tepav Economic Policy Research Foundation of Turkey An overview of Turkey s developmental journey: full side and empty side of the glass Esen CAGLAR 13 June 2011, Cairo
An overview of Turkey s developmental journey Slide 2 Framework Experience sharing: Experience is a collection of past mistakes What has Turkey achieved in terms of structural transformation? Full side of the glass What are the current challenges? Empty side of the glass What is it that reforms shall fix? Way forward? How to get out of the middle income trap?
An overview of Turkey s developmental journey Slide 3 What has Turkey done in terms of policy reform so far? 1980 policy reforms Price reforms Financial liberalization Trade liberalization Convertibility of the Turkish lira 2001 policy reforms Banking reform prudence etc. Privatization Independent authorities Fiscal and monetary discipline
An overview of Turkey s developmental journey Slide 4 What has Turkey done in terms of policy reform so far? 1980 policy reforms Price reforms Financial liberalization Trade liberalization Convertibility of the Turkish lira 2001 policy reforms Banking reform prudence etc. Privatization Independent authorities Fiscal and monetary discipline First generation reforms
An overview of Turkey s developmental journey Slide 5 Missing links Public administration reform Tax reform Operational problems of the legal system Education reformcurriculum Labor market rigidities Health reform
An overview of Turkey s developmental journey Slide 6 Missing links Public administration reform Tax reform Operational problems of the legal system Education reformcurriculum Labor market rigidities Health reform Second generation reforms
An overview of Turkey s developmental journey Slide 7 An overview of the recent progress of Turkish economy 1980 2001 2008 GDP (billion $) 70 509 700 Per capita GDP (USD) 1,500 2,906 9,000 Number of enterprises 90,000 723,503 1,170,248 Exports (USD billion) 3 31 132 Exports per worker (USD) 65 1,456 6,229 Industry share in exports 10% 92% 92% Number of exporters 1,000 25,000 47,000 Tourism revenue (billion $) 0,3 8 21 Ranking in the world (in terms of GDP) 25th 21st 17th Source: WDI, EIU, TÜİK, SSK, TİM
An overview of Turkey s developmental journey Slide 8 Transformation is still ongoing; along with rapid urbanization Sectoral distribution of labor (%) 1988-2009 60 50 Services 40 30 20 10 Agriculture Industry 0 Source: TÜİK
An overview of Turkey s developmental journey Slide 9 No structural change after 2001? Sectoral composition of GDP (%) 1965-2009 60 50 Services 40 30 20 10 Industry Agriculture 0 Source: WB, World Development Indicators
An overview of Turkey s developmental journey Slide 10 Transformation and diversification Diversification is increasingly becoming the key element of Turkey s economic transformation A three dimensional process / three aspects of diversification: Sectoral and technological Geogrpahic (within Turkey) Market diversificaiton (globally)
An overview of Turkey s developmental journey Slide 11 Technological transformation: declining low-tech, rising mid-tech Technological composition of Turkey s exports 1990-2009 60% 50% 40% 30% 20% 10% 0% 1986 1996 2000 2008 2009 Source: UN COMTRADE database, TEPAV calculations (Based on UNIDO classification of products by level of technology)
An overview of Turkey s developmental journey Slide 12 What does Turkey produce now? Emerging sectors: White goods Automobile and parts Consumer electronics Ships Machinery and equipment Traditional sectors: Textile, apparels, leather Food and agro-industry Construction materials Furniture
An overview of Turkey s developmental journey Slide 13 When it comes to high-tech, Turkey has a long way to go Technological composition of exports of Korea and Turkey (1990-2009) Republic of Korea Turkey 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 1990 1995 2000 2005 2009 0% 1986 1996 2000 2008 2009 Source: UN COMTRADE database, TEPAV calculations (Based on UNIDO classification of products by level of technology)
An overview of Turkey s developmental journey Slide 14 Sectoral diversification is increasingly a critical feature of Turkish economy Number of sectors with above $ 500 million exports (HS4 classification, 2 digit, 2007-2008) 45 40 40 35 30 28 25 20 15 10 5 0 21 20 17 16 15 13 11 11 9 8 8 8 6 5 4 3 3 1 1 1 1 1 0 0 0 Source: UN COMTRADE, TEPAV Calculations
An overview of Turkey s developmental journey Slide 15 Geographic diversification process: the emerging Anatolian tigers Cities with 5 or more firms among the largest 1000 industrial firms in Turkey, 2009 Source: Istanbul Chamber of Industry
An overview of Turkey s developmental journey Slide 16 Industry s move from west to east? Expressways in Turkey (red lines, as of 2010) and change in the number of firms listed in largest top 1000 industrial companies between 1997-2009 Tekirdağ + 6 İstanbul - 105 Kocaeli + 40 Sakarya + 4 Samsun + 8 Ordu + 1 Trabzon + 3 İzmir - 37 Balıkesir + 2 Manisa + 7 Bursa + 28 Bolu + 2 Eskişehir + 1 Ankara + 18 Konya + 12 Kayseri + 10 Adana + 7 K.Maraş + 11 Denizli 0 Antalya + 2 Karaman - 1 Mersin - 3 Hatay + 8 Gaziantep + 15
Geographically diversified export portfolio: presence in various different markets 60 Number of export destinations (non-energy) over $ 500 million volume, 2007-2008 53 An overview of Turkey s developmental journey Slide 17 50 47 40 32 30 20 10 0 23 22 19 17 14 13 10 9 9 7 6 5 5 5 4 3 2 1 1 0 0 0 0 Source: UN COMTRADE, TEPAV Calculations
