How Turkey will not escape the middle-income trap
In the concluding statement of its 2014 Article IV Mission to Turkey, which was released on Oct. 3, the IMF noted that without structural reforms, Turkey was likely to be left in a middle-income trap as a result of slowing growth.
Here is the introduction to my latest Hurriyet Daily News (HDN) column, where I discuss an op-ed by Turkish Finance Minister Mehmet Simsek, which was probably a response to the IMF document. You can read the whole thing on the HDN website. I have several points to make, but before I go on, a small clarification is in order: You may have noticed that the IMF document appeared on Friday, whereas Simsek’s op-ed was published on Wednesday. But government officials see (and approve; it is actually a very tedious process where they go over the statement line by line) these documents beforehand.
Another clarification before I move on: I also did not want to overlook Turkey’s external vulnerability. On the contrary, last Monday’s HDN column was about how vulnerable Turkey was. And reports that have been published since then, for example those from the IMF that I mention in the column, as well as the IIF’s “Capital Flows to Emerging Markets”, have confirmed my worries. A different set of vulnerable countries comes out from each report, but Turkey is in all those lists, along with South Africa and Brazil. However, I argue here that lack of growth is more important than a one-off sudden stop crisis…
OK, coming back to Simsek’s column: He has written similar pieces emphasizing the importance of structural reforms in the past, but I liked the way he identified the main problems of the Turkish economy this time: Education, labor market and innovation. I should say that none of this is original: Anyone who follows the Turkish economy a little bit would know that these consistently come as bottlenecks in academic studies. For example, here’s one I wrote about some time back. But it is good to see that government officials are at least aware of the problem.
I would like to discuss each of these ares a bit, but before that I should add that I still do not agree with Simsek on the reasons behind Turkey’s past economic performance under the ruling Justice and Development Party (AKP). Turkish per-capita income did not rise to $10,807, from $3,492 in 2002, because of wide-ranging reforms as he is claiming- unless the Minister has macroeconomic reforms in mind. The impressive rise was due to capital flows and appreciating lira= as well as newly-gained macroeconomic stability. But Turkish real GDP only rose about 40 percent, and Turkey in fact grew less than peers during the second half of this period, as Dani Rodrik highlighted in a blog post last year:
OK, coming to Simsek’s reform areas, I see the Turkish education problem as mainly as a skills-mismatch problem. For lower-level workers, their skills are just not enough for the needs of the private sector. But, as fellow HDN columnist Guven Sak emphasized in his latest column on Saturday, for high-skilled science and engineering grads, the problem is the opposite; they cannot find jobs for which they trained. And here are a couple of columns of mine on Turkey’s education woes: Bad and unequal education & Bad and unequal education encore.
As for the labor market, Simsek mentioned two issues, on both of which I wrote before: Labor market flexibility and and women’s labor force participation- actually I make it a point to cover women’s labor issue every year on international women’s day: 2014, 2013, 2012 and 2011:
Last, but not the least, innovation… This is the one I have written the least about among the three, because for one thing, I believe that if you give incentives to innovate and have human capital able to support it, innovation will just follow. Here’s a column where I sketched those ideas.
3 Responses to “How Turkey will not escape the middle-income trap”
Although the end results are right the approach does not seem justifiable. Why you guys are not trying to evaluate a bottom-up approach rather than a top-down? Meaning; you should take a leading role in facilitating arts and athleticism among youth rather than consistently blaming the state / government. A method inclined to Bertrand Russell seems more appropriate for Turkey's future. Otherwise you guys will age taking same route starting from top and ending with low growth at the bottom!
I agree with you fully. However, given that the perception of the legal system is corrupt, I do not think that we may convince that innovations will be rewarded. Note that we attract more so called hot money (portfolio investment) more than foreign direct investment. An important reason for this is not trusting the legal system or its speed. Thus innovation is not something can be realized in short period of time like building malls that people can build fast.
Turkey can always pull a Singapore and give alot of tax incentives to the wealthy and corporations to bring manufacturing to the country.