OBG talks to Ali Babacan, Deputy Prime Minister

Interview: Ali Babacan

What steps is Turkey taking to achieve a sustainable level of economic expansion? What factors drive growth in the face of global instability?

ALI BABACAN: Turkey’s endurance during the global crisis is the result of consistent and determined efforts to achieve structural reforms in economic, financial and social issues. Reforms of the past decade have successfully transformed the Turkish economy into one of high growth rates, generating jobs for millions. One of the key factors behind this favourable economic performance is our determination to preserve and improve the confidence of producers, consumers and investors through political stability. During a period of skyrocketing debt, ballooning budget deficits and deteriorating credibility on a global scale, Turkey differentiated itself by announcing a fiscal consolidation plan early in its recovery. Our strong banking system was another important factor in preserving confidence. Crisis management through prudent, timely and targeted fiscal and monetary policies, together with medium-term programmes to help manage expectations, led to a strong recovery phase. Overall confidence and credit conditions, coupled with GDP growth of 9% in 2010, made the Turkish economy the fastest growing in Europe. This rise was maintained in 2011, with an annual growth rate of 8.5%. The government is committed to further strengthening the economy’s fundamentals with complementary legal provisions that consolidate the successes we have achieved so far. One of the priority areas is a brand-new constitution in line with EU standards, which will improve democratic standards and introduce more liberties. In the meantime, we will implement active employment policies to create jobs and enhance the quality of labour, which will bring efficiency gains and support the sustainability of growth. Energy investments will also be given priority. We intend to ensure the reliable energy supply needed for growth while reducing the country’s dependence on foreign energy, which constitutes the bulk of our current account deficit (CAD). The structural reform process in health and education is likewise continuing at an accelerating pace, which is reflected by budget appropriations for these areas. Transportation infrastructure investments are under way, and legislative reforms following developments in international law will help bring us harmonise with EU standards.

With exports to Europe declining, what new markets are Turkish exporters targeting?

BABACAN: Competition for a higher share of global trade volumes is escalating, since exports are becoming the driving force of growth. Bearing in mind the recent turbulence in the financial markets and pressure on countries to push for more trade in order to avert stagnation, “trade wars” may become the main theme of 2012. Thus, being pro-active in targeting new markets and improving presence in the existing markets are critical issues for every economy. In this environment, we have established “country desks” to analyse country-specific issues in order to improve trade relations with the specific markets. These desks have been established for 15 target nations and 27 priority countries. “We have been trying to deepen our economic relations with African countries, and to this end we are increasing the number of our embassies from 12 to 34.”

How is the government working to stabilise the CAD? What role does domestic production of renewable energies play in these efforts?

BABACAN: The measures we have implemented to control credit growth have thus far narrowed the divergence in foreign and domestic demand – hence, the CAD is being kept in check. In the meantime, we are giving utmost importance to structural solutions that will decrease CAD. In this regard, we have implemented structural and medium-term policies for lowering the dependency on intermediate goods imports. In the face of widening CAD, increasing domestic savings is a crucial issue and our economic policy framework has been designed accordingly. We consider the reduction of our dependence on external sources to finance growth as a matter of priority. For this purpose, we are prioritising policies that will increase domestic savings, and public savings in particular.

As the government, we are determined to improve public savings through sustained fiscal discipline. We are highly dependent on energy imports. Thus, it is crucial to enhance energy efficiency, boost productivity and diversify energy sources. Our long-term strategy includes utilisation of all available domestic resources and also maximum usage of renewable energy resources. The integration of nuclear energy will be a major achievement that will reduce the need for energy imports.

What role is the government playing in fostering entrepreneurship and innovation? How is success in this emerging field being measured?

BABACAN: The economic restructuring of the past decade necessitated a shift in our industrial approach to technological developments. We believe that it is the right time to take steps to transform Turkey into an innovation-driven economy. A law to support research and development (R&D) was enacted to stimulate innovation and build R&D capacity within the economy. We have recently increased state support and incentives for R&D projects, and raised the number of the technology development zones and research centres in the country. Improvements in R&D and innovation have extended information technologies and will move our economy to a higher level of the value chain.

We have taken measures to ensure that small and medium-sized enterprises (SMEs) strengthen their R&D capacity and adapt to new technologies and circumstances of a knowledge-based economy. To this end, the SME development organisation, KOSGEB, provides supports under the R&D, Innovation and Industrial Application Support Programme. Our success is monitored by public and private bodies, and international statistics on comparative R&D expenditures and patent files indicate that Turkey is improving in innovative activities, though we still have a long way to go.

With major projects focused on Istanbul, how is the government fostering growth elsewhere Turkey?

BABACAN: Istanbul was the capital of two great civilisations and centre of the old world for centuries. Now, it is on the eve of becoming the cultural, economic and commercial centre of the region. The Istanbul Finans Merkezi Project emerged as a natural extension of the economic and social transformation that Turkey has undergone over the past decade. The main aim of this project is to create a principle-oriented, reliable, efficient and comprehensive financial centre. Initially regional, in the long-run this global financial centre will be mutually beneficial for our country and our partners worldwide. The project will stimulate a number of reforms to maintain an environment conducive for a successful financial centre. These reforms will also enhance the investment environment across Turkey.

To promote links in the areas of transportation, energy, education and employment, Kanal Istanbul is a multi-faceted project that will ease the overload of traffic on the Bosphorus Strait. Although physically centred on Istanbul, these two projects will benefit the country as a whole. For instance, capital inflows to the financial centre would create ample financing opportunities across the real sector. Meanwhile, the canal project, by easing the burden on the Bosphorus, will contribute to the preservation of the natural and historical heritage of Turkey, not just Istanbul.

The degree of stability we have maintained over the past decade allows us to introduce long-term targets.

Among these, we aim to make Turkey one of the top 10 economies of the world, in terms of total GDP by 2023. In line with these objectives, we will continue our structural reform agenda to improve the capacity and dynamism of Turkey in the fields of industry, transportation infrastructure, education, science and technology, and in legislative and institutional structure.