I’ll agree with half of that, the “productivity is crucial” part. Then, there’s the “decision to borrow.” You might think, “We’re so poor; we might not be able to pay back this loan in the future, but we’re dying now, so we have to borrow!” But we’re not like that! Or you might believe the future will be better and take out a loan, fully convinced you can pay it back.

It’s clear the future doesn’t look better, but we take out these loans anyway. Of course there are people who take out loans truly expecting their situation to improve.

Since the birth of the Republic we’ve had an unshakeable belief that this country is destined to achieve much more. No matter how roughly we get knocked down, as a nation we convince ourselves that we’ll get back on our feet. The current account deficit is one manifestation of this approach.

One thing to consider, though, is why the current account deficit has now shot through the ceiling. Instead of savings growing parallel with national income, as expected, the current account deficit has increased its relative share. Why’s that? It might partly be due to this: Once Turkey’s national budget was put into order and banks started behaving like banks, the private sector and households in particular gained access to loans in ways they had been unable to before. That wasn’t something we understood all that well or understand fully today, and it’s important. I fully agree with what Professor Üçer said about our focus on savings: Whenever we mention the current account deficit, savings, and the savings deficit, we talk about the measures government could take to promote household savings. Our government is also a player in this market, able to spend and therefore with the capacity to save. Yet it has never regarded itself as a potential saver, nor has it ever put itself to the same test.

On the other hand, in the public sector we need a surplus. We need a surplus for demographic reasons, in view of future social security costs and to cover unexpected circumstances. In a country with 10 percent inflation, government shouldn’t be encouraging demand this way. Look at government spending, and you see that our government collects a considerable sum in taxes and spends it freely. A better approach: collect the taxes, save the revenue instead of spending it, and reduce the savings deficit! It really makes sense to consider the role of public savings here.


Another long-running topic of debate in Turkey is the “informal economy.” Based again on my experiences as a businessman, my view is that it’s a major problem. We see the damage it causes in many of the sectors where we operate and frequently have to deal with its effects.

How much unproductivity does the informal economy create in the economy? How important is it? You might argue that the informal economy is indispensable because it gives our economy a degree of flexibility and creates jobs in certain geographical regions. You might even say, “Business leaders, adjust yourselves accordingly!” What are your views? I’m really curious.

I’ve got a very straightforward answer: The informal economy is an enormous problem in my opinion. It’s a scourge, unpleasant as this may sound, and the main source of unfair competition. To clarify, what I mean by “informal” is not the underground economy, of course, or money laundering - the truly unlawful stuff.

Today, “informal economy” actually means unfair competition, just as you’ve experienced, and resigning ourselves to unproductivity. It has to be challenged openly and firmly. Yes, the social and employment dimensions are very important, but I believe we should deal with them using completely different mechanisms, such as the budget. Let’s not legitimize and live with unproductivity, instead, let’s debate and plan how to implement social policies and more to manage the potential damage the transition will cause. You could add training to that list, because you’ll have to offer intensive, on-the-job training for many if you’re aiming to manage the transformation of the SME (small and medium-sized enterprise) sector.

I tend to believe this transformation is as crucial as the ones that took place in the Soviet Union and Eastern Europe in the 1990s. The state withdrew and the private sector was born; it wasn’t easy by any means, but it happened. A similar transformation is essential in the SME sector here. Consolidation and creative destruction must be allowed, in my view. At the end of the day, the grey economy and inflation are the two most fundamental causes of unproductivity in the system. They need to be tackled, and this demands tremendous political capacity, compromise and vision. It’s very difficult, perhaps impossible.   


My view is that the informal economy is not a cause, but an effect – an obvious consequence of government incompetence – because its supply and demand are caused by government. On the supply side, government makes it so costly to be part of the formal economy that it pushes businesses into the informal economy. And on the demand side, government not only makes it very easy to be outside the formal economy but also allows it to go unpunished. Under these conditions, the emergence of the informal economy is no surprise. Worse still, it’s impossible for the formal economy in Turkey to absorb the informal one under the present system. Given the current level of employment costs, output and employment would drop if you began taking effective measures to curb the informal economy, and the shock would be lasting, not temporary.

So, the employment system needs reform. Take severance pay, for example; it’s really important. If you think you can combat the informal economy without tackling this employment cost, then what you’re proposing is long-term unemployment, something we can’t cope with. There are enormous challenges here. Take on-the-job training, which Professor Üçer mentioned, and new skills training for the unemployed. Global experience has shown time and again that they don’t work.

