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Wednesday, August 18, 2004

Turkey's 'Economic Miracle'

Leaving aside political considerations (I would certainly fast-track Turkey's EU accession process for many, many reasons), the economic attraction of Turkey as an EU member state is rapidly making itself felt. Just look at these numbers from Morgan Stanley's Cerhan Sevic:

According to our estimates, Turkey?s overall productivity growth accelerated from an average of 2.1% a year in the 1990s (or an average of 3% in the 1960-2000 period) to an average of 8.8% in the last three years. The trend growth rate also increased from 2.3% in the 1990s (and 3.1% in the 1960-2000 period) to 5.8% in the post-crisis era. The productivity acceleration is even more pronounced in the business sector. The rate of non-farm labour productivity growth rose to an average of 9.5% per annum in the last three years, from 2.2% in the 1990s and 2.4% in the 1980-2000 period. The underlying trend growth rate improved from 2.4% in the 1990s to 6.3% in the last three years and 7.4% this year. Moreover, according to the State Institute of Statistics? estimates, the average annualised rate of increase in real output per person in the manufacturing sector during the 2001-2004 period has been 10.2%, compared with 3.8% in the 1990s. In other words, output per worker in the manufacturing sector has increased by a cumulative rate of 30.4%, as the trend growth rate jumped to 7.5% in the last three years.

Now with everything appearing to be so wonderfully lacklustre all over the eurozone, you might have thought an economy with an underlying trend growth rate of 6.3% and rising would be worth taking very seriously indeed.

The other interesting point would be to ask why it is that Turkey is apparently so succesful, even in comparison to the other new EU accession states (and without all the aid). I would suspect that demography has something to do with it, but then I imagine most of you could already have guessed I was going to say that :).


Anonymous said...

I came across the article below on another site and want to hear your view as an expert. Is the situation sketched in the article below indeed the case?


Edward Hugh said...


Thanks for the interesting link. As you can see my blogging here is rather irregular.

"and want to hear your view as an expert."

Well first off, I would point out that I am by no means an expert on the Turkish economy, and even less so on Turkish politics.

As a macroeconomist I am interested in the role of demographic processes in economic development. People often mention China, India and Brazil in this context, but it seems to me that Turkey offers another good example of how all this works, hence my general interest.

The article seems to ask the question whether or not Turkey would be better off without EU membership. I find it hard to believe that Turkey would actually benefit from a rupture in the EU accession process (for reasons I will explain a bit below), but if we put the question slightly differently - could Turkish development "survive" a rupture with the EU - then I don't doubt that the answer would be yes. I am certainly not clear though that this would be the best solution for Turkey.

As I suggest, Turket has had a huge tailwind for economic development in recent years due to the favourable changes in age structure which she is experiencing (relatively less children, relatively more people in the working age groups): this process is generally known as the Demographic Dividend, and if we look at economic growth in Turkey since 2000 (as in China and India for example), there is no doubt that Turkey is benefiting from this.

Indeed - if we come to one of the 'bogey' issues that seems to bother so many people in Europe - that of large scale migration into the EU - I think it is increasingly clear that post 2014 this is unlikely to be a significant problem. There is now little out-migration from Turkey, and indeed by-and-large Turkey has been transformed into a migrant receiving country.

Fertility in Turkey has been dropping rapidly in recent years - and indeed Western Turkey mayy now be below replacement level, with average fertility being maintained at relatively higher levels by the impact of the Kurdish east.

At some point aggregate fertility will drop below replacement, and if this follows global trends in the emerging economies there are good reasons to expect - absent a pro-natalist policy from the Turkish government, which is unlikely - that this will drop to the lowest-low levels we have seen elsewhere (ie 12./1.3 Tfrs).

So Turkey - if present growth rates are maintained, which I imagine they will be - is more likely to experience labour shortages than be sending out migrants.

Now, if we come to the institutional/political dimension, I have little doubt that Turkey has been a massive beneficiary of the Accession Process and the IMF intervention on the economic level.

It is clear - and especially in the context of the recent controversy over the election of a president - that Turkey is still badly divided between religious and secular factions, and hence there is a great deal of ground still to be covered on the road to political maturity. In the EU context I would think of Spain and Greece as good examples of where the EU has aided the process of political maturity, and provided a basis of stability.

If you look at recent Spanish growth performance, it would be hard to argue that Spain has not been a major beneficiary of EU membership, and this despite the fact that she has important possibilities (still largely to be realised I think) for economic expansion into Latin America. Indeed the EU environment has enabled Spain to develop large home grown MNCs - out of the ashes of the old Franco era state monopolies - which now can make Spain an important contender in Latin American markets.

I see no good reason why all of this should not be true of Turkey and her Asian potential.

Now for some specific points from the article.

"It should be noted that this armed conflict seems to have less legitimacy among average Kurds than it did in the past. There exists a dual explanation for this."

