Before evaluating the relevance and realism of the OECD recommendations concerning the Turkish economy, I would like to address the current situation. After the global crisis of 2009, Turkey seemed to have returned to its pre-crisis growth trajectory well-established in 2002-2008. In the pre-crisis period, the Turkish economy recorded a comparably high growth amongst the major emerging economies. During this period, Turkey also achieved remarkable success in restoring macroeconomic stability. In that regard, the annual average consumer inflation rate decreased to well below 10 percent as of 2005 from an almost 30 percent threshold in 2002. Moreover, the fiscal balances of both the public and the banking industry were also restored and preserved.
However, there were two major side effects with the potential to threaten the sustainability of this success. First, growth was associated with a rising external deficit that was increasingly dominated by short-term liabilities in the corporate sector; which puts the Turkish economy in a fragile position against external shocks such as we have been witnessing during the 2011-2012 period in the EU.
Second, after a sharp decrease, inflation has remained resistant and drifted from the emerging market average since 2007 onwards. As the Turkish economy is still far from total factor productivity (TFP) across the major sectors, mainly in the classical industries that are dominated by labor, with low value added and a lack of technological dynamism, Turkey failed to balance the negative repercussions resulting from sharp rises in commodity prices during the 2007-2008 period that brought the world economy to the last global crisis.
Just before the global crisis that erupted by the final quarter of 2008, the Turkish economy lost growth dynamism, while risk factors emanating from a wide current account deficit (CAD) and stubborn inflation with a quite higher real borrowing rate by the Treasury became the ruling facts.
It seems that Turkey has returned to this path in the post-global crisis era without any major changes in the architecture mentioned above. That effective macroeconomic and structural policies helped the Turkish economy rebound vigorously following the global crisis cannot be ignored. Growth not only averaged close to 9 percent in 2010-11, but it was also accompanied by strong job creation. In addition, it should be noted that high employment creation or employment-friendly economic growth in the recovery period in Turkey has been a distinctive characteristic of the Turkish model.
In the process, however, the CAD became even more threatening, widening to almost 10 percent of gross domestic product (GDP), and consumer price inflation also rose over 10 percent. Loss of control of Turkey's dangerously rising CAD also deserves special attention.
During the high economic growth at the beginning of the 2000s at around 7-8 percent per annum, CAD was at almost 3 percent of GDP. However, as of 2008, the two figures were reversed: Growth decreased well below 3 percent, whereas the CAD reached almost 7 percent of GDP. In the post-global crisis, high growth of almost 9 percent came together with an even higher CAD, as mentioned above.
In a world where the main structure of the Turkish economy remains without any remarkable change, the reaction of policymakers to fast growth with a high CAD and inflation has been quite conventional, such as their use of short-term fiscal and monetary policies. The most prominent aspect of such a policy mix is that they might allow you to earn some extra time to focus on the real problem and balance conjectural malaise, as they are not the type of tools that can solve the problems directly.
As both the domestic and external situation has deteriorated since 2007, Turkey failed to take decisive steps to change the structure of the economy and became addicted to the use of counter conjecture short-term tools. Therefore, it is not surprising that after some contractionary fiscal and monetary measures were taken at the beginning of this year, the Turkish economy entered a new phase by the first quarter of 2012. By the end of the first quarter, real GDP growth slowed sharply to 3.2 percent, and the CAD was at around 7 percent of GDP, according to my personal calculations.
There is no doubt that this “soft landing” would be appreciated by major economic players for a while. However, in the medium term this picture is not promising at all. It is quite obvious that in an environment where growth is repressed for the sake of controlling the CAD and inflation (without major success), not only will state revenue collection decrease, but also fiscal balances will be negatively affected, the capacity of employment creation will erode, and unemployment will start rising again.
Under the current situation, for Turkey to return to her high growth track with a manageable CAD and moderate inflation -- that is a convergence to the emerging market averages -- we will wait for the “normalization” of external credit channels, external demands, commodity prices and more competitive exchange rates.
It is suggested in the latest version of the OECD Survey on Turkey that by carrying out the necessary reforms and initiating the new institutions for good governance, Turkey should graduate from a position that would condemn the country to a middle income trap.
