Turkey seeking to unleash potential
by Korkmaz Ilkorur
Assessing the future of the Turkish economy is no easy task, particularly after the inconclusive result of the 7 June election. Some economic indicators have improved, but Turkey has failed to unleash its real potential.
Growth is falling, unemployment is high and persistent, domestic savings are too low. Income distribution is unsatisfactory. Growth is insufficient to promote welfare, quality of development is low, and inflation continues to be volatile and unpredictable.
Since the 1960s the Turkish economy has gone through several major crises. The origins have been diverse: lack of foreign exchange (current account imbalance), excessive public borrowing (wrong fiscal policies), political mismanagement (wrong macroeconomic policies) and banking sector failures (lack of institutions). In between these, there have been ups and downs of lower magnitudes.
Turkey has been able to derive some benefits from this chequered history. First, the lessons learnt in each crisis helped to prevent further mistakes. Second, repeated financial instability made clear the importance of sound macroeconomic management at the political level. These lessons helped increase the resilience of the economy.
From 2010-14, the budget deficit fell from 3.6% of GDP to 1.3%. Public debt declined from 43.1% of GDP to 34.9% and is expected to stay at this level in 2015. Exports increased from $114bn to $158bn, despite the weak recovery in the European Union which is Turkey’s most important export market (and the reason that exports are not expected to show much improvement in 2015).
Turkey’s challenges outweigh these positive indicators. Inflation rates, though much lower than the average of the last two decades, have remained stubbornly higher than the central bank’s targets, rising from 5.5% to 7.5%. Inflation remains a big problem this year, and will be exacerbated by the fall of the lira.
On the more positive side, the current account deficit has remained stable at 5.7% last year, according to the IMF, and is due to fall further this year. Unemployment, however, has not improved from 2014’s 10.4%.
The biggest worry is Turkey’s growth rate, which has shown a persistent decline from 9.2% in 2010 to 2.9% in 2014. The OECD Economic Outlook Report estimates Turkey’s growth rate for 2015 to be slightly higher at 3.1%. Domestic demand is sluggish, real sector confidence is declining and gross fixed capital formation sliding with a substantial slowdown in the private sector. All of these factors will be made worse if political uncertainty continues.
Several steps must be taken to unleash Turkey’s potential. It must establish a workable growth strategy based on competitive and value-added industrialisation, innovation, research and education. It should recognise the vital importance of institutions, rule of law, regulatory governance and structural reforms. And Turkey must reorganise its financial services industry to accommodate the fastchanging and growing needs of the economy and the international environment.
■ Korkmaz Ilkorur, a member of the Advisory Board, is vice-chair of the Finance Task Force of the Business and Industry Advisory Committee to the OECD. Back