The European Union, Turkey's traditional export market, has had many economic issues to deal with and Turkish economic growth has mainly been fueled by domestic consumption and credit expansion. When a CAD of 10 percent of the national economy is observed together with a high inflation, it's time to cool down the economy and try to address its structural problems while buying some time for what is called a “soft landing” in economic circles following two years of rocket-fast economic growth. With very strong fiscal discipline and a flattening of businesses' profit margins, it is time to think of the long-term vision for companies and, indeed, the country as a whole.
After getting caught in a low-income trap from which it took Turkey 55 years to escape, it is time to discuss the consequences of being an upper-middle-income country. In the ten years of political stability, together with sound economic policies, since 2002, Turkey has been able to reach a level of $10,000 per capita gross domestic product (GDP). Now it is time to worry about how we can overcome rising labor and energy costs while upgrading production and moving up in the value chain.
There are particularly interesting comparisons one should to study carefully in this matter. The economies of Mexico and South Korea are similar to each other in the sense that they have a special focus on machinery, vehicles and electronics with similar structures. In the 1970s, the value added to the Mexican economy was higher than that of South Korea. However, in the last few decades, while Mexico has been losing its value added on every front and value added has decreased from 21 percent at the beginning of the 1980s to 17 percent at present, South Korea has gained enormous ground in value creations and its value added has increased from 18 percent to 28 percent according to Organisation for Economic Co-operation and Development (OECD) data. Mexico has become the subcontractor of international corporations and marketers and has focused on the downstream by becoming less productive. There is an important lesson here for Turkey. The same challenge is quite clear when you analyze the export and import structure of the Turkish economy. Lesson 1: Upgrade the value chain and diversify the economy without losing the competitive edge.
Human capital, the labor force, is not less important than productivity and value added. The level of education and how people contribute to the local economy, labor force participation rates, the importance of innovation and commercialization determine the level of sophistication and efficiency of the labor force. Oftentimes, this is highly dependent on sound public policy and government intervention. A comparison between Asia and Latin America actually gives a very clear picture on this front as well. Over the last 50 years, Latin American labor productivity has stood at around 33 percent of US levels, but Asian labor productivity has jumped from 15 percent in the 1950s to 54 percent of US levels over the same period. One can see Latin American countries feeling the pressure of the middle-income trap while Asian tigers like South Korea are enjoying high levels of income. Lesson 2: Invest in education and elevate labor productivity through the wise allocation of public funds and by increasing transferable skills levels.
The third distinctive feature of countries that have escaped from the middle-income trap is institutionalization. This is especially important in establishing and maintaining efficient market structures, opening the way for entrepreneurship and innovation. Conscious and concerted efforts are required to strategize development based on a national economy's strengths and weaknesses. Connectivity, the successful transition of the economy, developing capacity and the market are all important components of institutionalization. Lesson 3: Invest in institutionalization, innovation and entrepreneurship.
Infrastructure and access to finances together with a sound and foreseeable macroeconomic structure are other sources of influence on development that help a country get out of the middle-income trap. Infrastructure is important for connectivity between the sources of input and the markets. And financing is of course the main guarantee of the private sector.
Turkey is carrying out sound, continuous reforms on all fronts. Policymakers are fully aware of the urgency of reform for future growth and the continuity of development. Private sector-led development strategies are all in effect.
The main challenge, though, is finding a comprehensive strategy that will facilitate and shorten the path to high-level income while avoiding the middle-income trap.