Opinion: Turkey’s Economic Reform Priorities
Cevdet writes: Turkish policy makers must focus on economic fundamentals and apply strict fiscal discipline to facilitate economic resilience and locally-driven growth.
@KorsanCevdet, 29 November 2020
Over the past twenty years, Turkey developed key areas of its economy, including its transportation infrastructure to facilitate growth through higher volumes of efficient domestic and international trade. With a young, well-educated population and strategically-developing high-tech industries, including an organically growing, local military industrial complex, an electric vehicle production capacity, and clean air technologies, Turkey’s economy has come a long way. Economic challenges have, however, recently resurfaced and require immediate attention.
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ARTICLES OF ASSOCIATED INTEREST:
· Economic Resilience During Volatile Times
· COVID-19: Urgent Lessons to be Learnt
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Looking back, Turkey’s economy faced serious challenges due to historic mismanagement, patronage appointments, a long history of ineffective coalition governments, and insufficient transparency throughout the 1960s to the early 2000s. This climaxed with Turkey’s 2001 economic crisis. The situation was dire as local markets became illiquid, overnight interest rates were in the thousands (percentage-wise), and there was a run on domestic banks. The Istanbul Stock Exchange hemorrhaged dropping approximately 30% within days, and the Turkish economy contracted between 6% and 10% depending on whose figures and analysis is applied.
Turkey had no choice but to seek assistance through an International Monetary Fund bail-out program. The IMF, known for its conditional assistance, is said to have also strongly encouraged Turkey’s governing coalition to recruit Kemal Derviş, a Turkish national and seasoned World Bank executive to implement the desperately needed economic reforms. Derviş was brought in as a technocratic State Minister of the Economy and while he only served as a Minister for 1.5 years (13 March 2001–10 August 2002), Derviş is widely credited with being the architect of Turkey’s economic transformation. Derviş introduced clearly defined, segregated and independent accountabilities across key sectors of Turkey’s economy, implemented effective checks and balances with transparent reporting, and focused on getting the economic fundamentals right. Essentially, Turkey’s economy required resuscitation and policy makers had to adhere to a strict economic rehabilitation program to rectify the nation’s financial ills. Turkey’s economy went from erratic to structured and stable, making Turkey a G20 regional economic power. This was demonstrated in Turkey’s quick turn-around following the 2008 — 2010 global financial crisis.
Twenty years on and with a pandemic that has crippled the global economy, Turkey once again faces economic challenges that have to be promptly addressed to avoid further risks, greater instability, and a long, drawn-out recovery. Similar to 2001–2002, Turkish policy makers must focus on economic fundamentals and apply strict fiscal discipline to facilitate economic resilience and locally-driven growth. Internally-initiated policy reforms and proactive, self-imposed structural adjustment has to be implemented to address the following challenges:
· Prolonged volatility and a depreciating Turkish Lira.
· Dependency on short-term capital inflows and high private external debt levels.
· National budget and trade deficits.
· Low consumer and business confidence levels.
· High unemployment levels and double-digit inflation.
· Strengthening domestic consumption and demand without triggering disproportionately higher levels of debt; increased private savings are a must.
· Restructuring external (e.g. USD & EURO) denominated debt to avoid further FX risks and heavier debt repayment challenges.
Structural adjustment programs are never easy, but it is always better for a country to make the required reforms voluntarily rather than have them enforced from abroad. Turkey’s current economic challenges have to be systemically addressed to avoid restricting Turkey’s future potential. Policy makers need to also account for other factors, even those that have yet to materialize, that could seriously damage the economy (e.g. Halk Bank’s US Indictment). Strategic precautionary measures must be taken, whenever required, to limit potential risks that threaten sustainable economic growth. After all, strength in Turkey’s economy is a positive and stabilizing factor for the whole region.
On a positive note, action is already being taken. In the past few weeks key personnel changes were made in critical financial and economic portfolios. There is a new Treasurer and Finance Minister, and the Head of the Central Bank was also replaced. News of these portfolio changes were positively received by markets and there have been clear signals that reforms are on their way. In addition to economic realignment, Turkey must also continue to invest in and develop its high-tech industries and transform its agricultural sector - these are both significantly underutilized. Developments in these areas will reduce Turkey’s reliance on imports, help fulfil local demand, and increase value-adding exports. İstanbul’s new Financial Center is also taking shape and with the right regulation, rigor, and incentives, İstanbul can become a dynamic Eurasian regional hub that helps shape Eastern Europe, the Middle East, North Africa, and the Eastern Mediterranean economies. Such a strategy aligns with China’s Belt and Road Initiative as Turkey and İstanbul are key entry points for China’s products across the region.
In the short-term, authorities and policy makers have to effectively deal with the pandemic and take measures to manage the risks without locking down and unnecessarily damaging the economy. Lock-downs are not prudent. Instead, tight controls and the enforcement of precautionary measures are required, including the enforcement of mask wearing, social distancing, adhering to high hygiene standards, and utilizing an effective track–and–trace system to monitor, restrict, and limit the spread of COVID-19 cases. As other countries across Europe struggle with the pandemic, if executed with properly (e.g. China, Hong Kong, South Korea, and Taiwan), Turkey can out of this crisis significantly stronger than its competitors.
Overall, policy makers have to transform Turkey’s economy and bureaucracy to significantly strengthen its ease of doing business and improve the nation’s global competitiveness. Turkey is currently ranked 33rd and 46th in these rankings, respectively. Reforms should aim to bring Turkey within the top 10 in the next 5 years and target the Top 5 for the long term. This will significantly improve the quality of life for ordinary Turkish citizens and Turkey’s economy will become more resilient and better equipped to deal with future challenges and crises — be they pandemics, economic volatility, or geo-political instability.
