Fatih Özatay, PhD - [Archive]

Dwarf stars 20/12/2010 - Viewed 1435 times

Growth performance since 1950 was inadequate to close the income gap between developed countries and Turkey.

The last general elections were in 2007. On the eve of next elections we had better check how Turkey's economy performed between 2007 and 2010. Assessing two important macroeconomic variables - growth rate and unemployment rate - would be enough for a healthy assessment. I take growth rate and unemployment rate for 2010 as 7.5 percent and 12.2 percent, respectively where the latter corresponds to the average of the first nine months of the year.

Over the questioned period average growth rate was 2.1 percent and average unemployment rate was 11.9 percent. These clearly imply a weak performance. For the sake of fairness let me exclude the year 2009 where the global crisis was felt harshly: growth rate rises to 4.3 percent and unemployment rate falls to 11.2 percent. But this is not impressive either: growth rate remains below the long term average and unemployment rate remains above the long term average. 

Reform index
This weekend I came across the summarized findings of a research carried out for the core European Union countries. The authors have also included the USA and Japan to the research. Relying on the Regional Outlook 2010 report by the IMF, they have derived a 'structural reform requirement' index. The index is composed of nine indicators. Among medium-term indicators are inefficiency of labor market, working life regulations and retail sector regulations. Long term indicators include institutions and contracts, human capital, infrastructure and innovativeness.

And surprise! All of the troubled European Union countries but Ireland rank at the top in the structural reform requirement index. Ireland stands at the neutral zone. And the second surprise: at the top of the list stands our old friend and neighbor Greece.

Interest rate on state bonds rises in countries which have lower chance to repay their debt compared to untroubled countries. Furthermore, the premium those who trade theses bonds pay for insurance schemes purchases to mitigate the risk of not receiving the return increase. 

Income gap did not close
We all know that both interest rate differences and premiums go up along with the rise in public debts and public deficits. Researchers in addition to this reveal that interest rate differences and premiums increase also along with the structural reform requirement. In fact this is not a brand new identification. There is a correlation between structural reform requirement and the level of productivity in a country. If you are at a good point considering structural reforms, you ensure a solid productive capacity and risk premiums for such countries naturally decrease. The mentioned research underlines another point: countries with high structural reform requirement have significantly lower per capita income. I have stressed several times with figures and tables that the growth performance since 1950 failed to close the income gap between developed countries and Turkey; we made no much progress since then. And the performance over the 2007-2010 period is even worse than the 'no progress' performance over the last sixty years; it is worse of worse.

We had better deal with structural reforms instead of bragging about 'how Turkey shined like star in the face of the global crisis' which is incorrect anyway.

A note: The research I referred to can be accessed at www.voweu.org (Cardoso and Domenech; 13 December 2010.

This commentary was published in Radikal daily on 20.12.2010