Turkey’s glass half-full but remains insufficient: World Bank Turkey director

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Turkey needs to accelerate its reform process if it wants to fulfill its ambitions, according to World Bank Turkey director Martin Raiser.

“For most Turkish people, staying where they are today is not an option. They’d like to get into the top 10.  For that, more reforms are needed,” said Raiser.

“It’s not clear to me whether the current pace is sufficient to fulfill the ambitions Turkey has,” Raiser told the Hürriyet Daily News in a recent interview.

The World Bank readjusted its growth forecast for Turkey to 3.5. You said first-quarter numbers were surprisingly good, adding that you were not expecting growth to maintain such momentum and that you were encouraged by the strong performance of net exports. What does this tell us?

One thing it reminds us of is that Turkey is a part of Europe economically and as Europe recovers, Turkey does as well. We perhaps forgot a little bit that this was the case during the years Europe was not doing so well and it was not so attractive to be so dependent on the European economy. Now that we see recovery in Europe, we see just how important it is for Turkish exporters in particular. This is a good thing and we expect European recovery to continue.

The second thing it tells us is that exports are not entirely insensitive to the real exchange rate movements. The Turkish Lira has adjusted; this has conferred a cost advantage on Turkish exporters which they have been able to some extent to utilize. First-quarter data also tells us that prudent macro monetary policies have been effective in slowing domestic demand; that’s another welcome sign.

What I don’t think it tells us is that Turkey has overcome the structural problem; it cannot grow at the rate it desires without getting into unsustainably large external deficits.

That is the fundamental competitiveness problem which exchange rate devaluation can only fix temporarily. Remember inflation is still running at 9-9.5 percent; it will come down but core inflation is high and that means this advantage that Turkey got through the devaluation of lira is evaporating month by month. And fundamentally what you want is competitiveness to be improving because your productivity is growing faster than that of your competitors and that is not happening in Turkey.

What is the reason behind the difference between the government’s medium-term growth forecast and the World Bank’s?

The government has clarified that its assumption of 5.5 percent growth in the 10th national development plan is based on a reform scenario. Indeed if you manage to accelerate the participation of women in the labor force, if you manage to double the rate of total factor productivity growth above the historical average and increase investment to something like 24 percent of GDP and at the same time raise domestic savings, then indeed Turkey may grow at 5-6 percent. But this is a very ambitious reform agenda. In our medium-term forecast we don’t assume things will go that well; we assume the Turkish economy will probably grow slightly below 4 percent.

The 10th national development plan is an interesting document. What we have seen in previous periods is that there is a divergence between plans and reality. The 10th national development plan sets the right direction. Therefore it would be important that it is implemented and if it were to be implemented, Turkey’s growth outlook would brighten. This requires the working out of detailed action plans; that’s a process now underway; we hope that this process will be given additional impetus and that the pace of implementation of the reform will accelerate.

What is keeping the government from not implementing it in time?

My sense is that there are other issues on the policy agenda that are not related to the economic challenges the country is facing; those issues are taking some of the attention of the policy makers away from these priorities.

How would you encapsulate the challenges facing Turkey?

There are three key challenges: The first is that Turkey needs to shift from productivity driven by structural change to productivity growth driven by innovation.

Over the last three decades we have seen tremendous urbanization; there was a big movement of people out of agriculture into modern services and industry – that lifted incomes. But what we have not seen enough of is productivity growth within enterprises driven by innovation.

The second main challenge is to make sure Turkey capitalizes on its demographic dividend. Turkey has a young population. But labor force participation rate is just over 50 percent. A young population helps economic growth only if it goes to work.

The third challenge is to create the institutions that are required for high-income countries. The quality of Turkey’s institutions, whether public finance institutions or governance institutions, et cetera, is still middle income. Turkey needs to make that jump. A particular challenge is to reinforce the independence of regulatory institutions.

All this brings us to political challenges; since you also talk about them as a factor affecting your forecasts.

We have said two things: there was a degree of political uncertainty, which is perfectly justified given what was going on; that has affected market confidence. Some of that has diminished but with the electoral cycle not over yet, some of it is still with us. Second, there were corruption allegation; we hope it is something the judicial process will address and create some clarity [in regard to this].

What’s your assessment of regional risks?

A: Turkey’s location is one of its biggest assets; right now, it comes with a number of difficulties. Our initial calculations suggest if things do not get a lot worse, those impacts will be moderate or manageable. But if things do get a lot worse, with oil prices getting higher, security deteriorating significantly and remaining poor for an extended period of time, this could affect the Turkish economy more significantly. So far it has been moderate.

When one looks at Turkey, it gives the impression that the glass could look both half-empty or half-full.

It’s always half-full. Turkey is a typical emerging market. That makes it an attractive place. The flip side? It does not go on a linear fashion. Countries go through these cycles and Turkey is no different. The glass is half-full; living conditions; quality of life, level of income, opportunities for investors are much better than a decade ago. At the same time, there are a lot of questions to be addressed; for most Turkish people, staying where they are today is not an option. They’d like to get into the top 10. For that, more reforms are needed and the glass needs to get more than half-full.

Is Turkey still the most vulnerable among emerging markets?

Countries like Turkey need to be conscious of the structural vulnerability they have; which is why we keep talking about improving productivity and competitiveness on the one hand and on the other, it needs to build policy buffers that try to insulate it against international volatilities. The Central Bank experimented with some tools but it is not clear to me that they found the magic recipe. Turkey is still affected by these volatilities. The search for the right policy answer is still continuing. Our view is that the best is to build strong fiscal, financial and monetary buffers; fiscal and financial buffers are strong, monetary policy buffers could be a bit stronger.

The government is criticized for having stopped the reform process in 2007.

That’s not entirely accurate but not entirely unfair criticism. I said the glass is half-full because it has been filling. A lot has also happened since 2007. It’s not like the government has been inactive. But compared to the drive we saw in the first half of the 2000s, clearly this is a different pace and that is a concern because if Turkey wants to be part of the best, it needs to move at the pace of the best. It’s not clear to me the current pace is sufficient to fulfil the ambitions Turkey has.

There has been a general sense that the global crisis has diverted the attention of policy makers in emerging markets from the structural needs of their economies; now that Europe and the United States are starting to see recovery, I think it’s time to re-examine the structural foundations of growth in middle-income countries. That’s the new agenda for Turkey.