By Andrew Jay Rosenbaum and Bahattin Gonultas.
ANKARA
Reconstruction of Turkey's economic institutions and a comprehensive growth oriented economic policy to be realized after the elections, Ibrahim Turhan, former Borsa Istanbul chairman and former board member of Turkey's central bank, said on Monday.
Speaking in an interview with Anadolu Agency, Turhan, who is also a Justice and Development party (AK Party) candidate for a seat in parliament for Izmir, said: "Although I have no early expectations, after the election, I am ready to take on any responsibility that the government may offer me."
Turhan is slated by observers as a possible cabinet member with economic responsibilities after the election.
Turhan pointed out that institutions will be renewed as well once the elections are over.
"Turkey should relook all of its economic institutions, and review their general philosophy, even consider a new fiscal policy to catch up with rest of world," he said.
"Many countries have changed the structure of their financial institutions since the crisis. The Bank of England has merged with the Financial Services Authority. The European Central Bank has taken on a wider responsibility for banking regulation and supervision. Before the crisis, one could hardly imagine that the ECB would lend to the banking industry based on instruments with a five-years maturity, at an almost-zero interest rate, buying private sector mortgage-based securities with almost no liquidity. The same thing happened in the U.S. with the Troubled Asset Relief Program."
The U.S. TARP was a program allowing the Federal Reserve to purchase such instruments as part of a stimulus program. The European Central Bank is engaged in a similar stimulus program, injecting liquidity into the financial system.
Nonetheless, Turhan pointed out, "the new government will continue the free-market policies that have made Turkey successful. "Institutions matter, not people, and the important institutions will continue: The AK party program has made this very clear; the free-market economy will continue, the open economy will continue, the free float of the exchange rate for the Turkish lira will continue, and the Turkish central bank will remain independent," Turhan said.
Turkey will attract investment
There is concern, Turhan pointed out, among international investors about how Turkey's economy will evolve if the Federal Reserve raises interest rates.
"But this concern is misplaced," Turhan explained. "First of all, I argued last September that there would be no rate hike before the end of this year. Everyone, at the time, expected one before the summer, but I am pleased to see now that I was right." In a speech on May 22, Federal Reserve governor Janet Yellen said that there would be an interest rate increase this year, but only when conditions permitted it.
"The earliest expectation is September now, and it probably will be after that." Turhan pointed out that the U.S. economic recovery is weak, and and the strong dollar is a challenge to U.S. policy makers. "Further, although unemployment is down, the rate of labor particpation is declining, so there are actually a large number of people out of the workforce," Turhan added.
And, when it comes, the rate rise will be gradual, so its effect on Turkey will be small," Turhan said.
What's more, Turkey has many advantages that will attract investment regardless, he continued. "There are plenty of investment opportunities in energy, in retail, and in many other sectors. The rate of return is still high enough to attract global savings -- and there is a glut of savings around the world while investors are in search of yield."
"Once the elections are behind us, there will be a huge capital inflow to Turkey, thanks to the stability brought to the country by the AK Party government."
Sustained Growth for Turkey
Turhan said that the challenge for Turkey is to deal with global economic volatility.
"Since the financial crisis, both developing and emerging markets have been struggling with this," Turhan said. "This is the big problem, not interest rates or other short-term factors."
Volatility has hurt growth around the world, Turhan said, and the need for sustainable growth is the predominant issue for all economies today.
"If you look at average emerging market growth, excluding China and India, this is the first time since the 1990s that EM growth is below that of the U.S. The European Union is also struggling with lack of growth, not only the periphery but also the core, including France."
Traditional economic theory is somewhat baffled by the current situation. "To make a striking observation: economic theory has lost validity – consider the concept of the time value of money: if you look five years ahead, ten years ahead, government bonds are no longer yielding positive returns. They are paying a negative rate of return for the first time. This is a clear indication that we are passing through an unprecedented volatile environment," Turhan said.
"The number one target is to keep growth sustainable at as high a rate as possible. So Turkey must consider how to derive growth in the medium to long term."
Turkey has for this object certain advantages," Turhan said. "The most notable one is demographics. Turkey has a large population of 80 million of which half is below thirty. This is a great potential driver of growth. Thanks to the education reform progress created by the AK Party government, the average number of school years per young person has increased. The number of students sent abroad to major graduate schools has increased, and is continuing to increase. Investment in education to improve human capital has vastly increased," Turhan said.
Comparing Turkey to Japan, Turhan said that the aging population in that country was a factor in weak demand. "Young people are good for demand," he said.
Further, Turkish labor productivity is increasing, Turhan observed. "That is thanks to the AK Party government's investment in human capital since 2002."
Turhan explained that labor productivity has two elements: stock variables, and flow variables.
"When Turkish labor productivity is calculated, it looks at stock variables, including the past 40 years," Turhan said. "Flow variables should be examined instead, for example, the large number of new businesses, the increase in the number of girls attending school, the increase in the number of years per student...all of this should be taken into account to show the marked increase in productivity Turkey has seen."
Similarly, the government is pushing for an increase in R&D and in innovation, Turhan said. "Countries keep increasing amounts of R&D, but, as a recent article in The Economist showed, the R&D spend increases, but the amount of actual innovation is decreasing. So there is a divergence. The last two times this happened in Turkey was in the early 1930s and the 1970s. Each instance coincided with economic crises. The problem is that you come to the threshold of innovation, the point at which current technology levels cannot stimulate further innovation."
For Turhan, this means that it is necessary to move up to a higher level of technology. In the 1930s, the space industry solved this problem. In the 1970s, it was the information technology industry that solved it, creating globalization, Turhan commented."
"Turkey must concentrate on pushing R&D and innovation to the next level, and we will be able to catch up with this trend. We will bring the Turkish people to a higher level of income, and the country will escape the 'MIddle-Income Trap," Turhan insisted. The Middle Income Trap is a point in a country's development in which wages are too high for commodity exports to bring a sufficient return, but at which the country cannot move up to knowledge-intensive, value-added production.
Making the transition to a knowledge-intensive economy
For last 2 years, the AK Party government, our ministers in particular, have been involved in detailed study to take measures for structural reforms that will make a level shift for the Turkish economy, Turhan said.
"We decided to concentrate on several issues," Turhan said, "and we elaborated nine critical structural reforms, of which were developed 25 main topics, and from which 1,248 action plans were made. These are very concrete, very carefully studied, very well defined. Each action plan will be carried out by a specific ministry, according to a well-defined time line, performance criteria and reporting requirements. Once each quarter, the council will come together to make necessary assessments in terms of the advancement of achievements, determining if they fit with previously decided criteria."
"I think that, thanks to these very comprehensive structural reforms, for example in energy efficiency, to increase domestic savings, to produce more innovative products, that Turkey will see long-term sustained growth," Turhan said.
