Thursday, July 03, 2008

The real deal on Turkish economy

At times like these, it seems redicilous to talk about economics. The latest detentions under the Ergenekon investigation are perceived as the government's response to the closure case brought against it in the Constitutional Court. The investigation has completely lost the credibility it once had in the eyes of the public, and the detainees are viewed as victims, not suspects. How can anyone feel safe and secure in a country when one cannot trust the police, the justice system? These detentions are just the tip of the iceberg. People who are anonymous to all but their loved ones are detained all the time, we just don't know about them. Our government has demonstrated that they are no different from all those who held power in the past. God help the powerless, the weak in this country.

The feeling of justice, safety and security is the fundamental condition of a thriving economy. People find ways to survive in any country, but they can go beyond survival only when they feel safe, only when they know that their lives and efforts are not left to the whims of those who hold power. Let alone attracting investment and technology from abroad, the best and the brightest people in our country will leave at the first chance they get, because they rightly feel that they are not getting what they work for, what they deserve.

Our economy has been performing well from 2002 to 2006 simply because macroeconomic conditions improved. Better fiscal discipline allowed inflation figures and interest rates to drop to more acceptable levels, banks were better regulated. Favourable global economic conditions helped us attract FDI and borrow cheaply, enabling us to finance the growing current account deficit. Now that the actual performance of the economy has caught up with its potential, growth rates have been slowing down. Now the question is how to increase the potential of the economy and achieve real growth, which is desperately needed to create jobs for millions of unemployed. And we have to achieve that in a more difficult global environment, when portfolio investments will be more easily reversed and foreign borrowing will be more expensive.

The real issue is the real economy. It is about how to increase savings and investment. People will save and invest only when they feel they are not striving in vain. They will build something only when they know that it has a potential to grow, that it stands on solid ground. Potential investors will consider the quality and credibility of institutions and laws, the quality of the workforce. If potential risks outweigh potential returns, undesirable decisions will be made all the time. Money will flow to high-return financial instruments and bank accounts instead of the real economy. Banks will lend to the government to get high interest instead of lending to entrepreneurs. As the current account deficit grows, macroeconomic policy will fall hostage to the whims of foreign investors and lenders instead of responding to the needs of the real economy.

Unfortunately, more sound macroeconomic management, supported by foreigners' strong appetite for our assets, was not enough to achieve sustainable growth. Economics is not enough to achieve a strong economy. Cheatsheets and equations will not give us the solution. What we need is decency and competence.

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