Pursuing the Achievable: Macroeconomic Stability and Sustainable Growth in Turkey, Speech by Anne O. Krueger, Acting Managing Director, IMF
May 5, 2004
Macroeconomic Stability and Sustainable Growth in Turkey
Economic Congress of Turkey
By Anne O. Krueger
Acting Managing Director
International Monetary Fund
Izmir, May 5, 2004
[Thank you for that kind introduction, Mr Chairman.] I am delighted to be here this afternoon. As you know, I have been a regular visitor to Turkey for many years, and it is always a great pleasure for me to return to this beautiful country. I was reminded, when driving around Izmir yesterday afternoon, what a beautiful and historic city this is.
But being at this Economic Congress is a particular pleasure for me, indeed a great honor. I am well aware of its long historical pedigree, going back to the inaugural gathering in 1923. Its close association with the man who I believe is justly regarded as among the greatest statesmen of the twentieth century—Ataturk—has for me a special resonance. He led his country to independence and, more than anyone, made Turkey what it is today; in so doing also made possible the economic progress that this country has made in the past decades.
The timing of this Congress is auspicious. The Turkish economy is making great strides and I believe the government can be justifiably proud of what it has achieved by sticking to its clearly-defined objectives and its reform program. Indeed, progress on many fronts has exceeded expectations. The prospect of continuing macroeconomic stability and, with it, rapid and sustainable economic growth, is, I believe, firmly within Turkey's grasp.
I want to highlight some of those achievements, today, and say a little about the challenges that still lie ahead. But since this Congress has such a long pedigree, I think it is appropriate first to look back and set the achievements of today in historical context.
The historical context
Let's go back fifty years. In the 1950s and 1960s, Turkey's economy, like that of most developing countries, was government-led and largely focused on import substitution. There was great suspicion of the private sector, a reluctance to rely on market forces and, instead, a fondness for the centralized organization of economic activity. There was, nevertheless, good growth in the 1950s, until the first crisis in 1957-58. Demand for imports had risen while exports had not: quantitative restrictions on imports finally got so tight that economic activity was being hampered—the harvest couldn't be gathered because of petrol shortages, for instance.
The crisis prompted a program of reforms that was, initially, successful. Inflation fell sharply from around 25% to something nearer 5%; growth rebounded; and exports grew. Over the following decade Turkish growth averaged about 7% a year; but inflation gradually rose—with a fixed nominal exchange rate—and the next stability crisis occurred in 1970. But a rising inflation resulted, as the growth potential of the import substitution strategy was exhausted. The 1970s were, essentially, a lost decade for Turkey because of the slow pace of growth. Two IMF-supported stabilization programs in the later part of that decade failed to deliver because the underlying commitment to reform was absent.
The ambitious program that began on January 26, 1980 was intended to mark the start of serious economic reform efforts after years of false starts. Inflation reached 100% that year. Power shortages were common in Istanbul and elsewhere. There were shortages in many sectors because of the quantitative restrictions on imports.
A big shake-up in both policymaking and policy signaled a completely fresh approach. The reforms had three main aims: economic stabilization, including a reduction in the rate of inflation; a deliberate shift away from import substitution and towards an export- oriented economy; and a move towards a more market-oriented economy.
The lira was devalued, and a more flexible exchange rate regime was established. Price controls on State Economic Enterprises were relaxed and their budget constraints were toughened. Structural reforms were introduced in the financial sector. The trade regime was liberalized. And there were efforts to improve revenue collection and reduce the fiscal deficit.
In many respects these reforms worked. 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. In the late 1970s, the economy had actually been contracting. GDP growth accelerated only slowly at the beginning of the reform process, though remember this was against the backdrop of a global slowdown. From 1984 onwards, the economy picked up speed, growing at around 5% a year. In the early years of the reform program, the government also succeeded in reducing the fiscal deficit. And in some respects, the reforms introduced succeeded in shifting Turkey permanently towards a more export-oriented economy.
Nor did the reforms peter out quickly. They only lost momentum briefly ahead of elections in 1983, for example. New structural measures were introduced in what is regarded as the second phase of reform, from 1983 onwards.
No, the real disappointment came later when the government ultimately failed to follow-through on its attempt permanently to bring inflation under control. Once inflation started to pick up significantly in 1987, the real exchange rate was allowed to appreciate. But this made exports less competitive and ducked the real cause of the resurgence in inflation—lax fiscal control.
Efforts to reduce the fiscal deficit were only partially successful and short-lived, in part because of the government's desire to push ahead with much-needed infrastructure improvements. In 1981, the budget deficit had been brought down to 1.7% of GDP; by 1984 it had risen to 5.3% and the deficit remained a problem. Inflation, meanwhile, had started to climb once more—up to 70% by 1989.
