Monday, 11 March 2013

Challenges To Long Term Economic Success

Deputy Prime Minister Ali Babacan of Turkey never spoke truer words. Whether the words will ever be translated into action is another matter. But for the moment, the words are welcome.
Regarded as an economic technocrat in a government of zealous ideologues, Babacan is widely credited for Turkey’s recent strong economic performance. 

He has kept a tight rein on the country’s financial management since the Justice and Development Party swept to power in 2002. He has often warned his countrymen against taking on too much debt, and once famously compared running the Turkish economy to driving a truck down a steep, winding road in a thick fog.  Perhaps most importantly he has kept economically illiterate politicians from wrecking the budget with their pet projects or handouts to favoured groups.
Deputy Prime Minister Ali Babacan
In a recent meeting hosted by theFoundation for Political, Economic and Social Research he said that Turkey needs a “predictable rule of law” to improve its investment climate. “We must certainly create a more rapid and consistent judicial process,” he told the audience. “We are not at an ideal point regarding fundamental rights and freedoms. We need more judicial reforms. To become a country where there is a functioning (italics are mine) democracy and the rule of law is our sine qua non.”

Welcome words indeed to those hundreds of people incarcerated in prisons for long periods without being brought to trial. Then he got to the heart of the matter.

“Without political reforms, economic success cannot be maintained . . . development based on economic growth alone falls short of satisfying people.” Never were truer words spoken. I wonder what the Chinese would make of them.

He continued by stating the obvious about Turkey’s education system. “Our educational system is not very pleasing. The average number of years of schooling for adults is 6.5 years. With this kind of education level it is hard to achieve a target of $25,000 per capita GDP. We can achieve this goal with a better education level,” he told the group. It is a measure of Babacan’s importance to the government that he felt free to make such comments. Most other ministers with the temerity even to hint that there was any risk whatsoever to Turkey’s economic growth would quickly be transferred to supervising car parks near the Iranian border.

His comments come on the heels of the Global Competitiveness Report that showed between 2006 – 2012 Turkey’s justice system declined from 56th place to 83rd place. The country’s tax regime declined from 95th to 117th, and the education system fell from 58th place to 74th place. With this kind of performance Babacan’s concerns about Turkey’s economic success are well founded.

Problems in the legal and judicial system that hurt Turkey’s growth are not limited to criminal cases. Recently there was a closely contested bidding procedure for the privatisation of the country’s toll roads and bridges that attracted three bids and was won by a consortium of Turkey’s largest conglomerate Koç Group and the Malaysian UEM Group with a bid of $5.7 billion. The process followed Turkey’s complex privatisation regulations to the letter. The winning bid was far above what the other competitors were willing to pay, and was considered very rich by other market participants. Despite this, Prime Minister Tayyip Erdoğan complained that the winning bid was too low and that he would be ‘accused of treason’ if he permitted the privatisation to be completed at only  $5.7 billion. The prime minister did not reveal how he arrived at this conclusion.  Predictably, the bid was cancelled. Nothing has been said about compensating the winning bidders for the considerable investment they made merely to make the bid.

Abrupt cancellation of the bidding process when the government is unhappy about the results is, unfortunately, nothing new. A few years ago a client of mine won a small bid for a property containing deposits of a low value industrial mineral. Two weeks after the bid the client received a two sentence notification from the Ministry of Energy saying the bid had suddenly been cancelled. No explanation, no reason was given. I made several fruitless trips to the ministry seeking some sort of explanation. Various officials had the grace to be embarrassed, but said there was nothing they could do. “It’s out of our hands,” they said.

This lack of transparency has plagued Turkey for decades. With its massive electoral mandates Turkey’s ruling Justice and Development Party has had the perfect opportunity to make long overdue and fundamental reforms to the country’s governing institutions – the very ones that Babacan talked about. By focusing instead on expanding his own authority, emasculating the military, and creating vote-gathering construction projects the prime minister has missed an excellent opportunity to make these fundamental changes that would transform Turkey’s recent economic growth into lasting economic and social progress.

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