ABDuLKADIR – Structural reforms and Babacan

Structural reforms and BabacanFrom time to time some catchphrases become popular among policy circles. andldquolobalizationandrdquo once was either reason or remedy for many economic problems.

Later, andldquosustainable developmentandrdquo became fashionable. Nowadays, a popular catchphrase is andldquoinclusive growth.

andrdquo However, my favorite one is andldquostructural reforms.andrdquoIf you are following the work of the World Bank on Turkey or that of any other international policy institution, you might be surprised to see how frequently you come across this phrase.

In these policy review papers, Turkey is constantly criticized for failing to implement structural reforms. Even more surprisingly, if you follow Ali Babacan, you might hear such criticism even more openly and candidly.

Sometimes I forget that Mr Babacan is indeed a deputy prime minister of Turkey. Even though he is responsible for coordinating the economic policies of the government, most of the time he talks like an opposition leaderOn many specific economic issues, many ministers, top bureaucrats and sometimes even the president express opposing views.

The conflicting ideas range from monetary to industrial policy, from labor reform to taxation of capital earnings. If these conflicting ideas were simply superficial, the harm would be relatively small.

However, these disagreements are apparently genuine and prevent the government from implementing coherent economic policies.In fact, it makes it impossible to accomplish any serious structural reform Turkey has been discussing labor reform for years, yet no meaningful change is on the horizon.

Similarly, not much has been done to prevent off-the-books economic activity. Tax reform has not even been discussed yet.

In the good, early days of Justice and Development Party (AKP) governments, genuine structural reforms were indeed accomplished. A successful example of these reforms was the deregulation of the airline industry.

Prior to 2003, Turkish Airlines (THY), a public airline, was dominating the airline industry in Turkey. A Cabinet decision in 2003 eliminated the restrictions regulating entry into the sector Other steps followed the deregulation of the sector, including the partial privatization of THY and airports and new pricing policies for flights.

Last month two Turkish economists — Tamer etin of the University of California, Berkeley and Kadir EryiIit of UludaI University — published their work on the effects of the deregulation of the Turkish airline sector on market welfare. They show that due to deregulation, the number of passengers taking domestic flights has increased almost 10-fold (from 9 million passengers to 77 million passengers annually).

Moreover, average ticket prices have decreased by 40 percent in real terms. As such, market welfare in Turkey has improved substantially with this reformIn fact, etin and EryiIit show that the welfare gains are even bigger than these numbers suggest, because when there are more flights between two points, a passenger can choose the most convenient flight for his or her particular needs and preferences.

Suppose that, prior to 2003, there were only two flights between Istanbul and Izmir — one in the morning and another at night. This meant many people had to waste long hours in the airports.

Now, because of competition, there are several flights on the same route.The convenience factor due to the increased number of flights makes each flight more beneficial for passengers.

Passengers can fly at more convenient hours and at cheaper prices. Moreover, due to competition and partial privatization, there are probably large cost savings for THY and other carriers.

As I mentioned in previous paragraphs, nowadays the government has lost its reform-minded stance. Even worse, the new policies given as examples of economic reform do not make any sense at all.

One particularly bad one is the subsidization of medical tourismIn theory, medical tourism can be a lucrative business since medical tourists on average spend more than other types of tourists. However, the government has overlooked the fact that for many medical inputs, Turkey is at the very bottom of the list of Organization for Economic Co-operation and Development (OECD)ountries.

One of these inputs is the ratio of the number of physicians and nurses per 1,000 in population. Similarly, because of low drug prices, many international pharmaceutical companies do not market their drugs in Turkey.

As another example, the Ministry of Health has declined to grant a license to the Foundation for Children with Leukemia (LSEV), a non-profit organization that supports cancer patients, to establish an oncology hospital. According to LSEV, the hospital would provide patients with state-of-the-art cancer treatment completely free of charge.

The Ministry of Health claims that since there are not enough physicians in the country, they cannot license this hospital. This is the same government that subsidizes the healthcare industry to attract more medical tourists.

This is just an example of what can go wrong when a deputy prime minister acts and talks like an opposition leader rather than coordinating the economic policies of the government.

SOURCE: Today’s Zaman