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May 27, 2012, Sunday

Pro-poor economic growth and the AK Party

Last Tuesday I participated in a panel discussion titled “Talking About A More Inclusive Economy” within the framework of the Organization for Economic Cooperation and Development (OECD) Forum 2012 held in Paris.

A recent OECD report, “Divided We Stand: Why Inequality Keeps Rising,” notes that “over the past 30 years, increased economic growth has not benefited everyone. In OECD countries, the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent, and this gap is much higher in some major emerging economies. Clearly, the benefits of economic growth have not been fairly distributed.”

In the 350-plus pages of the report, one cannot find any single analysis or any figures about the inequalities and poverty in Turkey, except in the first chapter where very few and very general figures are cited in some tables. This “ignorance” can be attributed to the quality of Turkish statistics in the past as well as to the neglect for Turkey in the OECD. But it may explain also why I have been invited to talk about the Turkish story in this field, a story which is quite different, at least in the last decade. Indeed, inequality of income as well as poverty declined during the high growth years of the 2000s, slightly deteriorated during the economic crisis of 2008–2009 and very probably continued improving over the last two years.

I am saying “very probably” because the figures for 2010 and 2011 have not yet been published by the Turkish Statistics Institute (TurkStat). The most accurate data on income distribution and poverty are compiled in the Income and Living Conditions Survey. Unfortunately these surveys contain information from 2005 to 2009 only. However, they are significant enough to judge the evolution of inequality and poverty for most of the Justice and Development Party (AK Party) rule, and we are able to make some forecasts by analyzing information from the past two years.

Let's start with the basic figures. The Gini coefficient decreased from 42.8 percent in 2005 to 40.5 in 2007, increased slightly to 41.5 percent in 2008 and fell to 40.2 percent in 2009. So, the total improvement has been 2.6 percentage points, which is quite a good performance in this area. Let's take a look at another measure. The average income of the richest 10 percent was about 18 times that of the poorest 10 percent in 2005; this ratio narrowed to 14 times in 2009. I would like to note that these figures are based on households disposable incomes transformed in individual equivalent incomes using households' sizes, and they are slightly higher than the figures based on uncorrected incomes. As for poverty, one should know that the poverty ratio declined from 25 percent in 2005 to 23.5 percent three years ago, with a transitory increase of one percentage point in 2008.

Clearly, both income inequality and poverty had been alleviated up until the 2008-09 crisis and continued to do so in the aftermath of the crisis. Let me remind you that the Turkish economy contracted from the second quarter of 2008 to the second quarter of 2009 during the economic crisis, which explains the moderate deterioration of income and living conditions that year.

How has this improvement been possible? Ranking in order of importance, I can highlight three main causes: high growth associated with a relatively high increase of non-agricultural employment until 2008; a decrease of interest payments, allowing room for social transfers to the poor without abandoning budget discipline; and, finally, a strong push to improve wages in the lowest income group. The minimum wage increased by 16 percent in real terms from 2005 to 2008 and the lowest public employee earnings by 28 percent. The share of interest payments in the budget decreased from 22 percent to 16 percent in the same period. Last but not least, non-agricultural employment grew by more than 3 percent per year, while the average growth rate has been more than 6 percent. The track record of this evolution can be easily observed in income distribution: The share of the poorest 20 percent in total income increased from 4.1 to 4.8 percent while its share in total social transfers increased from 3.1 to 3.5 percent and in total wages from 2.3 percent to 2.7 percent.

The AK Party received 34 percent of the vote when it came to power in November 2002. It received 46 percent in July 2007, but its support declined to 38 percent in the March 2009 local elections, which coincided with the deepest point of the crisis. This overlaps perfectly with changes in inequality and poverty.

What can be said for the last two years given the absence of data? We know that during 2010-11, the gross domestic product (GDP) growth rate climbed to 9 percent per year, the non-agricultural employment growth rate to 5.5 percent and the share of interest payments decreased to 12 percent, allowing more room for social transfers. The 50 percent of the vote received by the AK Party in the last elections almost a year ago therefore cannot be considered a surprise.

Here we have a very different story compared to Europe where increasing inequality and poverty, as well as unemployment, have overthrown incumbent parties from power and opened up an era of uncertainty and instability.

Now the question is, “Can the success story be continued for Turkey?” The answer is for next Monday.

Previous articles of the columnist