A 2nd wave of growth for Turkish economy: Ibrahim Turhan

By Andrew Jay Rosenbaum 

ANKARA

Ibrahim Turhan is a former professor of economics who has lectured at a number of Turkey’s universities, a former deputy governor of the Turkish central bank, and until recently chairman of Borsa Istanbul. He was elected member of the Turkish parliament for the AK Party, Izmir in June. Commentators like Erdal Saglam of the Hurriyet newspaper have observed that he is likely to replace Ali Babacan as Deputy Prime Minister in charge of the Turkish economy if negotiations for a new government in Turkey are completed successfully.

In an interview with Anadolu Agency on Wednesday, he talked about how the government could create a second wave of growth for the country’s economy.

 "Raising the level of productivity, and nurturing exports are key initiatives for the government to create a second wave of economic growth in Turkey," Turhan said.

"In Turkey, there is ongoing debate on how to treat retirees in terms of state pensions, and on raising the minimum wage. But it might not be necessary to raise the minimum wage. The right way forward would be to increase labor productivity, so that the minimum wage could increase in step with it," Turhan commented. 

"As labor productivity increases, companies would naturally be led to hire more workers, and demand would bring higher wages. In this case, even if you don’t increase the minimum wage, wages will rise anyway, as a function of market dynamics," Turhan explained. 

"But, if the minimum wage is increased without a higher level of productivity, companies will employ fewer workers. So you will end up with a very bad situation: Low industrial activity and lower employment at the same time. That will make no one happy," Turhan said.

"We in the government are totally aware of this. I wish that some opposition parties might also understand it," he added.

Nurturing exports

Turkish exports have declined from high levels in 2014. Turhan noted, however, that Turkey’s considerable success in export markets come from high standards, and that this pointed to the way forward.

 "Turkey has seen considerable export success in the past 12 years, going from totals of about $30 billion to about $150 billion. Yet Turkish exporters have successfully confronted three challenges.

"First, the real value of the Turkish lira has appreciated against most currencies. I am not talking about the nominal value. In terms of real value, the lira has gained against currencies in both developed and emerging markets. This makes Turkish exports more expensive in foreign markets.

"Then, Turkish exporters offer merchandise with high demand elasticity -- this means that the content of exports is not unique enough to give Turkish exporters market share by itself. Turkish exporters don’t have monopolies on their products. So the only way of beating the market is to be productive, efficient and effective.

"And, the largest market for Turkish exports is the European Union, where standards, norms and regulations are very strict. 

"So Turkish exporters have been successful despite all these challenges. They have gained market share even being more expensive, due to the higher-valued lira. And they have offered consumer satisfaction even where standards are very high.

"A success story of this type should continue. Turkish exporters must make the transition to high value-added products. And, the way to success, as we always emphasize, is that of making structural reforms in the economy," he said.

Structural reforms and transition

But can structural reforms make the difference. Turhan pointed out that the way to high value-added exports is not rocket science.

"It’s not magic, or esoteric knowledge that boosts exports. At the end of the day, producing high value added simply means attaining better technology with more research and development, educating a more qualified human labor force, and creating a more market friendly economic environment. That is what the government has proposed, with its economic action plans."

Increasing investment is an intrinsic part of these plans. 

"Of course, within these plans, we need to revisit and revise our promotion scheme for investment. Our investment promotions are currently mainly in the form of tax deductions -- you make an investment, make profit, and from your tax bill and you deduct the expenses for the investment. But this is not sufficient in order to create the kind of upgrade that we need. We need to increase the scale and scope of private enterprise. If your local corporates in terms of size are not big enough, you need to give them a first impetus.

"If you plant a tree, you provide water at first so roots can grow deeper and become safe and secure. After that normal climate conditions provide rain, but first you take care of the baby tree. It’s the same when an industry is at its starting stages. The state should take care of it, and once it is secure, the state should leave it to compete in the free market. It’s the same everywhere in the world, in the U.S., Germany, or Japan. It’s not magic or rocket science: We know how to do it, we know the processes, we have the recipe, so we can do it," Turhan insisted.

In fact, Turhan maintained that the structural reforms planned by the government will reshape the Turkish economy. "Again, we know how to do it. The government has mapped out 1,248 action plans starting from energy efficiency, to increasing domestic savings, improving capital markets, transitioning to higher value-added exports," he said.

Fed interest rate hike

What worries Turhan, as a threat to the Turkish economy, is the prospect of higher interest rates in the U.S. Federal Reserve governor Janet Yellen has made it clear that an interest rate hike will come this year.

"This is what wakes me up in the night," Turhan said. "It will affect not just the Turkish economy, not just emerging markets, but the entire global economy."

Turhan compared the current danger with what happened in the U.S. during the Great Depression.

"In 1933, during the Great Depression, when the first wave was over, and the U.S. economy started to recover, the Fed tightened the money supply prematurely. So what happened? There was a second wave of depression, one more destructive than the first, and, in my opinion, it was one of main causes of WWII. This tough and challenging economic environment made life unbearable for middle class and the middle class was demolished, cleaned up, so there was no middle class to consolidate values in society, and the gap was filled with extremist ideologies."

Turhan pointed to the success in creating a growing middle class in Turkey. "This is one of the most important elements which will ensure stability and moderation in Turkey, and it is a considerable success for the AK Party government that it has managed to create and consolidate the middle class."