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You may nudge but not push.

ySTANBUL (CyHAN)- One of the most fundamental macroeconomic problems of Turkey is the chronically high current account deficit (CAD).

In 2014 the CAD to gross domestic product (GDP) ratio was 5.7 percent. Although this year, the lira depreciated significantly and oil and natural gas prices -- Turkey's main imported commodities -- decreased substantially, only a slight improvement on the CAD is expected. Combined together, those two events should have a much bigger impact on the CAD.

A high CAD is usually a bad sign for the health of the economy. It is especially harmful if it finances consumption rather than investment. Moreover, a high CAD makes the country very vulnerable to shocks in the short run. Being aware of these potential dangers, a couple of years ago the government started several programs to reduce the CAD. One of those was the government subsidy of the individual pension system (BES). In this program the government matches 25 percent of individual contributions to personal pension accounts. The program was relatively successful in terms of increasing private savings. On the other hand, the savings rate is still one of the lowest among a comparable group of nations. In any case, the government wants to increase the savings rate and considers BES as a vehicle for this promotion.

Earlier this week Deputy Prime Minister Mehmet E[currency]imE-ek indicated they are considering new ways to increase individual contributions to BES. He mentioned they might utilize some automatic enrolment mechanisms. Although the details have not yet been released, what I understand is that individuals will be automatically opted into BES with a predetermined contribution rate. The operative word in this sentence is "automatically," although those who do not want to participate will be able to opt out or decrease the contribution rate. Many countries have tried these automatic enrolment mechanisms in various situations from individual pension plans to organ donations. Behavioral economist Richard Thaler documented the almost magical powers of automatic opt-in programs in his two bestselling books "Misbehaving" and "Nudge." In countless studies, Thaler and other researchers showed that people are really too lazy to make decisions, even in those matters that have a very large impact on their material or non-material wellbeing.

For example the organ donation rates in countries where people have to opt out in order not to donate their organs post-mortem are much higher than in countries where people have to opt in to donate their organs post-mortem. One may think that organ donation is such an important decision that simple paperwork procedures would not make a big difference. Another study showed that a small difference, as simple as crossing a box, on medical doctors' prescription documents made a huge impact on the prescriptions' content. Again one might think that medical doctors would value their patient's welfare more! Similarly, it is observed in many instances that workers contribute much more frequently to their pension plans when enrolment is automatic compared to cases where enrolment requires simple application procedures.

So if those automatic enrolment mechanisms are utilized, individual contributions to BES might increase substantially. If implemented properly, that could be even reduce the CAD. Slight adjustments on the rules of the game might make everyone better off by nudging them in preferred directions. However, I also want to point out the relatively dark side of BES. Although funds collected in BES are managed by private fund managers, those funds are heavily regulated. Even how much those fund managers can charge their customers for specific services is determined by public agencies.

On the other hand, the success of private BES funds is in question. According to data compiled by Abdurrahman Yyldyrym from the HabertE-rk daily, in the last five years the rate of return for BES funds is one of the lowest among alternative investment options. BES accounts performed worse than investments on real estate, bonds, plain savings accounts, gold and simply buying and keeping euros and dollars. According to most observers, BES accounts will not attract any investors if they are not subsidized by the government. I believe those two issues are related. When governments regulate an industry very heavily, competition between rival suppliers either simply ceases to exist or reveals itself in unhealthy ways. I think that is what is happening in the BES market. When the fees that can be charged for services provided to customers and the kinds of activities that are allowed are determined by the government, there is simply not much room left for competition. Without competition, we should be surprised when private companies provide high quality services to their customers and not when they don't.

However Deputy Prime Minister E[currency]imE-ek had a different opinion. Last month in the face of a low rate of return of BES accounts, he criticized the finance sector and threatened them with more regulations, not less. This week he kept his word and announced even stricter regulations.

Recent studies on behavioral economics hint that gentle "nudges" on private economic agents (especially individuals) might be a good thing, not only for society but also for those nudged individuals. However decades of economic literature have strongly shown that pushing economic agents heavily into doing something usually results in a deterioration of welfare of not only of the general public but also of those poor souls who the government wants to help.

ABDE[pounds sterling]LKADyR CyVAN [Cihan/Today's Zaman] CyHAN

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Publication:Cihan News Agency (CNA)
Date:Jan 6, 2016
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