Growth vs stability

Federal Reserve Chief Ben Bernanke says there will be no change in the loose monetary policy. As a consolation for stability defenders, he adds that the Bank is cautious and ready for a probable inflationary surge. On the other side of the Atlantic, Eurostat declared record-low inflation in the EU but the highest jobless rate. It is not surprising that the European Central Bank’s Governing Council thinks that consumer prices are no longer an issue. Do they mean that the record-high unemployment is the biggest issue ?

All these signs show that at present, “growth” is winning the battle against “stability,” at least in countries that are not forced by international institutions to implement austerity measures. Only the government in the UK still hesitates to abandon stability measures.

 The reason for this attitude change is obvious. The political appeal of opening stimulus packages is higher than implementing stability measures in a country where unemployment is a serious problem, and if there is still enough economic strength to follow that policy. If not, as history has told several times, there will be a jump in consumer prices before even a modest increase in growth. In short, only the United States and may be Germany in the western hemisphere can successfully implement such a policy but only for a short time. Other countries, including emerging economies in the same region, do not have enough strength to do that.

In Turkey, slowing growth is also seen as a political risk for the government, especially for the coming elections. Not only for politicians, also for business, weak growth is not a lovable situation. Does it mean they all together prefer mild (!) inflation instead of weak growth? At present, it seems so. However, Turks must have the best memory to remember that there is no long-term mild inflation. It begins with a slow and mild pace, then accelerates in a surprisingly short time period and turns into a galloping one that will take many years to control after destroying all economic, social and even political balances.

For that reason, whoever defends higher growth as necessary for job creation and for the prosperity of people must first explain, not only verbally but numerically, the true dimensions of the country’s economic power to stimulate the growth rate to higher levels. Otherwise, Turkey might face another disaster, as had happened several times during the last 60 years.

The management of the economy in Turkey is now much better than many Western countries. Weak growth is not a result of wrong policies but due to worldwide problems. A stagnant economy and high unemployment are, of course, political risks for a government. But the political risk of galloping inflation is higher. If the advocates of higher growth think that implementing stimulus policies that do not depend on real resources immediately creates higher growth but induces inflation after quite a long time, they are wrong. Look at history again.

The mathematics of Turkey’s growth teaches us that without considerable development in productivity, a 2 percentage increase in growth needs at least a 6 percent increase in investments supported mostly by real resources of foreign and domestic origin. Monetary expansion has only a marginal contribution to this process and must be kept in modest dimension. The mathematics can change, of course, by an increase in productivity. However, this will take time and can be realized only if international standards are taken into account, not domestic ideological concerns.