Low savings remain fundamental challenge
If Turkey wants an economic breakthrough, the first steps it must take are not economical at all. Every prudent observer knows what needs to be done, but suffice it to say Turkey must be rescued from the position serious international media persistently describe it as being in.
There is a need for comprehensive democratic measures that will make Turkey a country that is not known for its jailed journalists. It needs freedom, a healthy judicial system, rule of law and peace. Consecutive positive developments in those areas would bring the Turkish economy to a far better place than the current one.
That said, the most urgent economic problem Turkey must solve is the savings issue. The saving rate is 14 percent of gross domestic product, according to the old GDP calculation method, or 25 percent based on the 2015-2016 calculation method. I won’t delve into the controversy surrounding the new calculation but say, despite the increase, our savings rate is still our biggest economic problem.
It was a “very low” ratio, according to former method; now it is “low.” That the adverb “very” is gone has not changed the fundamental problem. Our average savings ratio between 2008 and 2016 was 22.3 percent. In the same period, the ratio of emerging-market economies and emerging coun- tries was 32.7 percent. We stand 10.4 points below that.
Since the savings ratio is low, we cannot finance even a less-than-assertive investment level, and we have to resort to foreign borrowing. But the amount of foreign borrowing is not only dependent on our own policies, which I outlined above.
It depends heavily on conditions we cannot control. This fact makes the Turkish economy highly vulnerable to the fluctuations of the risk appetite of foreign financial investors. First, it leads to volatility in foreign-exchange and interest rates. Rises in interest and exchange rates are due to declining risk appetite, and these increases are then reflected in the overall economy, including in increased unemployment.
We have to approach savings on two levels: public savings and private savings. To increase public savings, measures limiting the shadow economy are essential. But politically, that is difficult.
It is not easy to boost private savings either, but at least we know what to do. An interest rate that is below inflation discourages people from saving and has to be avoided. We are well aware of the factors that have led to this and the political challenges of resolving them.
However, until we address the political problems and encourage savings, the Turkish economy will be fraught with peril.