Goals: For 2007, the government aimed for 5 percent growth, 4 percent inflation, a budget deficit that is equal to 2.5 percent of the Gross National Product (GNP) and a current account deficit worth around 7.5 percent of the GNP. In addition to these macroeconomic goals, the government's targets concerning the acceleration of economic reforms and deepening the structural transformation were more crucial.
Observations for 2007: As the end of 2007 nears, we are able to make these evaluations, looking back at the year.
* Loss of growth acceleration: The first figure shows growth performance for previous years. The second handles the situation in terms of periodical quarters, dealing with details. Growth acceleration has been slowing down for the last two years and growth below 7 percent in Turkey should be seen as a loss, not as a success. It is not a sudden jump of "crises," exchange rates or other economic indicators, but the growth rate is falling below the potential of the country. Because a growth rate equal to 7 percent or above is necessary in terms of many aspects, the goals of increasing the GNP and employment and competing with competitor countries as well as other rising market economies at par and converging with the European Union (EU) are among such aspects.
* Structural rigidity and resistance: Due to structural rigidities that have continuously arisen since 2006, current problems in the food and energy sectors, uncertainty in the global economy and the pressure of domestic consumption tendencies, a relative slowdown of the economy has appeared to be a necessity rather than a choice. This slowing down simultaneously helps the disinflation process continue while stabilizing the current account deficit.
* Despite slowed growth and inflation, the current account deficit resists negative growth: Looking back, we can see that the growth rate had fallen below the amount aimed for. Despite the fact that final consumption expenditures slowed down considerably, resistance of inflation continues because of the reasons mentioned above. The current account deficit hasn't shrunk as much as expected in spite of a growth rate that has decreased below the targeted amount. Since the GNP hasn't increased as much as expected, the budget deficit has risen significantly above the effective performance in 2006 as well. In this economic atmosphere in which the economy relatively slowed down, unemployment has lost its declining tendency and has even begun to rise again.
* Cyclical slowdown is tolerable as long as it is not permanent: We think that in an atmosphere that experiences uncertainties inside and out, it is a smart step to reduce the growth target instead of aiming at an irresponsible growth populism. In fact, instead of struggling against the rise and fall in the Turkish economy, which has recently covered significant distance in the normalization process, cyclical fluctuations should be considered normal. The real problem here is that the "gradual slowdown" adopted to control the financial shock, which struck Turkey in 2006, may deepen its effects on Turkey in line with the slowdown in the economies of developed countries, in particular that of the United States, due to global problems.
* Reducing export market is risky: The risk posed by a reduction in the export market will make itself visible especially in two domains: in liquidity and in export figures. We have not witnessed considerable reduction in global export markets. Despite this, net exports have contributed to the growth rate in the last four quarters and curbed the uptrend in growth with 3.1 points in the last quarter. This fact has been mentioned in the final evaluation of the Organization for Economic Cooperation and Development (OECD). For the moment, it does not seem favorable to offer great advantages to foreign countries. Turkey's greatest attraction is its promising economy and constantly growing performance in exports. The loss of such significant dynamics will point to an unfavorable future in Turkey's economy for foreigners.
There is a downward trend in efficiency: On the other hand, the disruption in growth dynamics has a negative effect on the increase in efficiency. For example, the expenditure on investment in the private sector has slightly increased this year with 4.5 percent when compared to the previous term.
* Consumption is increasing. Conversely, annual increase in private final goods consumption has increased to 3.6 percent, the highest for the last five quarters.
* While the share of net exports and investments in growth decreases, this increase in domestic demands is very likely to continue over the last quarter of this year and the first quarter of 2008. This does not imply sound dynamics in terms of growth and also complicates things with respect to a fall in inflation.
* Reform enthusiasm should be resumed at once. This process, however, should be concluded and a healthy policy should be resumed concerning growth as soon as possible and necessary steps should be taken with determination to this end. As a common practice in Turkey, ruling parties fail to maintain their dynamics for reform and change during their second governmental term and enter the elections in a weakened condition. For this reason, the enthusiasm for reform and change should be kept heightened and the public should be guided in this respect. The reforms undertaken so far have helped the formation of a coalition of different groups that support the government in this respect. However, this support is not "permanent" and its continuation is based on maintenance of these reforms. The support of this small, but effective, coalition should not be wasted.
* 2007 marked a slowdown in the economy and big strides in politics. While some regard year 2007 as the year of a relative slowdown in the economy, political gains have helped the economy assume a stable course of growth. The Turkish economy has long been hampered by the political system that is resistant to change. This situation has changed thanks to the developments during and after the July 22 elections. With the work on the drafting of a new constitution and accelerating economic reform, 2007 will be marked with big gains in many respects.
