Turkey can beat the 'middle income trap:' economists

Economists say Turkey, with reforms, can achieve 4.7 percent growth required to grow per-capita incomes

Economists say Turkey, with reforms, can achieve 4.7 percent growth required to grow per-capita incomes

ANKARA - Economists agree that Turkey can emerge from the 'middle income trap,' with important structural reforms, by 2023.

"The challenge," writes Gokhan Yilmaz in a report for the central bank released in September 2014, "is for Turkey to achieve an average of  4.7 percent growth over the period." To achieve this, Yilmaz says, improving the Turkish education system will be critical.

"An education system that is consistent with the development path of the economy could yield both skilled and high capability human capital and innovative and competitive productive capacity to overcome the trap," Yilmaz said. 

But the way forward is challenging: "Economic stability, increased investment, an improved level of personal savings, improved quantity and quality of education, and increased high tech exports, are common features for countries that succeeded to be high income countries," Fatih Ozatay, head of The Economic Policy Research Foundation of Turkey said, speaking at a conference last week on the middle income trap.

- Why is per-capita income growth slow in Turkey?

 Turkish per-capita income has risen to about $10,000 in 2010, from $2,245 in 2000, according to government statistics. But that income growth compares unfavorably with other emerging markets that have avoided the 'trap," according to Yilmaz.  

South Korea, for example, saw per-capita income accelerate to close to $30,000 by 2010. Countries like South Korea have achieved what economists call "graduation" into the company of high-income countries. 

"Graduated countries could increase their per capita income levels progressively," Yilmaz explains. "Their average per capita income growth rates were higher than that of the U.S. On the contrary, Turkey’s per capita income path is similar to paths of the Middle Income Trap countries like Brazil, Malaysia, and Thailand." 

To be fair to Turkey, out of 101 middle-income trap economies, only 13 have managed to graduate since the 1960s, according to a report released by the World Bank on Dec. 15. Those countries were Equatorial Guinea, Greece, Hong Kong, Ireland, Israel, Japan, Mauritius, Portugal, Puerto Rico, the Republic of Korea, Singapore, Spain, and Taiwan.

Erinc Yeldan, from the economics department of Bilkent University said: "After 2000, Turkish economic growth relied mostly on speculation-driven capital inflows with intensive foreign debt accumulation.The downside of this type of development was a higher current account deficit, and relatively lower employment." Yeldan said that the transition to knowledge-intensive employment has been held back by this type of economic growth.  

According to Yeldan, Turkey is suffering from the dualistic growth path, rather than middle income trap. He gave example of share of construction and education sectors from the country's GDP.  "The education sector has been holding around 2 percent share of the country's gross domestic products since 2002 and construction sector over 8 percent over the same period," he said. 

- Actions to surpass the 'trap'

But there are actions underway to drive growth in a different way.

"Turkey has a plan, Vision 2023, to get the country to high-income status by the centenary of the modern Turkish Republic. Under this plan, Turkey will by 2023 more than double its gross domestic product to $2 trillion and triple exports to $500 billion annually. To achieve these goals under difficult economic circumstances, Vision 2023 establishes a roadmap," Finance Minister Mehmet Simsek wrote on Sept.20 in the Wall Street Journal. 

Part of the work has already been achieved. Turkey has taken  important steps towards economic stability such as fiscal discipline (low public debt and budget deficit), a stronger banking system and an independent central bank, Oztay pointed out.

"Now," says Martin Raiser, World Bank Country Director for Turkey, "Turkey has to deepen institutional reforms so that it can compete with the best."

Simsek said that Turkey's top reform priority is to enhance the quality of the country's workforce. "High-income countries rely more on high-skilled labor, and this is where Turkey needs to make the most progress. The average Turk over the age of 25 has completed only 7.6 years of schooling. That's nearly four years less than the OECD average," Simsek said.

Turkey has increased the duration of compulsory education to 12 from eight years, in line with most high-income countries.

The country has also made great strides in narrowing the gender gap in education. There are now 102 female students for every 100 males attending primary and middle school in Turkey, according to education ministry statistics.

The government hired nearly half a million new teachers during the past 12 years and increased the use of education technologies, including more broadband connections and smart boards for classrooms, and free tablets for students.

"These are important milestones," the World Bank report said. "Turkey’s education quality has improved markedly. However, perhaps the biggest challenge facing Turkey’s social services is how to ensure quality with reduced fiscal space as growth moderates and the windfall gains from Turkey’s successful debt consolidation are largely exhausted. Increased welfare spending has built rigidities into the expenditure side of the budget, which may be difficult to reverse, as expectations of citizens adjust upward."

-Achieving a knowledge-intensive economy 

Simsek pointed out that innovation and technology is helping Turkey transition from middle-income to high-income status. 

The government has increased the support for research and development through tax incentives and grants. Between 2002 and 2012, research-and-development spending as a share of GDP nearly doubled to almost 1 percent. The government wants to further increase research and development spending as a share of GDP to 1.8 percent by 2018 and to 3 percent by 2023.

The World Bank report applauds these steps forward, but notes: "An improvement in the business climate will be needed to sustain the creation of higher productivity jobs once the current forces of structural change and the shift of jobs from agriculture to services runs out of steam."

- The Outlook 

"Our analysis shows that the educational system in Turkey can play a pivotal role in its development path. Educating its human capital more both quantitatively and qualitatively, Turkey can break out of the middle income trap." Yilmaz concludes.

The World Bank agrees that education is the key priority. "And government policies were effective because they supported and enhanced the process of structural transformation. Against this background, Turkey seems well poised to benefit from its large demographic window. The labor force will continue to grow by around 2.5 percent each year over the coming decade, assuming the recent trend in increasing female workers is sustained. If the additional labor force entrants can continue to be matched with good jobs, Turkey will reap a significant demographic dividend starting from an unusually high level of income. Most other countries with similar demographic profiles are considerably poorer than Turkey, and most other higher middle income countries are aging considerably faster."

But the economists agree: Goals like allowing greater flexibility in the labor market, and upgrading the value-added component of Turkish exports, must also be achieved if the 'middle income trap' is to be decisively left behind.

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