Replace discretion with rules: how policy reform can boost economic performance

Replace discretion with rules: how policy reform can boost economic performance

A reform-minded government that adopts institutional reform to increase policy credibility and enhance the degree of competition may be rewarded with increased economic performance. The experience of Turkey in the 2000s suggests that anti-corruption and economic reform programs that promote more rule-based policy making and reduce the discretionary powers of the government may make significant positive contributions to economic growth.

Summary: 

  • before the 2000s economic policy making in Turkey was based on discretion and patronage rather than rules
  • this put a significant amount of stress on public finances, resulting in macroeconomic instability
  • in the wake of the 2000/01 financial crisis, the government created independent regulators for banking, telecoms, energy and public procurement, and made the Central Bank independent
  • to support its candidacy for the European Union it embarked on economic reforms broadly based on EU legislation
  • it was mainly due to the new regulatory environment that the financial industry survived the global financial crisis of 2008-2009 relatively unaffected
  • between 2002-2007, Turkey experienced one of the highest sustained growth rates in per capita income in her history
  • recently the government has weakened regulators’ independence and introduced new schemes with greater discretionary powers
  • as a result economic growth is less likely to be driven by open competition and will rely on discretionary instruments to generate investment
  • the Turkish experience suggests that a reform-minded government that adopts institutional reform to increase policy credibility and enhance competition may be rewarded with increased economic performance.
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