Poor Turkish growth rate due to decade of failure to back SMEs, says economist
In the run-up to what is maybe the country’s most anticipated parliamentary vote, Sunday’s Zaman talked with the well-respected columnist, economist and former bureaucrat, Süleyman Yaşar, to hear his assessment of the economic performance of the ruling Justice and Development Party (AK Party). As the opposition parties cranked up the pressure on the government with economy-focused promises a week before the June 7 election, Yaşar’s frank review sheds light on what the AK Party managed to sustain during its tenure and in which areas it failed regarding the economy.
“SMEs in Turkey generate 76 percent of the employment and make 54 percent of all investments in the Turkish economy; but they receive merely 25 percent of the bank loans. This issue has recently been addressed in the EU’s progress report on Turkey as well. Turkey ignored such warnings, and its growth rate has decreased. What did our country do instead? The lenders in Turkey financed large companies with the help of government incentives and public-private partnerships such as build-operate-transfer (BOT) models, which are all aimed at domestic consumption via populist projects,” Yaşar said, describing why the roots of the Turkish economy have been unable to flourish after the crowning growth rates sustained in the first years of AK Party cabinets.
“Turkey produced non-tradable goods, such as luxury public buildings, shopping malls and restaurants, but they do not contribute to our exports,” he elaborated, echoing the much-debated weakness of the Turkish growth model, which for years has relied on the construction sector.
Even Treasury guarantees and tax incentives from the government are always drawn up for large enterprises, excluding SMEs, Yaşar added.
While some politicians and intellectuals criticize the whole economic performance of the AK Party over the course of the past decade, others argue that the deterioration began after a certain period. When asked about his assessment, Yaşar said the basic indicators obviously took a turn for the worse in 2011, even though the government has been successful in some areas and failed in some others.
In lieu of a $14 billion-worth increase in the gross domestic product (GDP), Turkey’s gross external debt, including those of the public and private sectors, surged from $338 billion in 2011 to $402 billion in 2014, Yaşar said, underscoring that the current debt graph is not sustainable.
Economists have often spoken up about the growing mountain of private sector debt — more specifically corporate debt — in foreign currencies. Given that the Turkish lira has lost as much as 45 percent of its value against the greenback in the past two years, further debt put Turkey in a more fragile position against external shocks. Back in 2002, the external debt of the country was only $107 billion.
Yaşar added that Turkey’s annual growth rates have even lagged behind those of other countries in its league since the AK Party first came to power in 2002. Turkey grew by only 4.7 percent each year on average between 2003 and 2014, suggesting that the glittering growth rates sustained in the early years of AK Party tenure lost their sparkle in recent years.
“Even though Turkey’s GDP has nearly tripled during the AK Party government, its share in the global economy has shown almost no change, although emerging markets increased their total share from 20 percent in the 1990s to 57 percent today,” Yaşar maintained.
BİST in a declining trend
Touching on changes in the value of Turkey’s stock exchange, Yaşar stated that Borsa İstanbul (BİST) had dropped by 7.2 percent on a dollar basis since the beginning of 2015, and ranked second among poor performers, only just beating cash-strapped Greece and being edged off the top spot by Egypt’s stock exchange.
In his recent column in the Zaman daily, market analyst Selim Işıklar also noted that BİST, which rose from its 2011 value of 62,000 points to 85,000 points in 2015 on Turkish lira, dropped from 38,000 points to 33,000 points in the same period on a dollar basis. Maintaining that other stock exchanges in the world performed better in the last four years compared to previous years, the situation in Turkey was the exact opposite, he said.
Even the unemployment rate rose from 10.3 percent in 2002 to 11.2 percent in 2015, Yaşar highlighted.
AK Party did good job in some areas
When asked whether the AK Party had succeeded in any economy-related field, Yaşar said bringing the budget deficit and public debt down, and improvements in the social security system can be chalked up as positive points in the party’s history. “If the eagerly-introduced FATİH [Movement to Increase Opportunities and Technology] project had been implemented well, it would have revolutionized our education system,” Yaşar said addressing a promising start in this area which turned into an unfortunate failure. The government intended to deliver tablet PCs and smart boards to every public school in a bid to modernize the education system in Turkey, but did not meet that goal.
Short and long-term challenges after election
Aside from pre-election fragilities, Sunday’s Zaman asked Yaşar to reveal his assumptions about post-election economic challenges.
In the short term, he said that Turkey may have great difficulty with unstable foreign exchange rates along with foreign investment exits as the US Federal Reserve is expected to raise interest rates by the summer. Also, concerns over the rule of law in the country should be dispersed to preserve already-existing investments, Yaşar said, blasting recently introduced laws that he views as a threat to free market and property rights. He added that a potential prospective cabinet formed only by the AK Party is risky, as the party has no project left to boost the economy.
Regarding long-term challenges, Yaşar said Turkey needs to set up a new growth model, that production should focus more on tradable goods, and that the rule of law alongside democratic values must be secured to entice new and returning investment.