'Political uncertainties are the biggest risk for Turkish economy'

ISTANBUL – Hürriyet Daily News

The goals set by the Medium-Term program are realistic, but the program is not clear on the reform agenda which could risk the realization of those goals, says Professor Seyfettin Gürsel of Bahçeşehir University. DAILY NEWS photo, Hasan ALTINIŞIK

Political uncertainties that will come to the fore in the upcoming local, general and presidential elections are sure to affect Turkey’s much-needed reform agenda, according to a prominent economist.

Uncertainties such as who will be the next president and the leader of the ruling Justice and Development Party (AKP) stand as the biggest danger to the economy in the midterm, according to Bahçeşehir University professor Seyfettin Gürsel.

The elections are likely to postpone the reforms, threatening the realization of the Medium-Term Program’s (MTP) goals, which were recently made public, Gürsel told the Hürriyet Daily News.

How do you evaluate the MTP?

The MTP is not an unsound one. As far as the growth targets are concerned, it is in conformity with the analysis on potential for growth. In the midterm, we want the growth to stand around the 5 percent band. Turkey can do that. The MTP foresees a growth of 4 percent for next year and 5 percent by 2015-16.

There is nothing unsound in that. Turkey can reach that goal but this is not granted. There are certain conditions that need to be fulfilled. We have an important hurdle and that is the current account deficit. We are back to growth led by domestic demand, and this increases the current account deficit. The MTP forecast for the current account deficit is 7 percent. Everyone, including the government, knows this is not sustainable. The MTP has set the goal to reduce it to 5.5 percent by 2016. This is the right thing to do. How will it do that? The MTP says exports are going to increase faster than imports, which will ensure growth will not be only dependent on domestic demand. The problem is that we have been trying to do that for the past eight years and have not succeeded.

Another point is that the foreign exchange rate issue is a missing point in these policy suggestions.

But aren’t projections based on estimated foreign exchange rates?

There is a discussion going on whether the Turkish Lira is overvalued or not. But this issue is nonexistent in the program. It is there indirectly. There is the GDP in terms of the lira and in terms of U.S. dollars. So we can calculate that the MTP foresees the dollar to be 2.10 in 2016 and 1.98 for 2014. This is unrealistic. This is not a framework that will boost exports.

If we cannot rely on the foreign exchange rate, we need to have a substantial increase in productivity. We need to be more competitive, we need production at lower costs. The crucial thing is the total factor productivity (TFP) which includes several variables like human capital, increasing the quality of labor, innovation et cetera. Recently, our institute published a paper warning that Turkey is on the brink of a middle-income trap. We have shown that the TFP has become negative. The MTP has made similar calculations and come up with the same conclusion. It makes a confession. This is terrible. You cannot have growth with negative TFP.

So in a way, does the MTP show that Turkey is on the brink of a middle-income trap?

It accepts that risk and says the TFP will turn positive starting next year. But how will that happen? It won’t happen [just] by saying it. This can be done by comprehensive reforms. The MTP actually lists reforms like lowering the costs of energy, labor, supporting research and development and increasing the quality of education. But there is not much about what exactly will be done about all these. It says “quality in education will be increased.” Fine; but it has to give us clues as to how it will do that, which are not in the MTP.

Meanwhile, another important point in the MTP is supporting the monetary policy of the Central Bank, while resisting calls to increase interest rates.

There is no intention of listening to the IMF messages. But interestingly, the IMF says the fiscal policy is not tight enough, precisely because of the high increase in public spending. The budget performance was due to ad hoc incomes. The MTP says exactly the same thing and promises to reduce the ratio of public spending. It says this will be done by zero-based budgeting [a method of budgeting in which all expenses must be justified for each new period] on all public spending except the spending for personnel. This is extremely important, but I don’t how this can be realized. As our current account deficit is high, the only anchor we have is a tight fiscal policy. They are saying that they will insist on a tight fiscal policy at a time when there will be triple elections. If they can do it; I’ll tip my hat.

In short, do you think that although targets are realistic, there is no clarity as to how they will be achieved?

The reform agenda is not there in detail; if reforms are not done, then the targets which I today find realistic will not be attained. The MTP is reasonable and realistic but it is also ambitious and the key is reforms. And it is very difficult to enact reforms at election time. This is also the case for democracies in the West. There will be three elections in the first half of the MTP. There are tax reform issues like reforming severance pays – these are very difficult reforms which can have political costs.

So the elections seem to be the biggest enemy of the MTP.

The elections risk the realization of the MTP. I think reforms will be postponed until after elections. Our growth rate will be below expectations and we will go on with domestic demand-driven growth. But there is a problem there as well. The high current account deficit was financed due to the Federal Reserve’s loose monetary policy. We can’t sufficiently finance it until the Fed starts tapering its bond purchases. The government knows that as well.

But the AKP was always praised for being disciplined during previous elections.

It did not enact economic reforms, and it did not [open the purse strings ahead of the election]. These are two different things. It’s true, it did not increase public spending which would have increased, in turn, the current account deficit. They can have credit for that. They say they will continue to do so. This does not have a negative effect on growth.

Are the elections the biggest threat to the Turkish economy?

I do not think so. But it will postpone the reforms. The biggest danger in the midterm is political uncertainty. The AKP is facing numerous problems. We do not know how it will manage the presidential problem. If the prime minister becomes the president, who is going to lead the party? Would that be [President] Abdullah Gül? Will there be a contention there? [Deputy Prime Minister responsible for the economy] Ali Babacan will leave due to the [AKP’s three-term limit]. Who will replace him? I am not sure whether other ministers are as aware of the importance of reforms as Ali Babacan was. Will the AKP be able to solve the Kurdish question? What is going to happen with the Constitution? The uncertainty will definitely affect a lot of the reform agenda.