The Kurdish issue. I find it strange that the article presents its references to the Kurds as one of the "downsides" of the Eu association.

Undoubtedly the Kurdish issue represents one of the greatest threats to growth and prosperity in Turkey. In this sense Turkey is to some extent hostage to what is happening in Northern Iraq. IMHO the biggest danger facing Turkey is that of an eventual military adventure into Northern Iraq should things go badly wrong there. I think here the EU association is positive since it acts as a restraint on the ambitions of some sectors of the Turkish military in a worst case scenario.

I hope it is true that the violent backdrop which has prevailed in Eastern Turkey is now waning, but even if this is the case, the creation of a multicultural Turkey is still some way off, and again I would stress the positive role the EU can play here.

"Too many compromises at the expense of national interest. The most prominent of these compromises being the status of EU member Cyprus and the alleged Armenian genocide."

Again, the thinking of the author of this article seems rather muddled here, since I would say these issues are ones which Turkish citizens need to confront, and if any move away from the EU represents a move to delay this recognition, this will be a strong negative for Turkeys' development.

"Diminishing sovereignty."

Well sovereignty isn't exactly what it used to be, and those who raise these kinds of objections to the EU are more likely to be attempting to conserve existing vested interests than introduce far-reaching reforms.

Obviously the climate described in the article of negative attitudes towards Turkey is reasonably accurate, but we need to add a note of realism here. Europe really cannot afford to ignore Turkey, or let all this drift, so I think we may see changes, and in this regard we need to carefully watch how the Sarkozy presidency in France evolves.

"Even those who are vehemently opposed to Turkey’s inclusion, admit its economic significance as a major market"

Well, we need to qualify this a bit. Given the low standard of living which prevails in Turkey, it will be a long, long time before Turkey forms a significant market for finished manufactured products from the EU - the consumer purchasing power just won't be there.

Where Turkey can be an important market as she develops is for machinery and equipment and high value services associated with an investment process which will lead to an increase in export capacity which will need to find a market inside the EU - simply becuase this is where the purchasing power presently is.

We can see this in the case of Eastern Europe, China and India, and it should be noted that China and India are not EU members, so my guess is that we will see this happening in any event.

Where Europe can obviously help Turkey, over and above the political factors already mentioned, is in providing currency and interest rate stability via some sort of association with the eurosystem. I have no doubt that this would be beneficial for Turkey in anchoring expectations, and especially in the light of the kinds of fluctuations we have seen in the last 12 months.

"Turkey’s low wages and lax –relative to EU- regulation might be jeopardized in the case of EU membership, destroying its two most valuable investor attractions: cost benefits and flexibility."

Well this seems to me to be a very short term view. Turkey is developing rapidly, and - like China - won't be able to rely on low wages indefinitely. Like the South European members of the EU Turkey will need to move up the value chain. Everything here is a question of timing.

Obviously, as we already know, globalisation involves winners and losers, but at the end of the day there is no alternative but to modernise.

"Overregulation and high wages form the two top sources of agitation for Italian and Dutch entrepreneurs. So far, little empirical evidence shows a European-wide dedication at curbing the immense cannon of rules and regulations."

Well this is a bit tendentious. Europe is changing, possibly more slowly than, many of us would like, but it is changing, and will continue to change as the pressures to be globally competitive continue to make themselves felt.

Also remember that the EU is far from uniform in this regard. Along with the mentioned cases there is Scandinavia, the UK, Ireland, and the Baltic States, all places were open-ness and over regulation have been either addressed, or are in the process of being addressed. There is no reason why if Turkey joined the EU it would not come to form part of this group. Of course the outcome depends on political dynamics inside Turkey, but these will exist whether she is in or out.

At the end of the day, I can't help feeling that the author of the article still has a rather old fashioned view of what is happening in Europe.

"Poland perfectly illustrates the perils of EU membership. Poland has witnessed a period of continuous influx of manufacturing jobs, primarily due to its abundance of manpower and its –relatively- low wages. This trend is still visible and upward oriented, but shows signs of cooling of. Poland’s relatively lax regulation is slowly being replaced by elaborate and complex EU rules and regulations, diminishing its competitive edge in many ways."

I think here the author simply doesn't understand what has been happening in Poland. Poland is a rapidly ageing society. There are a lot of under employed (and hardly employable) rural workers in the over 50s age group.

At the same time there are comparatively few young qualified workers entering the labour market due to the existence from the early 90s over very low fertility (1.2/1.3 Tfr).

The problem has been compounded by the very rapid exit of a lot of young workers during the last few years (half a million in two years to the UK alone). This is producing labour shortages, and this is driving up wages. For demographic reasons Poland is increasingly likely to experience capacity constraints to economic growth over the next decade, and will have to rely on inward migration from points further east.

None of this applies to Turkey, where there should not be demographically driven labour shortages for at least a couple of decades yet.

