Long term growth perspectives for Turkey

Today low growth is a hot debate with regard to the Turkish economy. It has also been the most debated subject in this column. We do not yet know to what extent the growth rate will decline this year.

The forecasts range from less than 2 percent to more than 4 percent. My own estimation is around   3 percent. Obviously, this range of growth is not enough from a perspective of social cohesion. With such low growth Turkey cannot overcome the unemployment and poverty that are still quiet high despite the improvements of the last decade. But one year of low growth does not necessarily mean low growth for the long run. So, what about the long-term growth perspectives? The recent Organization for Economic Cooperation and Development (OECD) report on Turkey (OECD Economic Surveys: Turkey 2012) asked the question and gave a comprehensive answer. The OECD suggests a baseline growth scenario and extends it to provide some additional   assumptions. Let's first consider the baseline scenario. According to the OECD, average gross domestic product (GDP) growth would be 4.4 percent from 2012 to 2030. This forecast is based on three basic assumptions: 1- Educational attainment will continue to converge with the average for OECD countries, and the average number of years of schooling of the working age population will increase from 7 to 8.5 years. 2- Taking into consideration the actual pension system, the increasing educational level (see above) and the population trend, labor force participation (the share of employed and unemployed people in the working age population) will reach 55 percent instead of the current 49 percent. Let me point out here that with 55 percent in 2030, Turkey will continue to be among the countries having the lowest labor force participation rates. 3- Assuming efficiency-enhancing product market reforms, such as increasing competitiveness in the energy sector, average multi-factor productivity (MFP) growth will stay at 1.5 percent a year from 2012 to 2030. So, out of 4.4 percent growth, roughly 3 percent will come from the contributions of capital stock, human capital (increase in education level) and the increase in the   labor force, assuming that actual unemployment, which is slightly above 9 percent, remains unchanged. Education does matter a lot for growth I agree with this baseline growth scenario except for the capital stock contribution. I do not want to go into technical details but just to remark that the OECD model took for the capital stock contribution share the average of developed countries, which is 0.3, while estimations for Turkey are about 0.5. Assuming this last figure and also a lower MFP growth, I estimated the long run average growth for Turkey, albeit for a shorter period, to be about 5.5 percent in “Büyüme sorunu ve reform ajandası” (Growth problem and the reform agenda), Türkonfed, June 2012). Given the decrease in both capital contribution and employment contribution in a longer period, the average growth would definitely be less than 5 percent during the considered period if the assumptions above are accepted. What does this growth perspective mean, regarding the very ambitious official 2023 targets set by the Justice and Development Party (AK Party) government for the centenary year of the republic: Per capita income will double from $10,000 to $20,000, Turkey will climb to the 10th rank among the biggest economies and unemployment will decline consistently. (I do not remember if a figure had been announced.) Let me start with unemployment. As I mentioned above, the baseline scenario assumes stagnation in unemployment. Indeed, if the MFP is kept as high as 1.5 percent and the assumptions about the trend of population increase and the rather low participation rate are valid, an average growth under 5 percent would not be sufficient to create enough employment to absorb the increase in the labor force. As for per capita income, calculations show that by 2030, but not by 2023, it will roughly double -- assuming an average of 0.8 percent (currently 1.25 per cent) for the population increase and 4.8 per cent for GDP growth. Anyway, so far is so good. However, becoming the 10th largest economy worldwide by 2023 has to be forgotten. At best, Turkish GDP will rise to $1.8 billion by 2030 -- assuming that growth is at least 4.8 percent. This level will allow Turkey to outpace Holland and maybe Spain, if this county is trapped in very low growth for a long time. To be ranked 10th or 16th, frankly I do not care as long as we are a member of the G-20. Is better growth performance possible? The response of the OECD is positive. If the 12 years of compulsory education recently legislated is fully implemented, the average schooling will reach 9.5 years instead of 8.5, and this will add 0.8 percentage points to the average growth through the increase of human capital productivity. Furthermore, if “deeper labor market reforms,” such as severance pay reform, decentralization of the minimum wage and the measures suggested by the National Employment Strategy (NES) that encourage woman to work, are fully implemented, another 0.6 percentage points would be added to the growth rate. So, Turkey can have an average GDP growth of 5.8 percent until 2030 if radical reforms are implemented in the labor market and in education. Needless to say, a democratic constitution as well as the end of violence with regard to the Kurdish problem will help to achieve these reforms. But anyway, this also requires that the ruling AK Party focus its political energy on economic reforms instead of who is going to become the president in 2014.