Like fast growth, slower growth performance will create serious drawbacks. So which is better for Turkey -- rapid or slower growth? We define economics in introductory courses as “the science of scarce resources,” meaning that there is no such thing as a free lunch. Turkey recorded an annual 7 percent uninterrupted growth rate over the last five years. This is one of the highest rates not only among Organization of Economic Cooperation and Development (OECD) countries, but also other emerging market economies.
There have been three striking aspects of Turkey’s high growth performance since 2001. Firstly, despite high growth there has been a dramatic decline in consumer inflation from almost 69 percent in 2001 to 7.4 percent as of August 2007. The underlying reason behind this positive process is obviously the surge in both labor and total productivity.
Secondly, fast growth has not led to a significant decline in Turkey’s record level of unemployment (around 10 percent) due to a productivity surge, declining labor-intensive industries and structural transformation of the agricultural sector, where the share of employment is still around 28 percent, as compared to the 3 percent EU average. We can say that growth created significant employment, but that it has not been a satisfactory performance to absorb the new entrants into the labor market, which have totaled around 800,000 per year.
Thirdly, high growth was achieved at the expense of a record level current account deficit (almost 8 percent of gross domestic product, GDP, in 2006) and therefore resulted in high import dependency. This underlines the fact that Turkey’s sustainable growth potential has not yet been restored. In that regard import dependency at almost every level of production, lack of financial resources because of an ever-increasing savings-investment gap, deficiencies in human capital due to historical collapse in technical education, severe problems in social, economic and political infrastructure and chronic high production costs caused by several categories of taxes are the most urgent fields to reform and improve.
Since the first half of 2006 there has been a problem in achieving inflationary targets and controlling the growing account deficit. Therefore the Central Bank of Turkey has been applying policy to control inflation according to announced targets. As a matter of fact, according to the latest statistics, the GDP growth rate was 5.2 percent in the first half of 2007, well below the average of the last five years.
When we look at aggregate demand components from the given table, it is seen that private final consumption also followed the process of contraction. This is good news for inflation. However, due to the double elections this year, fiscal discipline has been relaxed considerably and public expenditures increased dramatically. Therefore public sector contribution to inflation is no longer helpful. I expect that its positive impact will be visible once again in the last quarter. The quality of public expenditure is also questionable.
Still, gross fixed-capital formation is well above the growth rate, indicating continuation of investment and export-driven production performance. However, as the growth slows the rate of unemployment will remain high. The ultimate question is when Turkey will be able to achieve a higher growth rate, so as to converge with the European average, without leading to a major inflationary deviation and with an acceptable level of current account deficit? The success of the Justice and Development Party (AK Party) government in its second term and the fate of the country are closely linked with the performance of Turkey at this critical point.
