SEYFETTIN – Low growth and the political economy

Low growth and the political economyThe Organization for Economic Cooperation and Development’s (OECD) recent economic outlook for its member countries, published this week, has been a blow to the outlook for the Turkish economy.The OECD downsized its gross domestic product (GDP) growth forecast from 3.8 percent to 2.8 percent. This is a critical revision in terms of political economy considerations. The Medium-Term Program, the official economic roadmap from the government, had put the GDP growth target at 4 percent. Deputy Prime Minister Ali Babacan has continued to claim in recent statements that this target is achievable and that it is too early to make a revision.The critical point from the political economy perspective is that GDP growth close to 4 percent, particularly balanced growth, could be defended by Babacan’s team and by the central bank’s management against the pro-growth hawks of the Justice and Development Party (AKP), Prime Minister Recep Tayyip ErdoIan being the most prominent representative of these hawks, who ask for high growth at any price. Nonetheless, GDP growth below 3 percent is prone to create further problems for the government in terms of its strict financial discipline.With a GDP growth close to 4 percent, unemployment would be under control, tax receipts would be quite sufficient to increase public spending in public investments and social transfers without jeopardizing the budget discipline and, finally, it would be possible to improve, albeit modestly, the welfare of low-income households, as was the case during the AKP rule in the past. Needless to say, such achievements are of the utmost importance during election periods.However, GDP growth under 3 percent would be unable to provide these welfare outcomes. Allow me to note that the OECD forecasts an increase in the unemployment rate from 9.5 percent to 9.8 percent this year. When the AKP faces the next general elections, at the latest in May 2015, it will not be able to claim successful economic performance anymore. Add to this fact a new leader, politically weak but suitable for a “de facto presidential system,” and a majority of seats for the AKP might not be guaranteed.So the crucial question is, “Is the OECD growth forecast realistic?” Before going through the details of the OECD analysis, let me recall that the International Monetary Fund (IMF) and the World Bank have recently announced growth forecasts under 3 percent. At the beginning of the year, I was also rather pessimistic about growth performance. In my piece of Jan. 7, (“Economic perspectives for 2014”), I wrote: “growth of 4 percent this year seems to me to be out of reach. What growth rate might be forecast instead? This is a difficult question to answer. I have already said I do not expect a recession. Nevertheless, 2014 will be a year of balanced growth as planned in the government’s medium-term plan (OVP) but a year of quite low growth at the same time. I will not be surprised if the GDP increase is limited to 2-3 percent.”However, the economic indicators of the first quarter allow us to be less pessimistic. In any case, economic growth is unlikely to come close to 4 percent.What does the OECD say? It says the current account deficit is still high (over 7 percent, actually), the total external funding needs (to finance the deficit and maturing external debt) remain substantial and the monetary policy should focus squarely on disinflation to stabilize the economy and minimize losses in competitiveness, since the Consumer Price Index is currently close to 9 percent and core inflation is even higher. Let me add that the central bank openly confesses that it fears that aerse pricing behaviors will cause a worsening of inflation expectations. So high interest rates and rationing of bank loans must prevail for a while.Under these circumstances, the OECD forecasts very modest increases in private consumption (1.9 percent) and private investment (2.1 percent), although the increase in government expenditures is expected to be quite robust (5.6 percent), as was the case last year. Given these figures, final domestic demand growth is forecast at 2.5 percent. As for foreign trade, the OECD forecasts a 2.7 percent increase in exports and 1.7 in imports. So net exports will bring an additional 0.3 percentage points to the GDP.These detailed forecasts seem quite realistic. It is possible that private consumption won’t be as weak in the second semester, thanks to a probable interest rate decrease, and that the net exports contribution will be higher thanks to a possible revival in the European economy. But anyway, these additional push factors, if they occur, might not be able to bring economic growth to 4 percent. The bottom line is that low growth is prone to cause problems for economic governance.

SOURCE: Today’s Zaman

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