Orwellian economics

At the end of George Orwell’s “Animal Farm”, we learn that “all animals are equal, but some animals are more equal than others.”

What holds true for pigs certainly holds true for exports, at least according to the new IMF paper “Structural Transformation and the Sophistication of Production”. The authors build indices for countries’ “sophistication of exports”, as measured by the average income and productivity level associated with all products exported by a country. 

They then go on to show that “increasing sophistication of exports, of both goods and services, can be an important contributor to overall economic growth.”  More sophisticated sectors not only create more value-added activities, but they also act as “engines of growth”, as they generate spillover effects for the whole economy.

Turkey is in the middle of the pack in terms of the sophistication of its exports. While that is not terrible news, the country has not been able to increase its export sophistication like China and India. Incidentally, this lack of progress is highlighted in a report from the Economic Research Forum, “The Transformation of International Production Linkages and Turkey”, which was released on Friday. 

By looking at the different stages of production linkages through time, Erol Taymaz and Kamil Yılmaz show that Turkey has specialized in stagnant sectors whose share of global trade has been falling over time. In general, the country is more competitive in goods with lower relative prices, where reducing costs is the name of the game.

 While the reasons behind this trend are outside the scope of the ERF report, İzak Atiyas, one of the discussants, offered some clues. For one thing, Turkey is not present in high-tech production linkages at all, which is another way of saying its exports are not sophisticated. Atiyas, who has previously argued that this acts as a binding constraint on growth in Turkey, put forward education as an explanation. 

He noted that while we do not know the relationship between human capital and structure of trade, we know that there is a link between exports and productivity and between productivity and human capital. The IMF paper has some results that shed light on this missing link:  An educated workforce comes out as one of the main prerequisites for developing sophisticated goods and services. 

Turkey’s educational woes are no secret:  The average Turks has only six and a half years of schooling. The country is at the bottom of the OECD in terms of PISA scores and English proficiency. While both the quantity and quality of education are suffering, the new education reform is only attempting to tackle the former by increasing compulsory schooling to 12 years. 

Moreover, moving children into vocational training at an early age, reminiscent of Charles Dickens novels, and dividing the primary education into two four-year segments, may even prevent them from receiving the necessary skills to contribute to those desired sophisticated export sectors. 

In Orwell’s “1984”, two plus two equals five. In 2012’s Turkey, four plus four is less than eight, as Sabancı University’s Education Reform Initiative has been arguing.