An insightful outlook on Turkish economy from the World Bank

The World Bank’s office in Turkey is set to hold an important conference today in Istanbul, on the occasion of the launch of a new book analyzing Turkish economic and social development since the 1980s under the title of “Turkey’s Transitions: Integration, Inclusion, Institutions.”
 
Following 5 percent annual growth between 2002 and 2011, Turkey’s economic growth has dropped to a more modest 3-4 percent range. “Turkey’s achievements in economic development and social progress [since the 1980s] are noteworthy and neglecting them would be unfortunate for the many countries still looking for inspiration from success stories among emerging markets,” the book states. It therefore offers lessons to other countries in how Turkey progressed toward international integration and increased social inclusion, but at the same time it addresses Turkish policymakers about both the strengths and weaknesses of the Turkish economy.
 
“The purpose of the book is unusual. You typically expect from the World Bank an analysis of the challenges the country faces. The first questions usually asked are: What are the risks of the Turkish economy? What is your outlook on the Turkish economy? This book is not about that. The book is more about the trajectory of how Turkey got to this point,” said Martin Raiser, the World Bank’s Country Director, in an interview with the Hürriyet Daily News on Dec. 8.

Raiser said he believed that this research will correspond to the needs of other emerging countries in learning about Turkey’s last three-decade success in economic development and social progress.
 
“I realized countries that are significantly poorer than Europe or the United States are often much more interested to learn about the development experiences of countries that are closer to them. So we have decided to make a book about what lessons Turkey’s experiences of development offer other countries,” he said.
 
While writing the book, they discovered a number of things about the history of Turkish development that have not been emphasized much in discussions up to now, Raiser noted. One is how the reallocation from agriculture to industry and services sectors has been beneficial for Turkey’s productivity growth. As was the case with China and Korea, this was a big driver for the Turkish economy over the last three decades.
 
The second point is the fact that Turkey is the second fastest urbanizing country in the world after South Korea, Raiser added. “We know from development experiences that urbanization is challenging because when you get such fast urbanization, you get major problems, like informal settlements, etc. But it turns out that Turkey, despite all of these public debates about urbanization, has done rather well. You don’t actually see large slums in Turkish cities; most of the majority have access to sanitation and electricity,” he said.
 
Education's effect on the economy
 
The third point that the book discovered is how education matters for economic growth. At a time when the country is having a lively discussion about the government’s intention to introduce more religious material to the curriculum, Raiser underlines that “Turkey had the fastest improvement in PISA educational ratings than any country participating in the survey between 2003 and 2012.”
 
“So, you need to ask yourself why did that happen,” he said. “When you look at, historically, the key measure; it turns out that the education reform in 1997 that extended compulsory education [from five years to eight] made a huge difference … You can now see the impact of these reforms although they are not much appreciated. But results are there, the data is there.”
 
The results of extending compulsory education have been much more visible in the eastern part of the country and in rural areas, he said, recalling that the effects of having longer education and access to education have been observed in the quality of the workforce. “But for moving forward, access to education is no longer a key issue. The key issue is the quality of the education,” Raiser added.
 
How to escape the middle income trap?
 
On the debate about whether Turkey suffers from what is called the “middle income trap,” Raiser acknowledged the problem. “Because it’s true that compared to other many emerging market economies, Turkey has not been growing rapidly. And when we look at the dollar income, it has not grown since March 2008. People are rightly worrying about whether there is something like a trap,” he said.
 
Stressing that becoming a high-income country is about making new reforms and implementing them, Raiser added: “If you have the right policy there is no reason why you should not be able to continue to grow. The real difficulty comes from the fact that the policies that allow you to grow in the past are not necessarily the policies that will allow you to grow in the future. Very specifically; this productivity growth that comes from reallocation is going to stop at some point, because what then matters is how big productivity growth is within these sectors. This is in relation to the adoption of new technologies, and when we look at that, Turkey’s records are not good.”
 
Turkey as a high-income country?
 
The most vital thing standing in front of Turkey becoming a high-income industry is its ability to create the institutional prerequisites of a high-income country, such as strengthening the rule of law and further reforming the business climate., according to Raiser.

“That’s the institutional side. Because this is what is needed to track long term investment and Turkey needs to upgrade its economy, both foreign direct investment, which brings technology and domestic investment. You can see in the last three years that domestic investment has been flat. As for investment activity, people want to be reassured about the rules of the game,” he said.
 
No improvement since 2008 on corruption
 
When talking about rule of law as an institutional prerequisite, it’s unavoidable to talk about the corruption in Turkey, not only because it is an important issue on the country’s agenda, but also because it stands among the hurdles before becoming a high-income country. Raiser said the World Bank's new book did not carry out an in-depth study on the issue, but he did touch on the recent index of the Transparency International, in which Turkey’s record worsened.  
 
“Basically, I could say two things: First, Turkey is ranked very much like a middle income country, not worse but not better than any others. Second, there were some significant improvements up until 2008, but since then there has not been much improvement. According to transparency indicators, there's even been a deterioration. So, I think any government that wants to establish institutional prerequisites of a high income country needs to worry about its ranking on those indicators,” he said.
 
‘Don’t push to grow too much’
 
On the World Bank’s short term and long term forecasts about the Turkish economy, Raiser underlined that Turkey needs to go through a period of moderate growth because of the external imbalances and the fact that it remains vulnerable.

“In the short term, our view is that Turkey needs to go through a period of moderate growth because of the external imbalances. Turkey remains vulnerable. If it pushes to grow too much, the public account deficit will start to increase again and that will not take Turkey in the right direction. The country needs to adopt 3-3.5 percent growth in this year and next,” he said, adding that they believe the potential growth rate of the Turkish economy is between 4-4.5 percent.
 
The book suggests two growth scenarios for Turkey, and Raiser said the achievement of these scenarios was very much dependent on key parameters, such as women entering the labor force and the expansion of the workforce. With more women participating in the workforce and with more investment that would create jobs in a stable macroeconomic environment, Turkey may well grow by 4.2-4.6 percent per year, he said.  
 
A second scenario suggests a 5 percent annual growth rate if the savings-to-GDP rate increased to 19 percent, if education results continue to improve, and if female labor participation converges to the levels of the OECD in the next 20 years.  
 
Sharing the IMF's concerns
 
However, there are serious risks and challenges in front of the Turkish economy, as suggested by the IMF in a recent report on Turkey. Raiser admitted that there is "nothing new" about the risks cited by the IMF, such as a sudden stop of capital flows, monetary policies and inflation rates. Underlining that “this analysis should be an important reminder for Turkish policymakers,” Raiser reiterated his call for the need to adopt structural reforms for prudent macroeconomic management.