Will AKP be able to reform?

The main question on the economic front nowadays is what kind of new economic story the Justice and Development Party (AKP) will tell us in order to overcome the low growth regime in which the Turkish economy has been trapped for four years.
Indeed, the targeted 5 percent gross domestic product (GDP) growth in the so-called and”balanced growthand” program implemented in 2012 was never attained as the average yearly growth rate has stood at around 3 percent during this time. What the and”balanced growthand” lacked in particular was politically difficult economic reforms.
In my last article (and”Economic dilemma of AKP governmentand”) I tried to define the two possible stories in this respect: The AKP power may either decide to pursue the existing and”balanced growthand” strategy followed since 2012 but reinforce it through structural reforms which have been taken off the agenda because of successive elections that started in March 2014, or question the and”balanced growthand” program, which the inner economist circle of the president of the republic holds responsible for the low economic growth, and return to the old-style growth regime essentially based on a robust domestic demand. Let me note that this old-style approach implies dramatic changes in monetary policy in particular and possibly in fiscal policy.
Last Friday, two ministers, Finance Minister Mehmet Simsek and Deputy Prime Minister Cevdet Yilmaz, belonging rather to the reformist side, brought some clarification to this issue through interviews they have given to the media. The top level supporters of the alternative economic strategy are keeping silent for the moment. Mr. Yilmaz claimed that they and”will implement the second generation of reforms in order to bring Turkey into the group of high-income countries,and” while Mr. Simsek said that they and”favor a comprehensive economic reform program aiming to increase overall productivity and to improve quality in education and encourage innovation.and” Mr. Simsek also promised the regular publication of and”progress reportsand” on the implementation of economic reforms. There is no doubt that in order for the Turkish economy to have a potential growth rate of 5 percent one needs to rapidly end our backwardness in human resources.
The only way to do that is certainly to improve the quality of education at all levels. Nevertheless, I not remember any concrete or notable policy suggestions in the AKP electoral manifesto on this matter. But we do witness unceasing repressive inspections at the schools inspired by the Hizmet movement, schools commonly esteemed for their high quality of education. We also learn that new projects aiming to further reinforce the already existing power of the Higher Education Board (YandOK) over universities are being prepared. However, we do not hear about any preparation concerning improvement of teacher quality or the modernization of the education curriculum.
Nor did Mr. Yilmaz or Mr. Simsek talk about the fiscal system for severance pay reforms, which had, in fact, been prepared by the preceding AKP government but were buried on the eve of elections. The only promise made regarding fiscal reform was the promise to fight tax evasion. This promise has been made many times in the past but never implemented seriously. Given the impending referendum campaign for the presidential regime, I do not believe that the fight against tax evasion will be pursued any more successfully. As for labor market reforms, it is only a question of subsidies to employment. The reforms targeting flexibility in the formal segment of the labor market are not on the agenda, as they risk attracting harsh reactions from established interests. One of the problems the reformist team will face, if ever it succeeds in receiving economic responsibility, is finding a way to mitigate the fiscal bill for electoral promises made by the AKP. The first promise satisfied will be to increase the minimum wage by 30 percent in January. This jump in the minimum wage will unavoidably push the average wage up also. An increase in wages in real terms while labor productivity is, at best, stagnating will certainly have aerse effects on inflation and on the current account deficit (CAD).
The two ministers said nothing about how the aerse consequences of these side effects would be compensated for. Furthermore, the bill for all the other electoral promises will certainly increase the budget deficit. On this matter, Finance Minister Simsek says only that the budget will be slightly revised but the low budget deficit target will not be seriously affected. I do not share this optimism.


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