By 1989 it was clear that fiscal imbalances, the appreciation of the exchange rate, and accelerating inflation were storing up trouble. But the stop-go pattern of economic management during the 1990s meant that the main problems were ducked. Only when the crisis of 2000-2001 erupted was there a determined effort to restore stability and, with it, sustainable growth.
The current outlook
The results of this most recent reform effort have been impressive. Just consider some of the figures. In 2001 the economy contracted by nearly 10%. Since then it has notched up annual growth of 8% in 2002, around 6% last year, and looks set to exceed 5% this year. Inflation is 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.
There has been progress on several other fronts, too. Although it fell slightly short of the 6.5% target, last year's primary surplus was the highest ever recorded in Turkey—6.2%.
Maintaining a high primary surplus is, of course, crucial if Turkey's debt burden is to decline to a sustainable level over the medium term. Here too the numbers are starting to look encouraging, with debt to GDP already significantly down from the 100% level in 2001 to around 70% at present. But it is clear that a high primary surplus is not hampering growth performance—indeed, the resulting reduction in interest rates has actually encouraged growth.
Credible efforts to sustain macroeconomic stability are essential for sustainable rapid growth. They also help build the resilience economies need to survive in the modern world. Those efforts need to be maintained, to guard against potential future problems, such as the widening emerging market spreads we are already seeing, and a rise in global interest rates which could have an impact on emerging market economies.
The challenges ahead
Much progress has been made, but much remains to be done, and this is that critical juncture when maintaining the momentum is both vital and challenging.
We are not yet at the point where we can be confident that Turkey's current growth performance will be sustained over the longer term. That requires continuing progress on lowering inflation. It also requires continuing progress towards debt sustainability: and that means not just meeting the government's primary surplus target but doing so in a sustainable way, through a better tax system and expenditure management. And it requires continuing reform on a wide range of structural issues.
Further progress is also vital because there is clear evidence that the returns to economic reforms increase sharply as more of them are undertaken. This really is an area where the whole is far greater than the sum of the parts. All reform is welcome, of course: but the full benefits will not come through if reforms elsewhere in the economy are overlooked, or postponed.
The reform agenda is challenging because governments can find it difficult to press on with politically difficult reforms when economic performance has already started to pick up. But difficult reforms are far more painful when implemented in a downturn or, even worse, in the middle of an economic crisis. The current upturn, both in Turkey and in the global economy, is the ideal opportunity for all countries—not just Turkey—to implement the changes needed to deliver rapid growth that is sustainable in the longer term.
The government's reform program, of course, envisages doing just that. It is reassuring to see the government's unwavering commitment to further reductions in inflation; to maintaining a primary surplus sufficient to reduce Turkey's debt burden; to broader fiscal reform; and to reform and consolidation of the financial sector.
Credibility matters in the global economy, perhaps today more than ever. The high-speed transmission of information that we all take for granted, and from which we all gain, also means that markets can act quickly. The markets can be harsh judges, as emerging market economies have painfully discovered. It is important that economies, and economic policymakers, are equipped to exploit the benefits that market discipline can bring. The rewards can be substantial, in terms of lower interest spreads and more foreign investment, for instance.
Let me not give the wrong impression. It would be wrong to view the challenges in a negative way. The desire for reform, and the determination to deliver it, is evident. As you know the Fund stands ready to provide advice and technical assistance as well as the financial support already provided under the program.
And the benefits to be had are enormous. Let me remind you of what could be within Turkey's grasp if the reforms are followed through successfully.
Macroeconomic stability is worth striving for. It is the prerequisite for the rapid sustainable growth in income and employment that raises living standards and reduces poverty. Low inflation makes economic decision-making easier for all citizens, and benefits the poor disproportionately.
Sound fiscal policies give governments and citizens more choice. A sustainable fiscal position makes it easier for society to decide on its priorities.
Increased economic resilience makes it easier to cope with unexpected shocks. These will always come, we just cannot predict when or in what form: the stronger the economy, the less harm those shocks do to a country's citizens, especially the poor.
Indeed, economic reform will be in the interests of all Turkish citizens. Living standards will rise, poverty will be reduced, and life will become more predictable, or at least less vulnerable to ups and downs.
As I said earlier, reforms build on each other. The returns rise more rapidly the more widespread and the more co-coordinated they are.
For countries that are ill-prepared, the modern global economy can seem harsh. For those with sound policies, the rewards are great indeed. Perseverance is worth it.