TBY talks to Ali Babacan, Deputy Prime Minister responsible for Economic and Financial Affairs, on growth prospects, the current account challenge, and efforts to develop exports.

Ali Babacan
Born in 1967, Ali Babacan graduated in 1989 in Industrial Engineering from Middle East Technical University in Ankara. In 1990 he was awarded a Fulbright Scholarship and attained his MBA at Northwestern University in Illinois. From 1992 until 1994 he worked in Chicago providing financial consulting services, before returning to Ankara to run the family business until 2002. In 2001 he became a founding member of the AK Party, and was elected to parliament and appointed Treasury Minister. He has also held the position of Chief Negotiator in Turkey's EU accession process, and Minister of Foreign Affairs. After the 2011 general election he became Deputy Prime Minister for Economic and Financial Affairs.

Turkey's economic history is full of periods of rapid growth and long stagnations. What is different about the latest period of growth?

During the last nine years, Turkey has gone through a period of strong political stability, and we benefited from this. The Justice and Development (AK) Party government has successfully implemented political and economic reforms in a timely manner. Turkey has been continuously upgrading itself when it comes to its democratic standards. This is a really important source of strength for us, as we base our policies on the aspirations and will of the people. Putting individuals' and citizens' welfare at the core of our policies has paved the way to strong growth and employment generation.

When the AK Party came to power, Turkey's budget deficit was 12% of GDP, and its debt-to-GDP ratio was 74% at the end of 2002. Looking at the latest fiscal figures, we expect our budget deficit to decelerate to 1.7% of GDP in 2011. In parallel with this decline, our debt-to-GDP ratio will be below 40%. The fiscal adjustment process was very important for Turkey.

On the monetary policy side, our central bank has been very successful in fighting the chronic problem of inflation. For 34 years in Turkey, the inflation rate has been in double-digit territory. However, during our term, it has dropped to single-digit levels. We are targeting even lower single-digit figures for the coming years.

In terms of structural reforms, we were able to make comprehensive social security reforms, including pension reforms. We were able to perform healthcare reform with a wide coverage. Furthermore, our banking system went through a significant reform process, enabling our banks to be quite strong compared to most other countries.

Turkey has undergone timely reforms in all of the areas that developed economies are now struggling with. The structural change that Turkey has gone through is now a very important source of strength for us, and one that we will have on our agenda for the years to come. In this regard, we are aiming toward attaining sustainable growth, enhancing the investment environment, labor market reforms, tax reform, and dealing with the informal economy. Reforms in the finance sector are aimed at making Istanbul one of the top 10 financial centers globally; these are some of the key agenda items for us.

Turkey's current account deficit is a noted concern. What sort of measures may be necessary to keep the deficit under control?

Strong economic performance on one hand and high dependency on oil and natural gas imports on the other have brought about a relatively high current account deficit. Bearing this problem in mind, we are designing and implementing fiscal and monetary policies so as to gradually bring down the current account deficit. Furthermore, we are aware of the importance of targeted structural reforms to fight this problem. This may require more R&D spending, more innovation, more high-tech production, higher value-added production in Turkey, and even better education policies, which will ultimately help generate yet higher value-added production.

On the fiscal policy side, we are determined to maintain our tight policy stance. Generating a primary surplus is not an easy thing to do during turbulent times, but we were able to do this in 2011 and will continue to do so until 2014. A tight fiscal policy stance is going to be one of our most important tools. Another important tool is going to be proactive measures by the Central Bank of the Republic of Turkey (CBRT) to maintain financial stability. Without these necessary measures, some negative consequences for financial stability might occur. The CBRT is also looking from that perspective. Furthermore, increasing R&D spending in Turkey, and moving to higher value-added production is going to be important. In 2010, our R&D spending was 0.8% of GDP. For the year 2023, our target is to reach an R&D spending level of 3% of GDP, where 1% comes from the public sector and 2% comes from the private sector.

After GDP growth of 8.5% in 2011, what are some of the key measures that the government's Medium-term Program is looking to introduce regarding growth?

The Medium-term Program covers the period between 2012 and 2014. The next three years, as signaled by the global economic outlook or the European economic outlook, are not going to be easy. Our Medium-term Program is in line with a mediocre medium-term outlook for the global economy. We are targeting growth rates of 4% for 2012, and 5% for 2013 and 2014. Compared with many countries, it is probably still a relatively high rate of growth, though below our potential. Turkey's growth potential is much higher. Although a better outcome than projected would be much appreciated, we also need to be prepared for the worst global scenario. This was our motivation when preparing our Medium-term Program.

In the area of fiscal policies, the target deficit for 2014 is 1%, and now we are at 1.7%. Thus, we will gradually go down from 1.7% to 1%. On the monetary policy side, we have a similar picture. The central bank is independent, and its first priority is price stability. As long as it does not conflict with that priority, the central bank will also take into account the government's growth targets. However, let me underscore one more time that the number one priority for the CBRT is price stability. The CBRT is also going to contribute to financial stability. It will cooperate with other government departments for particular measures on financial stability.

Regarding the banking system, we are several steps ahead of Europe. However, we want to be ready. Macroeconomic issues, such as production or other financial aspects regarding our banking system, are essential parts of our macroeconomic approach. Further reform areas for the medium term include the labor market, an improved investment environment, financial sector, and taxation policies.

What measures are being taken to reduce Turkey's reliance on imports and improve its export performance?

We are looking at schemes to produce imported products, for which we have a sustainable competitive advantage in Turkey. It is very important to exclude those products or sectors for which we don't have a sustainable competitive advantage. Therefore, we are going to be very picky in that respect.

Furthermore, we are moving into alternative energy resources. Currently, Turkey is highly dependent on fossil fuels. However, we are putting more emphasis on renewable energy sources. In this regard, literally speaking, hundreds of licenses have been issued for wind power and hydro energy, which have significant amounts of investment. Additionally, solar energy is just starting up. Despite the ongoing debates started after the Fukushima incident, we still think that nuclear energy is crucial for Turkey, as we are not sure whether renewables will be sufficient for our future energy needs. We need at least three nuclear plants in Turkey by the year 2023 in order for nuclear energy to constitute a major part of our energy resources.

In addition to our energy policy, Turkey needs to be more competitive in the labor market and have better labor-market strategies. Judicial reform to make our courts more efficient, more predictable, and more reliable is going to be very important in making Turkey an easy environment for investors, so that we will have more international investment, especially in terms of FDI. Compared with previous periods, FDI is high, but we think that we can do better.