result of all other economic variables. putting interest and exchange rate policies in the forefront leads structural reforms, the prerequisites for sustainable and high growth rates, to remain in the background. the level of foreign exchange rates is of course a noteworthy and influential factor on economic variables. in the short run, the foreign exchange rate is determined by monetary and fiscal policies, international capital movements, expectations and even political developments and current issues. however, in the medium to long term, the most important factor determining the value of a local currency is the economic performance of that country. the foremost factor influencing this performance is productivity increase. productivity increase, at the same time, is the only variable to ensure the permanent increase in the welfare of a society. the monthly real exchange rate index, which is released by the central bank, shows that compared to 2003, the turkish lira appreciated in real terms compared to the currencies of developed countries, while no significant change occurred against the currencies of developing ones. this is not surprising. the increase in the real exchange rate index against developed countries is a natural consequence of the high productivity increases in our economy compared to these countries. for example, oecd data suggest that in the 2003 – 2008 period, the productivity increase per employee in turkey is approximately 6 times higher than that in europe. our currency did not mark a notable change against emerging market economies competing with turkey in the exports markets. in this respect, the relatively stable course of the real exchange rate index compared to developing countries underpinned the maintenance of turkey ’ s competitive power in foreign trade. as is the case across the world, the central bank ’ s decisions on monetary and exchange rate policy also affects the economy as a whole in turkey. under a fixed exchange rate regime, it is possible to control the nominal level of the foreign exchange rate. nevertheless, under free market conditions, whatever the exchange rate regime and exchange rate policy are, it is impossible to control the real exchange rate level. the real exchange rate level will ultimately move towards the long - term balance level according to the structural features of the economy. in an environment of pressurized nominal foreign exchange rate, this movement will emerge by the changes in the prices of goods and services ; i. e. inflation. in countries like latvia, estonia, lithuania, bulgaria, where a fixed exchange rate regime was implemented, this was experienced before the global crisis and these countries faced the problem of high inflation. we foresee that the distinguishing characteristics

or those who had recently joined the labor force but could not find jobs also poses the risk of permanent unemployment for such people. in this respect, the implementation of structural reforms to improve the labor market will prevent a permanent rise in long term unemployment during the global crisis and underpin the increase in the potential growth rate of the economy. 4. productivity after sharing my views on the labor market, i would like to move on to total factor productivity, the third factor that influences the potential growth rate. total factor productivity in an economy arises from the interaction and combination of a number of elements. the leading one is the establishment of macroeconomic stability by alleviating the uncertainties that economic agents are confronted with. the prerequisite of macroeconomic stability is fiscal discipline and price stability. public balances that have improved thanks to prudent monetary and fiscal policies coupled with the inflationary gains following the deep economic crisis in 2001 are noteworthy steps on the road to establishing macroeconomic stability. economic welfare only increases along with sustainable growth. sustainable growth implies price stability. the growth rate we attained with the high inflation in the 1980 ’ s did not last long and had been replaced by higher inflation rates and economic recession. meanwhile, between 2002 and 2007, high growth rates were attained while a remarkable decline was recorded in inflation. in this scope, we are of the opinion that the monetary policy implemented by the central bank of turkey, which is consistent with the main objective of price stability, has supported the establishment of price stability in turkey and contributed to the permanent increase of the competitive power of the whole economy and the exports sector. i would like to emphasize that the quality of fiscal adjustment is crucial for both the struggle with inflation and the permanence of the high growth rates. the fiscal rule, which is to be enforced in the near future will enhance predictability and create confidence for the future. fiscal rules play a critical role in the establishment of fiscal policies consistent with sustainable debt dynamics and foster a more prudent and permanent implementation of fiscal discipline. however, in the light of country experiences, in order that fiscal rules can function as expected, these rules should be implemented in a transparent way as per the required institutional and legal framework to be established. 5. exchange rate as you may have noticed, in my speech regarding how to increase the potential growth rate of turkey, i have not mentioned the issue of foreign exchange rates. economic literature besides country experiences has shown that the value of the currency of a country is the