The systematic encouragement of profit-seeking and the absence of any taxes on land profits reinforce the possible risk of lowered potential growth rate for Turkey

Land profit is easy to earn everywhere around Turkey. This is why industrialists shut down their production facilities and switch to the construction sector, not to mention allocating funds for research and development. The other day the mayor of an important city was painting in glowing colors a project on the construction of a controversial highway, arguing how it would increase the value of the land at the district the highway will pass through.

Potential growth, also known as the sustainable growth, is a critical economic concept. The systematic encouragement of profit-seeking and the absence of any taxes on land profits reinforce the possible risk of lowered potential growth rate for Turkey. Indeed, there are a number of signs that it might have decreased already. For instance, in the last couple of years Turkey had record-high current account deficit and foreign borrowing, despite radically low growth rates. Similarly, private sector investment expenditures decreased drastically after the global crisis. Following the recovery in 2010 and 2011, private investment spending headed down back again in 2012. Or take the latest university entrance examination results in which the rate of correct answers was lower than 40 percent in all tests. Or take a look at the remarks by senior state officials that Turkey should settle with raising intermediate staff.

At first glance, sustainable growth does not directly concern the man on the street. After all, it is different than the annual GDP growth and an economy cannot always achieve the potential growth rate. Moreover, achieving it does not necessarily increase the income level of all individuals. On second thought, however, you see that the truth of matter is quite different.

First, any improvement in the sustainable growth rate accompanied with a similar high growth rate for a long timeframe ultimately imply a relatively higher level of prosperity and a relative convergence to high-income countries. In other words, not only the cake gets bigger but it grows at a higher pace than it used to under the existing potential growth rate. It does not remedy the income inequality, which is an important problem per se. Yet, as the cake grows bigger, the amount every citizen gets increases if not their share.

Second, an increase in the sustainable growth rate is beneficial for citizens of countries without a mature democracy and an institutional structure that will overcome partisan politics. In pre-election periods, such countries typically implement economic policies which create a temporary wave of relief but disturb economic balances in the long term. The damage such policies might cause is smaller when the potential growth rate is higher.

In fact, the repercussions of trying to increase growth rate to 6 percent before the election will be different for a country that has a potential growth rate of 4 percent and another one that has a potential growth rate of 5 percent. Evidently, the damage will be smaller in the case of the latter. For instance, the increase in inflation rate will be limited and so will the fall in the purchasing power (real wage) of the average citizen.

So, the million dollar question would be if and at what degree Turkey’s potential growth rate has decreased. Further research must be done on this issue.

This commentary was published in Radikal daily on 28.09.2013