EconoMonitor

The Kapali Carsi

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.

OK, time to move on. I would like to elaborate on Simsek’s motivations for writing his op-ed: For one thing, once the Fed starts raising its interest rates, the decade of easy money to EMs will be over, and foreign investors will have to be picky.They will choose countries that can continue to grow in this new world. That’s why Simsek, Mexico’s President and others are rushing to emphasize their zeal for reform, whether real or not…So is Simsek’s real? Probably yes. He and econ. czar Babacan (but not President Erdogan and his chief econ. adviser Brave Cloud) are well aware that Turkey cannot grow more than 3-3.5 percent without structural reforms, which won’t be enough to absorb new entrants to the labor force and keep unemployment at bay- as he notes in his WSJ op-ed. However, he and Babacan should also know that they won’t be able to convince Erdogan on the need for structural reforms before the very important 2015 general elections- as Erdogan will try to get enough votes to change the Constitution. And if Babacan is a really a goner after the elections (if the AKP’s rules don’t change), I am not sure if Simsek will be able to push for reform himself- unless Erdogan Bulut suddenly realize that Turkey can not grow anymore without reforms.

Therefore, a more realistic way of interpreting Simsek’s WSJ op-ed is to realize that he may be trying to buy time, as economist Murat Ucer underlined in the FT piece I hyperlinked in the column. I’ll quote him directly: “They [ministers] understand Turkey’s macro story is stuck but also say they cannot do these reforms quite yet. I wonder if investors are going to give Turkey the benefit of the doubt for another nine months” What do you think? Will they succeed in buying time?
Finally, if you speak Turkish, I would recommend comments from main opposition Republican People’s Party’s (CHP’s) freshly-minted vice chairman in charge of economic policies Selin Sayek Boke on the middle income trap. Selin is a first-rate macroeconomist, with whom I had the privilege of working with at Ankara think-tank TEPAV almost a decade ago, but I have serious reservations about unbacked promises like creating a global brand every year. To repeat my point on innovation: If you create an environment conducive to creating global brands, you will end up getting global brands. It may not be one every year, but you will get them. But I will give her the benefit of the doubt for now- and will be waiting to see the CHP’s economic program, which should be revealed soon. With her at the helm, I have really high expectations. We’ll see…
I know I already said “finally”, but if you made it this far, you deserve a little bit of fun. See the title state-run Anadolu Agency used in its article about the IMF report. :):):)

3 Responses to “How Turkey will not escape the middle-income trap”

bataryaOctober 7th, 2014 at 8:56 am

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!

BerumentOctober 7th, 2014 at 2:34 pm

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.

koylugozeliNovember 27th, 2014 at 9:18 pm

Turkey can always pull a Singapore and give alot of tax incentives to the wealthy and corporations to bring manufacturing to the country.