Pursuing the Achievable: Macroeconomic Stability and Sustainable Growth in Turkey, Speech by Anne O. Krueger, Acting Managing Director, IMF

IMF News, May 5, 2004

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Canonical URL: Pursuing the Achievable: Macroeconomic Stability and Sustainable Growth in Turkey, Speech by Anne O. Krueger, Acting Managing Director, IMF

Authors: Anne O. Krueger Acting Managing Director International Monetary Fund Izmir
Published: May 5, 2004

1950s–1960s: economy largely government-led and focused on import substitution; growth in the 1950s until the first crisis in 1957-58.
Early reform outcomes:
- Inflation fell from around 25% to something nearer 5% after initial reforms.
- Turkish growth averaged about 7% a year over the following decade.
1970s: described as "essentially, a lost decade" because of slow growth as import substitution exhausted its growth potential.
1980 reform program (began January 26, 1980) aims:
- economic stabilization, including reduction in the rate of inflation;
- deliberate shift away from import substitution towards an export-oriented economy;
- move towards a more market-oriented economy.
Post-1980 reform numeric outcomes:
- Inflation came down from around 100% to around 30% by 1983.
- Exports rose from about 5% of GDP in the late 1970s to 20% of GDP by 1987.
- From 1984 onwards, the economy grew at around 5% a year.
Subsequent setbacks:
- Inflation began to pick up significantly in 1987; by 1989 inflation had risen up to 70%.
- Fiscal outcomes: budget deficit down to 1.7% of GDP in 1981; by 1984 it had risen to 5.3%.
1990s: stop-go economic management left major problems unaddressed until the crisis of 2000-2001.

Crisis and recovery:
- In 2001 the economy contracted by nearly 10%.
- Annual growth since then: 8% in 2002, around 6% last year, and looks set to exceed 5% this year.
Inflation and interest rates:
- Inflation down from 70% in 2001 to just over 10% according to the latest figures released just this week.
- "Single digit inflation is clearly well within reach."
- Interest rates have been falling as a result.
Fiscal and debt indicators:
- Last year's primary surplus: 6.2% (fell slightly short of the 6.5% target), described as the highest ever recorded in Turkey.
- Debt to GDP: down from the 100% level in 2001 to around 70% at present.
Macroeconomic stability is framed as essential for sustainable rapid growth and resilience; vulnerabilities noted include widening emerging market spreads and potential rises in global interest rates.

Sustaining current growth requires:
- continuing progress on lowering inflation;
- continuing progress towards debt sustainability, which means meeting the government's primary surplus target "in a sustainable way, through a better tax system and expenditure management";
- continuing reform on a wide range of structural issues.
Reform complementarities:
- "The returns to economic reforms increase sharply as more of them are undertaken" — benefits are larger when reforms are widespread and coordinated.
Political economy constraints:
- Difficulty of pressing ahead with politically difficult reforms during an economic upturn, despite the risk that delaying reforms makes eventual adjustment more painful.
External risks:
- Markets can act quickly; credibility matters due to high-speed transmission of information.
- Potential shocks: widening emerging market spreads, a rise in global interest rates.

Maintain macroeconomic stability to secure rapid and sustainable growth.
Sustain a high primary surplus sufficient to reduce Turkey's debt burden, achieved by:
- improving the tax system;
- better expenditure management.
Continue reductions in inflation and financial sector reform and consolidation.
Pursue broad, coordinated structural reforms to amplify returns and build resilience.
Leverage the current upturn as the ideal opportunity to implement politically difficult but necessary reforms.
Utilize IMF support: advice, technical assistance, and financial support already provided under the program.

Macroeconomic stability:
- Is the prerequisite for rapid sustainable growth in income and employment that raises living standards and reduces poverty.
- Low inflation benefits economic decision-making and "benefits the poor disproportionately."
- Sound fiscal policies give governments and citizens more choice; sustainable fiscal position facilitates social priority setting.
- Increased economic resilience reduces harm from unexpected shocks, especially for the poor.
Reform payoffs:
- "Living standards will rise, poverty will be reduced, and life will become more predictable" if reforms are followed through.
- "Perseverance is worth it."

Source: Speech by Anne O. Krueger, Acting Managing Director, International Monetary Fund, Izmir, May 5, 2004.