TEPAV Director Güven Sak assessed the outlook of the Turkish economy and economic policy at a joint World Bank event themed “Turkey’s Transitions.”

Sak said that Turkey had lost its momentum, and added, “It’s the same with economic policy. Turkey needs to regain its momentum.”

A new World Bank report titled “Turkey’s Transitions: Integration, Inclusion, Institutions” was introduced at TEPAV. Speaking at the opening of the event, Sak said that the report was a starting point to assess how Turkey had progressed and to elaborate on the direction in which it was heading.

Stressing that the transformation of the Turkish economy had so far relied on internal migration and cheap labor, Sak said those options had come to an end. He added, “From this point on, we have to devise measures to enhance productivity at the sectoral level. We have to strengthen our institutions, lower the price of education and justice, and increase that of corruption. We have to readdress Turkey’s institutional infrastructure.  From this perspective, there is a difficult road ahead for Turkey.”

Sak stated that the 2023 goals were achievable if right steps were taken, and pointed at the need for a coordination unit to cater to the balance between strategy and institutional structure.

Martin Raiser, Country Director for the World Bank Turkey Office, followed Sak’s speech with a presentation of a report titled, “Turkey’s Transitions: Integration, Inclusion, Institutions.” Stating that the report was based on lessons learned from the cooperation between the Bank and Turkey since the 1950s, he said, “A common understanding of how the country got to where it is today is key for an objective diagnosis of the remaining challenges…We hope may contribute to the development of a roadmap to the path to high-income.”

Raiser: Institutions May Be the Most Important Challenge

Raiser stressed that economic integration and liberalization were the two factors that had determined Turkey’s recent success in economic and social transformation, and pointed at reduced inequalities between the western and the eastern regions of the country, and between men and women, as well as the improvements in health, education, social services, and urban infrastructure. He listed three challenges ahead in order for the country to achieve high-income: sustained productivity growth, enhanced labor force participation, and deepened institutional reforms. He added:

“The third challenge may be the most important one. Turkey’s institutions need to become fit for high income. Turkey has not fulfilled the institutional prerequisites of a rich country. The necessary reforms are both complex and well-known. They cover the rule of law, the strengthening of regulatory agencies, the completion of public financing reforms… If you want to become competitive with the European Union, than institutional reform is a key.”

The panel session themed “The Middle-Income Trap” hosted participants Fatih Özatay, director of the TEPAV Finance Institute; Erinç Yeldan, Bilkent University faculty member; and Erdal Sağlam, columnist at the newspaper Hürriyet Daily. Moderator of the session, Durmuş Yılmaz, Director of the TEPAV SME Studies Institute, spoke at the beginning of the session and emphasized the importance of the quality and sustainability of growth. He said, “Turkey took critical steps in the aftermath of the 2001 crisis, but there appears to have been a halt in the three to four years following that period. Therefore, we should ask, to ensure sustainable growth, why progress halted in the last 3-4 years.” Yılmaz stressed that the reformist mindset of the post-2001 crisis era could be useful in overcoming this period of stagger and the middle-income trap.

Özatay: Turkey Cannot Make Any Progress with the Current Level of Savings

Özatay stressed that the common characteristics of countries which had escaped the middle-income trap were macroeconomic stability, high domestic savings rates, high levels of educational attainment, and high shares of high-technology in production and exports. He said that Turkey had performed poorly with respect to these indicators. Maintaining that critical steps towards macroeconomic stability had been taken after the 2001 crisis and that Turkey had performed successfully during the 2002-2007 period when the international climate was relatively conducive, its economic performance had weakened lately. Pointing in this context at low levels of domestic savings, investments, and the resultant fragility towards international capital inflows and external shocks, he said, “We were talking about the same challenges a decade ago. This is the status quo we are talking about, and it remains intact. Moreover, macroeconomic stability has weakened. Turkey cannot make any progress with the current level of savings. It seems to be the biggest binding constraint.”

“The Central Bank is Making a Huge Mistake”

Stressing that the savings rate could not be improved over night and that it was critical to avoid mistakes during the process, he said, “The Central Bank of Turkey is making a huge mistake. In a country where the savings rate is as low and current account deficit is as high as inTurkey, an interest rate below the inflation rate encourages consumption over savings. This is a mistake.”

Yeldan: What Part of Turkey is in the Middle Income Trap?

Erinç Yeldan pointed at rapid drops in real GDP growth and the share of the manufacturing sector in the GDP as well as the foreign debt-accumulating structure of the Turkish economy. He stressed that the decrease in national savings coincided with the lowering of the share of manufacturing in the total GDP. The Turkish growth experience relied more on construction projects than human capital.

Drawing attention to the dramatic differences between the west and the east of the country in terms of province-level GDP, Yeldan said, “Turkey seems to be suffering from the dualistic growth path rather than a middle income trap. A dual trap between poverty and the middle-income trap has emerged in Turkey.”

Erdal Sağlam: The Focus Should Be Shifted towards Quality

Columnist Erdal Sağlam said that while the report was important for the issues it debated, it was overly optimistic in its assessment of education and health reform and independent institutions. He said, “The focus should be shifted towards quality. Quantitative figures alone, quantitative transformation and trends fail short of depicting the reality. I believe that it is necessary to analyze the picture a bit from the inside.” He also said that the report was weak on its analyses of corruption, informality, and democracy.

Stating that the decline of independent institutions was more severe than what the report depicted, he added, “I don’t know if Turkey really is stuck in the middle-income trap, but there definitely is an obstruction. And it is deepening. Turkey’s people have paid a large price for economic transformation. From this point on, Turkey even might fall below the middle-income level, let alone escape the trap.”

The meeting ended after a question and answer session.