Since 2005, the OECD has annually published a report titled “Going for Growth” (GFG), which provides novel structural surveillance under the theme of economic policy reforms, complementing its country and sector-specific surveys. Aimed at raising living standards, the report analyzes 30 member countries’ structural policies and their outcomes in terms of the OECD’s policy priorities and recommendations. The analysis is based on a set of internationally comparable and periodically updated indicators, linked to benchmarked performance across these indicators. Performance measurement focuses on the gross domestic product (GDP) per capita, productivity and employment indicators.
GFG 2009 comes in the midst of a global crisis that has forced unprecedented emergency action by governments everywhere. This crisis has been widely blamed on the failure of financial markets, which will certainly face tougher but not necessarily better regulation in the future. But the failure of financial markets has been mistakenly generalized to the failure of markets in general, with many Cassandras doubting the future of capitalism. Markets in the non-financial sector, specifically the product and labor markets, in contrast to those in the financial sector, have performed relatively well.
The basic premise of GFG 2009 is that from a long-term perspective, structural reforms that increase the competitiveness and improve the flexibility of product and labor markets are essential for sustainable rapid economic growth. They are also critical, from a medium-term perspective, for resilience against future recessions to lessen the severity of losses in output and employment. GFG 2009 stresses that governments should pursue policies that increase aggregate supply in the long run as they struggle to stimulate aggregate demand in the short run. Observing that structural reforms often occur in times of economic crisis, it offers four broad fiscal/structural reforms that can yield both short-term and long-term benefits:
(1) Higher spending on infrastructure (education, energy, water, transport and telecommunications) with spillover effects;
(2) Higher spending on labor market policies to improve skill levels;
(3) Lower personal income taxes, especially on low-income earners, to boost aggregate demand in the short run and to increase employment as well as investment in human capital in the long run;
(4) Product market regulatory reforms to lower entry barriers and increase competition.
GFG 2009 depicts these as growth-enhancing structural policies that can benefit nearly all OECD members.
GFG 2009 identifies, following a standardized approach, five structural policy priorities for each member country to raise the GDP per capita under two performance areas: labor utilization and labor productivity. Three of the structural policy priorities are based on a systematic benchmarking approach, using internationally comparable OECD policy settings and performance indicators. The remaining two priorities are often backed by indicator-based evidence, but may also use country-specific expertise. These two priorities aim to capture any potential policy issues in areas excluded from the indicators. It is discouraging that GFG 2009 retains 134 of the previous 155 policy priorities -- 86 percent -- fully or in part from last year’s report. Although the pace of structural reform has been quite slow in the past, the current crisis can accelerate the combination of structural reforms with emergency action.
GFG 2009 summarizes Turkey’s basic structural indicators as follows:
(1) Gaps (relative to the US) in GDP per capita and productivity, although narrowing, remain very wide.
(2) Employment rates (employed persons as a percentage of the working-age population) are much below the OECD average.
(3) Average tax wedges (measured as the difference between total labor compensation paid by the employers and the net take-home pay of employees, as a ratio of total labor compensation) for low- and middle-income earners are too high.
(4) Cumulative expenditure per student in primary and secondary education is very low.
For Turkey the five policy priorities in GFG 2009 fall under the categories of labor utilization and labor productivity.
The first three priorities concern labor utilization:
(1) “Contain minimum wage increases to below average wage increases to stimulate employment of low-skilled workers in the formal sector.” The reason for this is that the high minimum wage relative to the average wage rate and high payroll taxes keep the legal employment costs of low-skilled workers too high, discouraging their employment in the formal sector, especially in regions and sectors with very low labor productivity. The OECD recommends the reduction of the high minimum wage to average wage ratio by limiting the rise in mandatory minimum wages and differentiating among minimum wages across sectors and regions. It also advises continued cuts in the labor tax wedge, especially on low earnings.
(2) “Ease employment protection and facilitate temporary work to stimulate hiring of regular workers in the formal sector.” The reason for this is the rigid employment protection in the formal sector for both permanent and temporary workers, contributing to employment in inefficient informal activities. The OECD recommends the easing of employment protection in the formal sector by facilitating temporary work and reforming severance pay entitlements.
(3) “Reduce incentives to retire early and to take work in the informal sector by making the pension system actuarially neutral.” To encourage employment in the formal sector, the OECD recommends reducing incentives for retiring early from the formal sector to work in the informal sector by decreasing net pension benefits and requiring a health insurance contribution for young retirees.
The last two policy priorities concern labor productivity:
(4) “Improve educational achievement to raise the efficiency of the labor force.” The reason for this is that secondary education average academic performance and tertiary education enrollment rates are very low, resulting in widespread basic skill deficiencies that cause low productivity and sluggish growth. The OECD recommends higher spending on public education, financed by a broader tax base through a reduced informal sector.
(5) “Simplify product market regulations, especially the sectoral licensing rules, to encourage competition.” To improve productivity performance, the OECD recommends simplification of licensing rules that act as market entry barriers, acceleration of privatization and encouragement of competition in network industries.
These policy priorities deserve the serious attention of the AKP government, which now fully realizes the importance of going for growth in Turkey.
