Feel the love. Turkey’s general election on Sunday delivered a third successive landslide victory for Recep Tayyip Erdogan, prime minister. The vote was the first for perhaps a generation not conducted in a crisis atmosphere. Mr Erdogan is leading a Turkish revival; he deserves his mandate. But rather than tinker with the constitution, he should use his mandate to reform an increasingly unbalanced economy.
Turkey is growing. Gross domestic product expanded by about 9 per cent last year, capping a decade of strong growth that has lifted the country into the middle-income bracket and ended its long dependency on the International Monetary Fund. Yet some of the foundations are shaky. Growth is financed by spiralling domestic credit, which increases imports – up by 44 per cent year on year in the first four months of 2011, while exports grew by only 21 per cent – and by abundant low-cost foreign savings, which finance the resulting current account deficit.
The deficit shows Turkey’s lack of external competitiveness, and it is increasingly problematic. The trade gap reached $63bn, or 8 per cent of gross domestic product, in April; only 12 per cent of it is financed by foreign direct investment. Most financing is from portfolio flows and short-term capital. That leaves Turkey vulnerable to an abrupt correction.
The underlying causes are mostly structural. A recently announced tax amnesty may yield 1.2 per cent of GDP in additional revenue, but it is no long-term solution. The central bank’s policy response has also been unconvincing. Ministers are working on a medium-term plan of fiscal and macro-prudential measures. But to have bite, it should address labour market and tax reform, and encourage banks to raise lending standards.
A decade ago Turkey was deep in financial crisis. Despite its impressive emergence, all the preconditions for another one are now in place. It must not wait to act until markets put it under pressure. A hard economic landing would be no way to repay the trust of the electorate.
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