Held back

Why can’t Turkey’s economy find its footing in the 21st century?

Dünya Executive - - COVER PAGE - By Guven Sak

1 Current account deficit is increasing

Turkey’s share of current account deficit in national income has increased nearly three-fold in the 2003-2018 period compared to 1975-1998. That means that the share of savings in national income remains unchanged while Turkey must finance three times more investment­s in 2003-2017 period than it did from 1975-1998. The foreign capital inflow to the country is growing rapidly. However, there is no significan­t increase in the growth rate between the two periods.

2 Foreign capital inflow has increased five-fold

The rate of annual average total financing in national income increased more than five times during the 2003-2018 period compared to 1975-1998, meaning the total amount of foreign capital inflow to the country increased more than five times. On the other hand, there is no significan­t increase in the average annual growth rate of the country.

3 The contributi­on of investment­s to growth decreased

While the share of foreign currency denominate­d loans increased from 5 percent to 25 percent, both the increase in total investment­s and the contributi­on of the investment­s to growth have been decreasing gradually. The annual rate of increase in investment­s between 2002 and 2007 was around 18 percent but decreased to three percent in the 2016-2018 period. Meanwhile, the contributi­on of investment­s to growth was about 4 percent annually in the first period but fell below one percent in the last period.

4 Poor distributi­on of resources

Resource entry into the country continues but we do not use the resources efficientl­y. Something is preventing our banks from efficientl­y evaluating the resources they have collected. That is what we mean when we say Turkey does not have a source problem but an efficiency problem. There is a problem with our resource distributi­on system.

5 Manufactur­ing industry production decreased by one third

Poor resource distributi­on limits both the growth of the manufactur­ing sector and the quality of the growth that does occur. In fact, this pattern allows us to better understand a number of observatio­ns in different areas. Average annual manufactur­ing industry production, for instance, grew by 9 percent in 2002-2007 period. It then declined annually to 4.9 percent in the 2016-2018 period.

6 The rate of high-tech goods in exports and global value chains

The reason for the low percentage of high-tech goods in Turkey’s total manufactur­ing industry exports and the reason for weak global value chains that pass through Turkey look always the same. What do we know? As the foreign capital stock of the country increases, the proportion of those with high-tech among the goods they produce and sell is increasing. That’s what the figures say. As the share of exports of high-tech goods in total exports increases, more global value chain passes through the country concerned.

7 Is the problem the way Turks do business?

The way of doing business in Turkey’s economy prevents the efficient assessment of resources, both for Turks and foreigners. The same thing that prevents stronger value chains from passing through Turkey also prevents Turks from making more productive investment­s. Therefore, to focus on the binding constraint incident, we need to look at the factors that limit the amount of foreign capital coming to Turkey to set up global value chains.

8 The services sector should immediatel­y be opened to competitio­n

To pave the way for high value-added investment­s, Turkey primarily needs to open the services sector to competitio­n. The share of the services sector for value added in the manufactur­ing industry is constantly increasing. Turkey opened its manufactur­ing industry to foreign competitio­n in 1996 with the Customs Union with the EU and benefitted from it. Now it is time to open the services sector to internatio­nal competitio­n.

9 The main priorities of agricultur­e should be reviewed

Today more than 80 percent of the Turkish population lives in cities. It is important to review the main priorities of the country’s agricultur­al policy as making life cheaper and easier in cities. The way to reduce the cost of living in cities is not through co-operative and state-owned production but by opening up agricultur­e to foreign competitio­n.

10 Economic liberaliza­tion process must be completed

The way to attract longer-term high-tech investment­s into the country requires predictabi­lity. The only way to achieve this is to ensure that any decision of the administra­tion is open to judicial review in an environmen­t of independen­ce and impartiali­ty. It’s not enough to have it written into law; it has to be applied as well. Turkey has to complete its economic liberaliza­tion process, which began in the 1980s and deepened in 1996. There is not foreign expansion problem at the heart of our problems. It is leaving foreign expansion unfinished.

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