Turkey overcame the 2001 crisis by tightening the belts. Base issue was the budget discipline. Now we are faced with the 2008 crisis. And we are at the beginning of a period where we have to tighten the belts. Budget discipline is again the base issue. Then, is the problem in 2008 is the same with that in 2001? No, it is not. Let us explain why we think this way.
The first question is: Are 2001 crisis and the 2008 crisis the same? No, they are not. 2001 crisis was Turkey's crisis only. 2008 crisis however, is the crisis of global economy rather than of Turkey. It might be correct that, we, presenting a huge policy inertia, did not fulfill our share, failed to minimize the impacts of the crisis, and successfully put Turkey's name in the list of most affected by the crisis. However, the result does not change. 2001 crisis was Turkey's crisis and 2008 crisis came from outside.
Second issue is: 2001 crisis stemmed from internal dynamics and was a direct fruit of the domestic fiscal policy indiscipline. Rise in budget deficits due to the fiscal lavishness of 1990's is the first phase of the issue. Budget deficits financed by public borrowing turned into the problem of how to finance the government debt securities (GDS) and brought about the 2001 crisis. Because, we successfully shut GDS's in bank balance sheets. We thought that as we shut GDS's in, banks will continue purchasing and thus balance sheets expand. To expand balance sheets, we ensured that the Central Bank provides liquidity to banks increasingly. Then, a moment came and balance sheets exploded. That was when we learned that we cannot continuously stretch out balance sheets and control risks using monetary policy and that there are tricks in every trade. In this context, 2001 crisis began as a banking sector crisis. Things broke out with fiscal lavishness and the will to sustain the unsustainable public borrowing. So the second point is: 2001 crisis is the result of the unsustainable domestic fiscal policy.
And the third issue: As 2001 crisis is closely connected with public borrowing, the essence of the fiscal discipline perception back than was decreasing GDS stock. In fact, the successful tightening the belts policy implemented as of 2001 decreased the share of GDS stock in national income considerably. This way, ratio of domestic debt stock in national income was reduced from 51 percent in 2001-end to 29 percent in 2008-end.
In the meanwhile, however, the credibility required by the fiscal contraction measures implemented to control public borrowing reignited the growth process. Financial market actors that trusted in the expenditure limiting measures increased their demand for GDS in Turkey. This is what economics literature names "expansionary fiscal contraction". Turkey overcame the 2001 crisis rapidly thanks to expansionary fiscal contraction. And this was the fourth point.
Second question of the day that will lead us to the fifth point is: Can Turkey benefit from the "expansionary fiscal contraction" dynamic also in this crisis? Both yes and no; because this time the problem is different. The problem should be defined not as "expansionary fiscal contraction" but as "expansionary fiscal discipline". This time the same dynamic can be benefited from not by saving but by spending. Therefore, this time the objective of the fiscal discipline is not decreasing public expenditures as in 2001; it is to control fiscal expenditures at the first phase. The second objective is to change rapidly the composition of public expenditures that will not be reduced. As a result, this time what we need is "expansionary fiscal discipline". This is the fifth point of the day.
So, what is the reason for the change in fiscal discipline concept from 2001 to 2008? It is the climate of economic recession. In this recessionary climate, reducing public expenditures will make economic recovery completely responsive to the positive news to be heard from the rest of the world. Domestic economic policy will fade out. This is not good. And this is the sixth point.
Please note how the credibility gain resulting from fiscal discipline changes it meaning from 2001 to 2008. Yesterday, the aim was to cut expenditures all out in order to limit the domestic debt stock that grows out of control. Today, the meaning of fiscal discipline is introducing measures that will ensure that public expenditures contributes to growth process as much as possible; i.e. cutting down unproductive expenditures while maintaining productive ones. This is the seventh point.
Where is the risk? Changing the structure of public expenditures is a huge political problem. What is good for governments is to address as rare as possible the issue of changing the composition of public expenditures. Maybe Turkey has to build the fiscal role not only upon the total amount of public expenditures but also upon the change in the composition of public expenditures.
At this point, let us put a historical reminder: "Non-budgetary fund system experience" of Turgut Ozal must never be forgotten. Reason for the establishment of non-budgetary fund system was the effort to avoid changing the composition of public expenditures, as being a hard task, by introducing clear principles. Was this a good move? This was a bad experience, but it shows how hard the mission is.
Today, fiscal discipline means putting forth clearly and credibly the will that public expenditures will be controlled and the composition of public expenditures will be changed. This is what we should get from fiscal discipline in the climate of economic recession. And this is exactly what multi-year budget must tell us.
See how the adjustment quality of fiscal discipline entered from the back door in the main priority agenda of Turkey. This path day by day approaches to the "impossible without the IMF" lane.
Honorable administrators of Turkey, please surprise us.
This commentary was published in Referans daily on 15.09.2009
