account deficit in the longer term.
As it is seen from the given figures below, despite her recent impressive performance in growth, Turkey's per capita income has not converged to that of EU and of comparable emerging markets. Korea, Malaysia and Chile had per capita income similar to that of Turkey in 1980 but have grown much faster than Turkey. Turkey's income per capita has been at 25 percent of that of EU countries since 1975.
Based on this observation and Turkey's history in inflation, we must derive two interrelated policy recommendation here: A growth level above 7 percent can not be sacrificed, except some conjuncture related domestic and/or external business cycles. Second, in order to achieve such a growth trajectory, a stable price level, around 4 percent or lower, must be achieved. Unless a decisive and lasting result is achieved on the inflationary front, it is unlikely to achieve the above-mentioned growth results.