There’s a much more doable way: Force these businesses to go formal! Make it too risky to establish an “informal” business, so it won’t be worth it. Make it easy to be legitimate; reform business regulations. Then you can start to push the informal out slowly; let the weakest fall first, don’t demolish it all at once.

Just to clarify: I wasn’t suggesting that we restructure the sector and let them stew in their juice before ensuring the right environment, fully comprehending the problem, and resolving a series of structural problems.


We can see that there’s a problem here. We all agree it exists, and when you look into its causes, it’s not just a matter of “wicked people trying to evade tax” or anything. The system itself actually encourages you to avoid becoming part of the formal economy if you’re only setting up a small-scale business!


Inflation is a topic that had been off the agenda for a while and now appears to have made a comeback. My impression is as follows: We believed we had triumphed over inflation in Turkey. We declared victory and seemingly dropped our guard. What is that victory? Over the course of a few years, we were able to lower our inflation rate from the 70 and 90 percent range, where it had fluctuated for decades, to 8 to 12 percent. So, we congratulate ourselves: “Turkey’s done a great job here!” Yet, we also observe that our trading partners have inflation rates closer to zero; they’re so low that some of them were concerned about the risk of deflation until recently. When you compare our inflation performance, the chasm is still vast.

Hence, the problem continues with all its drawbacks: the imbalances it creates, the difficulties it causes in forecasting and planning, the uncertainties in costs. Inflation is a problem whichever way you look at it. Except that it doesn’t seem to be perceived as such. I wonder if you share this impression. Also, do we have the tools and resolve to tackle inflation? And can this become a priority in the current political environment?

I find it helpful that you, as a business leader, see inflation as being costly on the micro level and bring these arguments to the table. Because from the macro side, inflation rates of eight, nine or ten percent do not represent “price stability.” You’ve also mentioned the associated high volatility. Then, there’s the competitiveness aspect; to compete with Europe, which has inflation rates of one or two percent compared to eight or ten here, your nominal exchange rate has to fall by around ten percent every year to maintain your competitive edge. Additionally, high inflation leads to high nominal interest rates, so you attract speculative capital. What arrives is very short-term capital that is easily spooked, and it creates instability.

Tools to lower inflation exist, of course, but they, too, require social consensus and Central Bank involvement. My reference point is Paul Volcker’s disinflation effort in America in the early 1980s. Once a problem has calcified to such an extent, it’s impossible to solve it without some pain. And why is that? Because you have to change expectations: The mindset needs to change from “This is a country of eight or ten percent” to “This is a country of three to five percent inflation.” You can do this either through debate, which is really difficult, or through force, which effectively means you’re going to put the economy into recession. Depending on your credibility, the process could last a few quarters, or it could take far longer. In any case, I believe we have the tools: interest rates and a bold and determined monetary policy stance. But it’s impossible to do without politicians behind you, and Turkey isn’t ready for it. Mainly because most people fail to see the cost of inflation – unlike you. The Central Bank needs political support. Volcker himself was threatened at the time, but politicians supported him one way or another. Today, textbooks refer to that period and Volcker’s policies as success stories.


In other words, we’ve managed to maintain our global ranking as the country with the highest relative rate of inflation. We may not understand all the damage inflation causes, but what we do see is this: Firstly, if you’re in the formal economy, inflation raises your tax burden. Secondly, it makes figuring out relative pricing quite tricky. In fact, inflation slows demand and makes it harder to do any kind of business. We know inflation is harmful and how to stop it. It needs to be tackled.

We thought it was going to be hard to lower inflation after the 2001 crisis, but it turned out to be much easier than anticipated. So, some things are easier to do in Turkey. In other parts of the world, in countries we generally select to study inflation and its costs, the primary difficulty is the powerful clash of interests. A cost is inevitable, and who will pay for it? This leads to a struggle between labor and capital: “Who draws the short straw?”

There’s only one reason, in my view, why disinflation costs are low in Turkey and why we recover quite quickly from crises: Labor always pays! There’s no systematic protection of labor in Turkey. Government can slash the share of labor in our national income in one fell swoop. Which is why disinflation can be achieved rapidly without being too costly at the macro level. And I believe Turkey can do it again.

What we really need to talk about here is the rapid erosion in the quality and structure of our country’s institutions. Any discussion of inflation requires a look at our Central Bank. We now know that running a central bank is essentially about managing expectations; it’s a matter of credibility, and in this regard our Central Bank has already used up its capital. The people running the Central Bank aren’t incompetent, but since they’re operating under certain restrictions they don’t actively oppose, they get the blame.


Please feel free to correct me if I’m wrong, but lowering inflation – which you pointed out was easier than anticipated – clearly happened the moment the Central Bank gained independence.