Higher growth, higher misery in Turkey

Turkey’s economy grew by 11.1 percent in the third quarter of 2017. That’s the highest figure since 2014. Yet the misery index, found simply by summing up the inflation rate and unemployment rate, has reached 21.2 percent. That figure, in turn, is at its highest since 2004. So higher growth has made Turkey even more miserable. Why?

It’s about the quality of growth. One-off policies to boost growth served their purpose in 2017 with a tremendous cost. Despite the high growth rate in the economy, the unemployment rate stayed high, at 10.1 percent as of November 2017. The inflation rate jumped to 11.9 percent in December 2017, maintaining its double-digit status since 2008.

Growth driven by domestic demand is not good for job creation and inflation. Let’s look at the persistent unemployment rate, and government policy to stop it. I see billboards all around Turkey of a campaign that can be loosely translated as “a call to arms to stop unemployment.” The idea here is to summon up the national will that stopped the Gulenist coup attempt and mobilize it against unemployment. If all businesses in the country just take on one more person, the thinking goes, the unemployment problem would be solved. The economy of course, doesn’t work like that. But even if it was possible to tap into a mythical “national will” to stop unemployment, it would only be a one-off measure. It might have negative side effects, such as spreading the illusion that the government is distributing jobs. That would lead to an automatic increase in the labor market participation rate and unemployment would become more persistent.

Think about the 26.8 percent female unemployment rate between the ages of 20–24. Think about the more than the 21.5 percent youth unemployment rate between those ages. These are deep structural problems, stemming from things like the lack of jobs training, bad education and poor incentive schemes. There are countries that have these programs in place, and as a result, have low unemployment, or in some cases, none at all. Structural problems need structural solutions.

Why then is the inflation rate on the rise again? It’s all about the wrong policy mix. Just have a look at the transmission mechanism. More public expenditure leads to a higher budget deficit. A higher budget deficit leads to higher current account deficit. The current account deficit has risen from 39.4 billion dollars in 2008 to 47.1 billion dollars in 2017, reaching 6.2 percent of the GDP. Lower public savings mean that Turkey needs higher foreign savings.

Its higher current account deficit makes Turkey more risky in this changing global growth environment. The riskier Turkey gets, the more lira you’ll need to get a dollar. Lira depreciates leading to a general adjustment in the price level. Lately, 80 percent of the prices are adjusted upwards in the inflation index. This is a general and broad movement, mind you. Something serious is going on.

This brings me to my last point. Higher growth in 2017 also creates a basis for more potential misery by making Turkey more vulnerable in 2018. A higher current account deficit means higher dependence on the US dollar market. With global growth picking up again, it is not the ideal time for a country like Turkey to increase its foreign exposure. Note that I am not even talking about sanctions or secondary sanctions yet. It’s about pure economic policy making. That’s what I call policy myopia when I look at Turkey. If policies are not recalibrated on time, policy myopia may lead to utter policy failure.

What is the root of all this? In every society, systems need to be in place to leverage expertise towards a collective goal. Even the most radical of regimes needed to make the trains run on time.

This commentary was published in Hürriyet Daily News on 17.02.2018


Originally published at www.tepav.org.tr.

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Notes from Turkey: It’s the economy, stupid

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