And remember - as is now happening in China - the pressure of rising wages need not necessarily be a bad think, since it can force efficiencies on companies and encourage a move up the value chain. Everything depends on the quality of the labour supply coming from the education system, and here Turkey certainly has room to improve, EU or no EU.

Having gone through the article pretty systematically in writing this I have come to the conclsuion that it is really arther muddled, and tries to make "easy" points in order to justify a certain point of view, rather than offering a rigourous analysis of the complexity of the situation.

However, at the end of the day, as I say at the start, if the question is whether Turkey could survive OK outside the EU, my guess is yes. If the question is would being outside slow down the reform and modernisation process, my answer is probably yes. If the question is whether Turkey's economic future is, one way or another, inextricably linked with the European economy, my answer is an unqualified yes.

Edward Hugh said...

By coincidence this article is in the FT this morning, it really reflects some of my principal concerns about Turkey's future, concerns which are not really reflected in the linked article.

Below I am posting an extract.


US warns Turkey not to invade Iraq

Robert Gates, the US defence secretary, on Sunday warned Turkey not to invade northern Iraq amid a build-up of Turkish forces on the border between the two countries.

There is an intense internal debate in Turkey about whether Ankara should push across the border to root out guerrillas of the Kurdistan Workers’ party (PKK), based inside the Kurdish autonomous region of northern Iraq. Turkey accuses the PKK of launching attacks inside Turkish territory.

The Turkish government, which faces a general election next month, has appeared so far to want to avoid a military incursion. But a bomb attack in Ankara two weeks ago in which six people were killed, has been blamed on Kurdish separatists and put the issue of terrorism, and Turkey’s appropriate response to it, at the top of the election agenda.

The military holds a spring offensive in the region every year, but the build-up in recent days has taken on an ominous dimension amid ever-louder rhetoric from Turkey’s senior generals about the need to crush PKK fighters.

Speaking at a security conference in Singapore, Mr Gates expressed sympathy for Turkey’s “genuine concern with Kurdish terrorism that takes place on Turkish soil”.

However, he added that the US hoped that there “would not be a unilateral military action across the border into Iraq”.

The presence of PKK bases in northern Iraq has been an irritant between Turkey and the Kurdistan region for years, and Ankara – which already has troops deployed inside Iraq – has several times threatened a large-scale strike.

However, the rhetoric this time has been unusually fierce, with Turkey’s general staff suggesting last week that Turkish forces could also move against Iraqi Kurdistan’s regional president, Massoud Barzani, who has been critical of Ankara.

The tensions increased sharply at the weekend after an incident – which seemed from news reports to be mainly an exchange of insults – involving Turkish troops and Kurdish peshmerga fighters at a checkpoint in Suleimaniyeh, a city in northern Iraq.

The Turkish troops were in northern Iraq “within the scope of a regular mission”, according to Turkey’s general staff, and were in civilian clothes. They were able to return to their base “without any problems”, the general staff added in a statement late on Friday.

Baghdad, which is frequently at odds with the Kurdistan government, has nonetheless offered its support for Mr Barzani, with prime minister Nouri al-Maliki on Saturday urging Ankara not to stage an incursion.

Edward Hugh said...

Purely coincidentally I came across this article on Poland in Bloomberg this morning. If you read it, it should help to show how wide of the mark the writer of the article is in the Polish case. Inparticular there is this:

Poland must cut labor costs urgently to halt emigration, lift employment and avoid a slackening of economic growth, Deputy Finance Minister Katarzyna Zajdel-Kurowska said.

The nation must end the ``vicious circle'' in which employers face growing difficulty finding workers as people leave for jobs abroad and the unemployment rate remains the highest in the European Union, Zajdel-Kurowska said in an interview on May 31.

and then this on the state of the budget deficit:

Poland must maintain fast growth to bring down the debt burden and reduce the budget deficit to 3 percent of gross domestic product, meeting euro-adoption criteria laid down when it joined the EU in 2004.

The ruling Law & Justice party plans to cut employees' contributions to social welfare funds by 3 percentage points this year and by a further 2 percentage points next year. Employers' contributions will be cut by 2 percentage points.

``The most clear bottleneck in the Polish economy is the labor market as still-high labor taxes and high social spending do nothing to encourage greater participation,'' said Thomas Laursen, the World Bank's chief economist for the European Union's eastern members, at a press conference in Warsaw on May 31. ``There's not much you can do about emigration, but there's a lot you can do to address the situation on the Polish labor market.''

In other words the pressure from the EU is to cut wasteful government spending at reduce taxes, not quite the picture the author paints. But outward migration of workers is undoubtedly the most serious problem:

The Economy Ministry estimates that GDP may be lower by about 400 billion zloty through the year 2025 because 2 million Poles have emigrated since May 2004 and others will follow. As many as 3 million people are considering leaving in the coming years, according to a May 15 survey by IMAS Intl. for Rzeczpospolita.