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Turkey's mysterious reform agenda

HDN | 8/28/2011 12:00:00 AM | emre.deliveli@gmail.com

At $9 billion, the July trade deficit came in much better than expectations of $9.5 billion, raising hopes that the current account adjustment promised by the Central Bank has finally begun.

At $9 billion, the July trade deficit came in much better than expectations of $9.5 billion, raising hopes that the current account adjustment promised by the Central Bank has finally begun.

Given the trade figures, the July current account deficit will likely turn out to be around $5.5 billion to $6 billion. While the 12-month rolling deficit will still increase because of base effects, it is likely to start falling in the last quarter of the year, as base effects start working in the opposite direction. Lower oil prices, the slowing economy and the weaker lira will all contribute as well.

Does this mean that Turkey’s current account deficit problem will be solved by itself? Not at all! Even if you pencil in the strong slowdown in imports implied in a recent Yapı Kredi research note, it is easy to see that it will be quite a while until the deficit falls even a couple of percentage points.

Besides, once growth picks up, or the real exchange rate starts appreciating, the deficit will start rising again, so complacency is not really an option. Neither is expecting more from the exchange rate. As the Central Bank notes as well, further depreciation is unlikely to boost exports and curb imports. It could in fact undermine earlier gains by increasing inflation.

This is where the mysterious reforms come in: Because Turkey’s chronic current account deficit is the results of its savings gap, structural reforms are often given as the solution. But what do reforms mean exactly?

My esteemed colleagues talk about education reforms and moving up the value chain by producing (and exporting) more technologically advanced products. Having coordinated a World Bank report on higher education, I could not agree more with such noble aims, but even if the government kicked off an ambitious agenda today, it would take several years before the measures could have an effect.

On the other hand, there are several reforms that could have a more immediate impact. For example, Turkish labor markets need to be more flexible, as World Bank Doing Business rankings show. Average severance pay is among the highest in the world, and regional minimum wages would probably be a good idea. The wedge between actual wages and labor costs could be narrowed, while at the same time continuing the fight against the informal economy.

A tight budget would be an even quicker fix, despite claims that higher government savings would be offset by lower private savings. In normal times, that would have been the case, but I just don’t see much appetite for spending in the current global environment, especially if the domestic economy loses pace considerably, as I think it eventually will.

Luckily, the government is aware of all this. All the items I noted above were in the priority list disclosed by Prime Minister Tayyip Erdoğan after his meeting with his economy team early in the month. The difficulty lies in implementation, as most of these actions are costly in political terms. For example, I wonder if the government would go for serious fiscal restraint if it is planning to push for a new Constitution in a referendum.

But if deed does indeed follow word, good times might be ahead for the Turkish economy.

Emre Deliveli is a freelance consultant and contributor to Roubini Global Economics. Follow his blog, the Kapalı Çarşı, at www.economonitor.com/emredeliveli/.

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