However, recent data on productivity, profitability, the current account deficit and inflation have shown that structural rigidities are a major obstacle to the sustainability of recent achievements and eradication of the abovementioned vulnerabilities. What I would like to note is that rather than relying upon short-term monetary and fiscal policies in containing the temporary surge in inflation and controlling the current account deficit, Turkey needs to focus on a long-term market-conforming, merit-based transformation approach in the manufacturing and services industries. The graph below shows that Turkey is dramatically lagging behind major innovation drivers. Under these circumstances it is unlikely that Turkey could catch up and close the development gap with the leading countries. In order to open the way to innovation for the economy, Turkey needs to fortify the economy by emphasizing microeconomic reforms, the so-called second generation reforms. Today, I will briefly introduce a summary of findings released by Organization of Economic Cooperation and Development (OECD) economists.
In order to enhance the growth potential of the economy amid increasing competition from low-wage countries, Turkey needs to implement a broad-based strategy of improving structural conditions for all types of firms. In this regard, the country should focus on reducing labor market regulations and labor costs, improving competition in product markets and improving infrastructure, which would not only enhance the productivity of formal firms in the sector, but would also facilitate the creation of new firms and the movement of the large population of informal firms to the formal sector.
These economists offer a strategy of regulatory simplification and formalization. A layered regulatory and tax framework with a unified, low-cost, level-playing and much more flexible formal structure takes the central priority in this regard. The resulting streamlined business environment, they argue, would:
* stimulate the productivity and competitiveness of large-size, dynamic medium-size and micro-scale firms alike
* facilitate resource shifts between these groups according to their true underlying efficiencies rather than according to their uneven exposure to legal and tax liabilities
The argument is that these measures would:
* reduce the heavy regulatory burden on formal-sector firms, particularly in the areas of costly product and labor market regulations
* help informal micro operators to become normal business firms by enhancing their capacity to build up physical and human capital
* break the glass ceiling that is currently impeding the performance of dynamic medium-sized firms by permitting them to expand and by giving them access to the funding, technology and marketing resources that they need
In fact, in order to create such an environment, the government has been carrying out quite painful reforms at a time of difficult domestic as well as global conditions.
