Turkey’s economy

OECD Observer

©Mehmet Kacmaz/NAR Photos-REA

The OECD is preparing its forthcoming Economic Survey of Turkey. What issues will be examined? We asked the OECD Economics Department to outline them. Turkey has achieved strong growth in terms of GDP and employment and its public finances are in comparatively good shape. As you prepare your forthcoming Economic Survey of Turkey, what factors would you say contributed to these successes? 

Turkey’s bounce-back from the global slowdown has indeed been impressive, with a growth rate comparable to China’s in 2010-11, at close to 9% per annum. The recovery was facilitated by macroeconomic policy stimulus but its pace largely reflects private sector dynamism, both in the Istanbul area and in Anatolia. In the process, Turkish firms have managed to reorient their exports towards the Middle East and other regions where demand expands relatively fast or where they have a strong comparative advantage. Growth has been slowing down quite markedly in recent quarters, but remains robust and its pace is now more sustainable.

Reducing the current account deficit has been described by the government as a priority. What measures are being taken?

The external gap approached 10% of GDP last year, an uncomfortably high level. While this partly reflected a soaring energy import bill, it also resulted from the erosion of competitiveness Turkey experienced until recently, as inflation outpaced exchange rate depreciation. A number of measures have been taken since around mid-2011 to restrain domestic demand and reduce the current account deficit, including on the prudential side. Even if further increases in oil prices have masked it somewhat, adjustment is under way, albeit gradually.

In the face of high inflation and volatile capital flows, the Central Bank pursuing what some see as a somewhat “unorthodox” monetary policy? How does this approach work?

The Central Bank uses a wide interest rate corridor as well as changes in banks’ reserve requirements, alongside occasional foreign exchange market intervention, to try and bring inflation down towards its 5% target while limiting exchange rate appreciation. We understand the motivation but this is a tricky balancing act. In recent months, inflation has been in double-digit territory. It is important to bring it down and to firmly re-anchor inflation expectations around a moderate level.

What are the other main challenges facing the Turkish economy today?

Living standards in Turkey are improving fast but remain far below those enjoyed in the leading OECD economies. Strong growth in the 2000s helped reduce poverty, but going forward, growth needs to be more inclusive and greener, building on efforts already made in these areas.

Labour market reform is key, especially to encourage the shifting of resources from the informal to the formal sector: a more flexible labour contract is needed and minimum wage setting should be decentralised. At the same time, women’s labour force participation needs to be encouraged, not least by making affordable child and elderly care a priority.

Education of the youth and upskilling of the older working age cohorts is equally crucial: school enrolment rates have risen but there is ample scope to improve quality and equity, notably by granting more autonomy to schools and universities; concomitantly, training efforts for the existing labour force need to be stepped up.

Greater competition in network sectors and agriculture will spur economy-wide growth and help reduce the external imbalance: in particular, the long-planned liberalisation of the electricity and natural gas sectors needs to be implemented; and support to agriculture ought to rest less on price support and more on direct transfers. Turkey’s per capita carbon footprint is low in international comparison but it is set to rise fast as economic catch-up proceeds, notwithstanding a high share of environmentally-related taxes. More reliance on market-based economic incentives to rein in emissions, and greater neutrality across emission sources, are called for.

This set of challenges that Turkey needs to meet to keep growth on a strong and sustainable path will be reviewed in our 2012 Economic Survey of Turkey.

See: OECD (forthcoming 2012), OECD Economic Surveys: Turkey, Paris.

Visit www.oecd.org/turkey and www.oecd.org/economy

©OECD Observer No 290/291, Q1-Q2 2012

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