Does Turkey need magic formulas for its economy?
We hear a lot lately: ‘But the Turkish opposition does not have an economic program to solve the economic problems.’ Leave aside the political arguments and look at the issue within the framework of the following question: ‘What kind of economic program will solve Turkey’s problems?’ Do we need a magic program, magic formula, or magic wand?
The argument that ‘there is no economic program that aims at solving the problems’ somehow indicates the expectation of a ‘magical’ program. Really? Does an economic program that will reduce the problems we are in and then put them on the solution path require excellent design skills?
The unemployment rate is very high as is inflation. The share of wages in national income is shrinking. We have an economy that depends on foreign borrowing. Productivity is low. Of course, it is not possible to solve all these problems at once. Some are deep-rooted problems. For example, addressing low productivity requires a long-term perspective and detailed program. In contrast, inflation is a problem that can be resolved more quickly with conventional methods. On the other hand, there are essential steps to take immediately for almost every problem.
Where is the magic in that?
Could an economy with deep doubts over the justice system be a center of attraction for productive investment? Can public investments be productive if the procurement law is not smooth? Do industrialists devote a substantial portion of their resources to research and development if land rent cannot be taxed? Or do some of them incline towards the construction industry? Would not the fragility of the economy of a country with deep foreign policy problems exacerbate? If there is no merit-based assignment in the public sector, will the economy run smoothly? If there is no confidence in the Central Bank’s policies and the Bank is open to political pressure, can the fight against inflation succeed?
From this point of view, it turns out that there are critical steps to take fast towards the solution of our economic problems: the establishment of a fair judicial system, a merit-based appointment system, the enactment of a new tender law, the creation of a system that taxes land rent, and the re-establishment of the Central Bank’s independence.
For instance, consider what to do to create a fair judicial system. Experts on the subject draw attention to the following sub-headings: Establishing the separation of powers, a regulation that safeguards the Judges and Prosecutors Board (HSK) against political influences, geographical guarantees for judges, the inability of lower courts to resist the decisions of the Constitutional Court.
Alternatively, ponder the merit-based assignment system, recruitment of successful candidates in the public entrance exams, the appointment of the competent ones to senior positions, or creating a structure of in-house promotions similar those international institutions.
One can start by taking the tender law enacted immediately after the 2001 crisis as an example. There are studies already done for the taxation of land rent. Tax professionals can quickly design a new system.
The regulation currently undermines the Central Bank’s independence. One can change it overnight. Starting from the top government officials, no one should talk about its monetary policy for independence to be effective.
Are they enough?
The most challenging thing mentioned above is the separation of powers. Others are easy tasks. Their implementation will significantly increase the confidence in the economy. So, are these steps enough?
To answer this question, let us return to our economic problems. After the 2001 crisis, the banking sector was substantially reformed. Thanks to these efforts, the sector did not suffer significant damage despite the two crisis experienced later crises (2008-2009 global crisis and 2018-2019) and the pandemic. However, very rapid credit growth in recent years may have adverse effects on the sector. It is possible to measure such effects by creating some negative scenarios. One of the BRSA’s duties is to conduct these tests. Tests carried out with reliable methods and the announced results will lessen Turkey’s risk.
Despite the pandemic, Turkey’s budget deficit is at reasonable levels. The ratio of public debt to national income is low. Nevertheless, there are two problems. First, a significant portion of the public debt is in foreign currency; exchange rate increases escalate the debt burden on the budget. In particular, it is beneficial to reduce borrowing in foreign currency from the domestic market. Second, income support and debt guarantees to private companies. Any development that will cause the exchange rate to jump will impose an additional burden on the budget. In addition, the guarantor will pay if the companies guaranteed cannot pay their debts. In other words, if such an unpleasant development occurs, the public debt will rise. It would also be helpful to create negative scenarios similar to the scenarios created for the banking sector, measure the possible budget and public debt effects, and explain them to the public.
While taking the steps mentioned above, reducing the problems in foreign policy problems is crucial. I would not like to comment on a field I am not en expert on, but foreign policy experts consider problem reduction as feasable.
An essential part of the program outlined above consists of steps to take quickly. Such a program will not solve every economic problem of Turkey. Nevertheless, it will prepare a solid ground for works to come. Accordingly, no magic solutions are needed as they are not magical. If such a program gradually tackles more complicated problems, it will quickly boost the Turkish economy. What are they?
Magic is in rule of law and separation of powers
We often hear: “Let us produce high value-added goods” or “let us increase efficiency.” But how? There is no easy answer; it requires a detailed industrial policy design. There are experts on this subject, and it would be beneficial to hear their thoughts.
As stated in the beginning, one of our most important problems was our dependence on foreign debt. In other words, we run a high current account deficit while growing. It is possible to look at this from the productivity side and the insufficient domestic savings side. Having touched on productivity, let us turn to the savings side. Domestic savings are the sum of public and non-public savings. Private pension systems were established to increase the latter; right step. However, in recent years, interest rates have been suppressed to depreciate the lira in real terms. An interest rate below inflation either means do not save, spend or turn to foreign currency. Both. This circumstance is not saving-friendly, let alone increasing inflation.
On the other hand, essential measures can increase public savings (the difference between public income and consumption). First comes the taxation of the informal economy, although it is a tough job politically.
Last but not least comes education and the green agreement. Education is a tricky problem. Nonetheless, some actions can be done right away, such as providing better education in education faculties, increasing the quality of existing teachers, closing most doctoral programs, and sending many doctoral students abroad. The green agreement and green economy seem to be the most discussed topics in the upcoming period.