Thinking on the potential growth rate of economy in 2011 makes me pessimistic to a certain extent for two reasons. First, general elections will be held in 2011 if not called early. Moreover, the year after that, presidential elections will be held. Election mood in 2007 pushed up the political polarization, which is not good for the economy. It makes economic units anxious and forces them to postpone long term plans. Therefore, demand does not rise as if it would under a normal climate. On the other hand, in such periods, no attention is paid to structural reforms. Let aside reforms, no sufficient effort is made for designing short term economic policies. The second reason is economic.

To be able to explain it, I have to go back to the reasons lying behind my 2010 forecasts. I provided growth and unemployment estimates for 2010 under various scenarios as of mid-November. Under the basis scenario, growth rate would stand between 3.8 and 4.9 percent. Economic growth in 2010 will have three determinants. First factor is mathematical: It stems from the fact that 2009 growth, used to calculate 2010 growth as a denominator, is too low. In that case, even a slight recovery in 2010 will make us feel that the economy grew in 2010. But how can this 'slight recovery' be ensured? In this context, external factors will be determinant. Therefore, the other two factors are related with external conditions. Foreign demand will shape Turkey's exports. And production and investment capacity of corporate sector will be limited slightly or considerably depending on the level of foreign funds accessed.

As a result, 2010 growth will be highly dependent on external factors. Of course credit extending decisions of domestic banks, developments in public sector budget and confidence in the economy will as well have an effect on 2010 growth and unemployment rate. However, impact through these channels will remain secondary then external factors and will themselves be shaped in relation with the changes in external conditions.

In short, 2010 implies a 'passive' stand in terms of economic policy. We will mainly try to reduce budget deficit, which started to rise increasingly from 2007 to 2009, back to reasonable levels. There is no 'passive' attitude in this sense. However, we cannot expect that this effort will improve confidence and activate the deferred demand, and accelerate growth, as was the case in the post-2001 period. We need a new 'story' in order to maintain and improve the 2010 growth in 2011. Of course it is a prerequisite to restructure budget discipline; but that is not the story we need now. It is just a part of the story. And thus, we are to assume a 'passive' stand in economic policy.

So, what can the main body of the story be? First of all, as well considering the forthcoming elections, it should be secured that budget discipline will not be disturbed. There is a need for medium term fiscal rule and a relevant legal implementation framework. Moreover, we need a new focused reform attempt. Turkey cannot make it to the premier league with such low tax revenues. We need a reform that increases tax revenues at least near to EU average without pushing up tax rates. It is doubtless that this cannot be achieved overnight; but preparations must be initiated and disclosed to the public. This is the second point.

Efforts must be focused on introducing a regulation that allows higher revenue transfers to poor. We need a mechanism that will carry out this regulation not arbitrarily, but in a way that will be beneficial for the economy in the future. Conditional mechanisms can be designed; like mechanisms conditional to sending kids to school or to participation in skill developing trainings for women. This is the third one. Moreover, a mechanism that will reduce the responsiveness of the economy toward external demand conditions must be devised. It is for sure that the main heading of this attempt is industrial policy; but a new export promoting mechanism can also work in the short term. We need to work this through. And this is the fourth point.

This commentary was published in Radikal daily on 24.12.2009