WE HAVE BEEN WAITING FOR Godot for a entire decade, if not two or more. On the face of it there is a strong and fluid dynamic that drives the business world. Here and there old town folk who were busy trading olives now produce olive oil machines, for instance. More people export, even SMEs. But if you scratch beneath the surface, there is apathy and the repetition of old ways of doing business that have already cashed in so much profit. The apparent change is only a facade. In fact, radical change in business mentality – in mentality in general – is always perceived as untimely. Why change now? If you don’t change even a bit, then the promised brave new world that will surely be missed, just as before, just the way the first, second and third industrial revolutions were missed. Nonetheless, profits and profitability will endure as always, no?
FAVORABLE BASE EFFECTS
Because last quarter’s growth came below expectations, the 2021 base effect will be stronger. That means growth will benefit but will be still below potential unless consumption is somehow rekindled. This is a low possibility, but then who knows? Should this happen and trigger 5-6% GDP growth this year it won’t be because credit will boom or earnings will suddenly rise. Surely unemployment won’t fall drastically. It will be simply because both income and wealth distributions are so unequal that the upper 20% can spend nonetheless. There is also a strange outdoor effect that awaits us: because people can’t stay at home for a long time – they didn’t get in the habit of reading and writing, and except for Netflix, I don’t know what the middle classes did during the pandemic – now that cafés and restaurants are open they will rush into them. It is a normal psychological response but it can get into overexcitement quickly. It may be too soon for opening up, and the opening we witness isn’t yet an unlimited grand opening, but it will suffice to fuel a lot of services expenses. Since the services was in a comatose state, this will jumpstart the sector; well, at least for those who can restart their businesses. Another big if lies in the tourism sector. Will there be a genuine fresh start? Who will travel and at what prices? Can tourism earn FX revenue as before? Now that monetary policy is being conducted in an awkward environment, this is a crucial question. With still a lot of net negative reserves the Central Bank faces a unique problem: Is there another Central Bank that faces negative net reserves while deciding policy?
NEGATIVE RESERVES LEAVE NO CHOICE
Did reserve erosion “finance” anything? For instance, was there a huge current account deficit, one that was unheard of for decades, and reserves were depleted to finance that? Was there any mechanism whereby reserves were indirectly transferred to public enterprises or public banks so they could curtail unemployment, prevent large-scale foreclosures from happening, etc.? No. Instead, they were spent with no tangible result. Obviously overseas investors got out in time to avoid serious losses because selling reserves saved them time. Some of them may be back now, with rather large gains. Some FX-indebted firms might have gotten off the hook by buying dollars at the right juncture, but was it worth it? Now the Central Bank has to stick with near-equilibrium interest rates, which means even envisioning a cut, even during summer, would be premature – again.
HIGH BUDGET DEFICIT THAT HAS NOTHING TO DO WITH THE OUTBREAK
We are one of the few countries that did not use much of its budgetary resources to shore up household incomes and support closed businesses during the pandemic. That’s because our budget dynamics have been deteriorating since 2016. The central budget deficit jumped to TRY 172.7 billion in 2020 from TRY 30 billion in 2016. Tax revenues have been rising above the rate of non-tax expenditures since July 2020. So, what’s happened to the budget happened before the pandemic. The net public debt stock-to-GDP ratio stood at 6.83% in Q2 2016; it was 19.89% in Q3 2020. But in Q3 2019, it was already 15.56%, meaning there was no pandemic-related shock to public finances.
RISK MANAGEMENT LACKS EFFECTIVENESS
What has the pandemic shown? New funds, new ways of insurance, new rules – such as job protection – new trends – such as working on-line even after the outbreak dies off – and perhaps direct injection such as “helicopter money” will and should be called for. The working mode of the system might change a bit after this – which didn’t truly happen after 2008 (on which more anon). Risk – especially correlated risk – underlies the financial market failures that plague smallholder agriculture and retail. Correlated risk also undermines SME financing more often than not. Risk mitigation mechanisms (insurance) can potentially alter this financial market reality. It is not just a matter of stabilizing consumption with insurance, but also a matter of inducing financial market deepening and underwriting risk-taking needed for technological change and productive asset accumulation. It is definitely not about opening credit channels for a short period at low rates – artificially, a device that is (was) conducive to both FX and interest rate risks further after the first phase is over. We are there now.
POLITICAL SITUATION IS UNFAVORABLE
Almost all commentators emphasized how Biden would be different from Trump. Of course, but the idea that Biden is so cosmetically carved with democracy, human rights, climate concerns and what not is a bit of an exaggeration. I also flirted with the related but distinct idea that Biden would essentially stage a replica – with some changes admittedly – of the second Obama term. All his appointees were from that period. Because Biden is a seasoned and experienced statesman, he wouldn’t otherwise call most veterans of the 2012-2016 administration to duty. For a while this idea seemed to have bite. But now that neither his Iran policy nor the initiative towards Russia is reminiscent of that period, it is time to realize that bygones are bygones. The international scene isn’t what it was back in 2012 or in 2016 for that matter. Biden is coming in hard and strong. That applies to the U.S.-Turkey relations as well. Many scores could be settled shortly, or so it seems. Anyway, Biden may be the Good Samaritan and as a well-endowed guardian of the best habits of the American government he may like to develop good formal ties with NATO and the EU, and undo any unilateral arbitrary relations with third countries, but he isn’t soft; neither towards Iran nor Russia, and eventually China. He won’t be soft against anyone. He will be cold-blooded, calculated and bureaucratically neutral, just as every good statesman ought to be.
AND SO THE IDEOLOGICAL SCENE, DESPITE THE BIDEN WIN…
Consider the following argument: “Contrary to the theory prevalent on the left that liberals say what they say because they are hirelings of the Koch brothers (while the leftists are not hirelings of George Soros), liberal ideology was and is not a reflex of the relations of production, or a necessary outcome of some self-interested social contract, or speech bought for pay. As Antonio Gramsci argued, ideologies seldom are, the vulgar Marxists aside. Ethical ideas
underlie ideologies, independent to a considerable degree from formal institutions or incentives to self-interest or the relations of production. Ideas and ideologies matter on their own.” (See: McCloskey, “Fukuyama Was Correct: Liberalism Is the Telos of History”, Journal of Contextual Economics). It is perhaps true that culture and values determine behavior, and institutions only to the extent they shape values and determine culture. Nevertheless, Italians may not be that religious and Irishmen may not be that poor or ignorant as 200 years ago, but the world at large other than European off-springs – and China possibly – isn’t imbued with the values of free will, entrepreneurship, and innovation. In fact, quite the contrary; even Europe and the U.S. aren’t immune to right-wing populisms, and a return to the golden age of classical liberalism looks like an elusive target.
Yet none of these will be sufficient to cause yet another dramatic downturn unless something extrinsically uncertain, like sunspots, a shock that is totally unpredictable, happens. Another year of subpar but positive growth is in the making, with a lower current account deficit. If you ask me, that is another lost year. Because stop-go cycles don’t help ameliorate long-run dynamics and the long-waited structural change, a base effect-cum-return to the right monetary policy based betterment is short lived. Obviously, the lira is still fragile. We may call that a natural vicissitude engendered by an episode of monetary policy with negative net reserves.