An overview of Turkey s developmental journey Slide 18 Market diversification for export markets; declining share of the EU, rising MENA 100% 90% 80% 70% 60% 50% 40% 12% 12% 12% 13% 13% 13% 4% 7% 4% 3% 4% 12% 4% 4% 4% 8% 6% 11% 4% 9% 14% 19% 19% 21% 11% 7% 10% 12% 12% 10% Other North America North Africa Middle East Non EU Europe 30% 20% 54% 56% 56% 48% 44% 46% EU-27 10% 0% 1996 2000 2007 2008 2009 2010 Source: UN COMTRADE
Kaynak: COMTRADE, TEPAV hesaplamaları An overview of Turkey s developmental journey Slide 19 Decreasing share of EU implies low sophistication for Turkish exports 16000 Export Sophistication Index (EXPY) Turkey and selected countries (1995-2009) 15000 China 14000 Mexico 13000 12000 11000 10000 Thailand Turkey India Brazil Russia 9000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
An overview of Turkey s developmental journey Slide 20 To sum up the transformation story Transformation is happening and changing the Turkish society more than ever before Not a coherent growth strategy but rather the outcome of the interplay of several factors Internal structural factors: Geographical location EU Customs Union and accession process Demographic structure / entrepreneurship potential External factors: Global economic and technological trends Vertical specialization strategies of MNCs Rising foreign direct investment flows
An overview of Turkey s developmental journey Slide 21 Empty side of the glass? Major policy challenges waiting to be tackled Achieving convergence Increasing the economic growth capacity from 4 to 7 percent A coherent growth story? Tackling SME growth problem Productivity and innovation issues An ambitious eco-system renovation strategy? Fighting skills mismatch and unemployment Urban-rural transformation An education reform strategy in line with growth and competitiveness strategy?
An overview of Turkey s developmental journey Slide 22 A very stable convergence performance! Structural change with no (relative) results? GDP per capita in Turkey as percentage of GDP per capita in U.S., (PPP, 1975-2008) 70% 60% 50% 40% 30% Turkey 20% 10% 0% -10% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Kaynak: EIU and TEPAV calculations
An overview of Turkey s developmental journey Slide 23 Though non-convergence is not destiny. A coherent growth story is what Turkey needs GDP per capita in S.Korea and Turkey as a percentage of GDP per capita in U.S., (SAGP, 1975-2008) 70% 60% Korea 50% 40% 30% Turkey 20% 10% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Kaynak: EIU and TEPAV calculations
An overview of Turkey s developmental journey Slide 24 Growth of firms in a healthy, private sector driven economy Employment Growth across firm size 20 15 10 5 0-5 Micro Small Medium Large
An overview of Turkey s developmental journey Slide 25 Growth problem in Turkish SMEs Firm-level employment growth across different sizes, percentage increase (2004-2007) 20 18 15 10 6 5 3 2 0-5 Micro Small Medium Large Kaynak: World Bank Enterprise Suerveys
An overview of Turkey s developmental journey Slide 26 Dual structure of the economy is a big problem Registered (modern) firms Productivity levels: 62% of firms in USA Economies of scale; new technologies, quality products Spread over Anatolia; export oriented Unregistered (traditional) firms Productivity levels: 25% of firms in USA Old technologies, low quality; domestic oriented Being unregistered provides a cost advantage of around 20% Source: McKinsey Global Institute
An overview of Turkey s developmental journey Slide 27 Rapid urbanization puts pressure on labor market and skill needs Urban population as a percentage of the total population in Turkey, Spain, Italy, Greece and South Korea, (%), 1960-2009 80 75 70 65 60 Spain Turkey Italy South Korea Greece 55 50 45 40 35 30 Source: World Bank, World Development Indicators
An overview of Turkey s developmental journey Slide 28 What sort of growth strategy needed for Turkey? Larger context: A coherent growth story that would tackle the binding constraints with ambitious reforms (eco-system renovation for innovation) Access to finance (PE and VC focus) Education (second generation reforms to upgrade institutions) A supporting industrial policy framework as part of the overall growth strategy Process more important than policy: focus on governance of industrial policy
An overview of Turkey s developmental journey Slide 29 Turkey s major risk: middle income trap Factor-driven economy Efficiencydriven economy Innovationdriven economy low-cost inputs productivity unique-value Source: WEF Where does Turkey stand? Turkey was a transition economy from efficiency-driven to innovationdriven in 2009. In 2010, WEF downgraded Turkey to efficiency-driven. Upgrade to an innovation-driven economy? Delayed reforms Tax system, education, judiciary, public administration -- ecosystem Risk: no-reform political climate The period ahead will be even less conducive for reforms: elections in 2011, 2012, 2013, 2014, 2015.
An overview of Turkey s developmental journey Slide 30 Conclusions and takeaways Turkey has a lot to offer for the policy debate in Egypt lot of experience to share. So many mistakes. We are yet to see the adoption of a new growth strategy, with a strong reform focus Risk is obvious: middle income trap. Stuck in between two worlds Hard time converging to US and EU income level. Hard time competing with low-cost East Asian producers Easier for Egypt to attract capital by focusing on policy reforms. Turkey s experiement is a good case. Harder for Turkey to do the jump. Continue the growth process in its old pace most likely scenario