Turkey on the brink of middle income trap

Turkey has had an astonishing performance with regards to income per capita in the last decade. Indeed, the per capita income has risen from $3,000 to $11,000 under the rule of the Justice and Development Party (AK Party). Encouraged by this performance, the AK Party set very ambitious goals for the next decade, feeling confident that it would be possible to repeat this great performance in the future. Indeed, the AK Party is aiming for per capita income of $25,000 by 2023. I tried to explain several times before in this column that there is little chance of doing so. This time I would like to share with readers further evidence to back my claim.
The Bahçeşehir University Center for Economic and Social Research (BETAM) last week published a research paper titled "Türkiye orta gelir tuzağının eşiğinde" (Turkey on the brink of the middle income trap). As one of the authors of this research, let me explain briefly how the idea for this subject came about. At BETAM we have for years now been closely scrutinizing the Turkish labor market, publishing a monthly “Labor Market Outlook” and a number of occasional research briefs on various labor issues. It was surprising to observe continued high job creation despite the huge decline in the growth rate in the last two years. The factors behind this “happy” event are still not clear. Based on the findings of some preliminary research we suspected that the incentives intending to lower labor costs (such as subsidies for social security premiums) would have contributed to this nice surprise regarding unemployment. But considering the quality of growth as well as the per capita income performance, it was not difficult to predict the existence of some problems, particularly regarding the evolution of labor productivity. Thus, we decided to look more closely at this aspect using a simple decomposition methodology that allows us to break down the per capita income increase into its three contributors: the ratio of the working age population to the total population; the employment ratio (employment /working age population); and labor productivity, defined as the gross domestic product (GDP) per employed individual. The contribution of the working age population ratio is marginal. Though the working age population is still growing more rapidly than the total population, this factor will be extending into the 2020s because of an aging population. As for the two other factors, namely the employment ratio and labor productivity, three different periods are observed. Before the Great Recession in 2009, from 2005 to 2008 high growth was driven almost by labor productivity increases, with the index of labor productivity rising from 100 to 109.6. During this period, total employment almost stagnated, though non-farming employment rose remarkably. Indeed, agricultural employment declined strongly, thus contributing -- via the composition effect -- to the increase of overall labor productivity while labor productivity was also increasing in non-agricultural sectors. In the aftermath of the Great Recession, the nature of growth changed dramatically. From 2009 to 2011, though the Turkish economy had high growth rates, both the increase in the employment ratio and the increase of labor productivity contributed more or less equally to the increase of per capita income. However, since 2012, not only did the growth rate decrease dramatically but the increase in labor productivity first stopped and later started to decrease, as BETAM's research shows. Indeed, the index of labor productivity decreased from 105.8 to 104.8 from the second quarter of 2011 to the first quarter of 2013. Thus, for two years now, under the combined effect of low growth and declining labor productivity, the increase of income per capita is almost stagnating. Obviously, if this poor growth performance continues to prevail, the per capita income of $25,000 targeted for 2023 will never be reached. Moreover, the Turkish economy risks being trapped in the middle-income group of countries since increases in the per capita income will be very slow, if not stagnating. High job creation is certainly good for keeping unemployment in check. Nevertheless, labor productivity must start to increase again in order to continue to increase social welfare. The Turkish economy needs growth rates higher than the current one hovering around 3.5 percent actually. Moreover, this additional growth should come from labor productivity gains.