* Finance is not a bottleneck for growth; marginal productivity of foreign capital should be monitored. In the past, Turkey suffered from problems in financing its growth and the country used to employ a bad and populist approach in public administration. The result was crises. But now, developments concerning global capital are favorable for Turkey, though national savings are inadequate and the country is able to finance its growth through foreign resources. Accordingly, from now on, the country should concentrate not on financing growth, but on the quality and resources of the growth. While in 2006 and 2007 Turkey saw a direct foreign capital inflow of $20 billion as well as other loans higher than this figure, economic growth is slower than expected. These resources should have triggered a growth equal to or higher than 7 percent.
The decrease in the capital's contribution to growth is extremely critical for development and it has two causes. The economic product or production is the result of a combination of a number of production factors. In other words, production factors complement or replace each other to a certain extent. This implies that if finance is one production factor, human capital input and its quality, the infrastructure of production, other input costs and quality, too, are other extremely important production components.
If some of these factors are there and sufficient (currently, financing is sufficient) while some other factors are deficient, production/growth cannot be attained and other resources which become redundant and idle will lead to problems. It follows that as there are many obstacles hindering development of the Turkish economy, incoming capital cannot be translated into production and, therefore, remains idle and underutilized, posing a risk to the economy. Indeed, capital starts to trigger production in line with decreasing interest rates. Consequently, the Central Bank is compelled to absorb this liquidity in the markets albeit significant costs. Nevertheless, this does not lower the inflationary pressures. We clearly face such a risk at the start of 2008.
While the targeted growth is 5 percent for 2008, private consumption items have increased by about 4 percent in the third quarter of 2007. There are early signs that this will increase in the last quarter and early 2008. Banks are waging campaigns that trigger installment sales and consumption loan usage. Boosting consumption in a slowly growing economy brings additional risks to inflation.
Another obstacle that prevents capital inflow from boosting growth is that this capital is used more in privatization, purchase and mergers than in new investment. Assuming this trend to be temporary and an expected development, new investments should be facilitated.
2008 targets: The government is still sticking to the targets of a 5-percent growth and a 4-percent inflation rate for 2008. It is a relative risk to have a targeted growth lower than 6 percent as the three-year average and this will have repercussions. The targeted inflation rate, for which tight monetary polices are employed and tighter ones are envisaged for 2008, is undermining the real economy. In particular, small and medium-sized industrial businesses that produce for domestic markets are suffering from stagnation in domestic markets and cash crises are being felt more markedly. In this context, a 4-percent inflation target for 2008 is not realistic. Departing from the fact that there is no need to tighten monetary instruments and maintain high interest rates, the anti-inflationary measures should focus on supply-oriented policies in 2008.
Four strategic targets for the economy: The future orientation and composition of Turkey's economy should take the following four points into consideration:
1. Healthy internal integration for external integration: Global integration of the Turkish economy should bring about increased welfare within the country and should not be impoverishing. Thus, Turkish corporations should actively participate in the global value chain and this should be ensured through effective dialogue and public guidance. It should not be forgotten that if external integration is not supported with parallel internal integration, it cannot be sustained and does not boost welfare within the country. Thus, without countrywide infrastructure, a healthy vocational education system, efficient and competitive auxiliary industries and a transport and logistics sector suitable for massive transportation, external integration of the country will not bring about the desired added value.
2. Vocational education: Reforms for transformation of labor and vocational education are long overdue. In this respect, the country should invest in human resources with a view of eliminating recruitment problems in the labor market and effect a change in the mindsets and develop and implement a reform map.
3. Switch out to energy sectors of the future: Turkey has the potential risk of an energy bottleneck that would become noticeable as of 2009. Energy is becoming one of the global economy's fragilities. Energy is also the weakest link of the growth chain; therefore, Turkey should accelerate its attempts in the energy sector in accordance with the predetermined strategic map as soon as possible. The energy sector has been in a stationary state for the last couple of years. If we consider this stagnant period as a process which prepared an efficient infrastructure for current attempts, then it is obvious that the energy sector needs a significant amount of foreign capital inflow. Privatization should be used as a key step to provide this. The sector needs new investments and technological input.
Also taking global warming into consideration, there should not be any water source that is being wasted (hydroelectric investments), thermal resources should be put into operation and alternative energy resources such as nuclear, thermal, hydrogen, wind and solar energy as well as bio-fuel energy should be used in fields that won't affect agricultural activity negatively.
On the other hand, Turkey's abundant strategic resources such as boron and thorium, which aren't currently used actively, should also be taken into consideration. Hence, the longest-term strategy would be to merchandise such energy resources and to support necessary research which will bring them into use.
4. Agricultural sufficiency and global warming: Due to global warming, a food shortage is slowly breaking out throughout the world. Turkey has had to import around 2 million tons of wheat for the first time in 2007. Furthermore, as food prices entered into a phase which threatens inflation and makes life difficult for those with low-incomes, it has became urgent for Turkey to produce high quality food items with a high level of productivity uninterruptedly. Therefore, in order to provide this the government has to include critical agricultural products in the agricultural strategy and to carry out necessary research so as to avoid any deficiency in this field.
