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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Turkey published on 18 October 2006.
Economic growth has been strong over the past few years and Turkey is well-placed to break with the previous history of boom and bust cycles…
The recovery from the 2001 crisis has been impressive. Over the 2002-05 period, output increased by a third, representing the strongest pace of growth among OECD countries. At the same time, annual inflation fell steadily, reaching single digits in 2004 for the first time in three decades, while sound fiscal and monetary policies improved confidence and reduced risk premia, thereby enhancing business investment and FDI inflows. Thus good progress has been made towards a shift to a stronger and more sustainable growth path. Indeed, the process of real income convergence seems to have begun, following the disappointing periods of the late 1980s and the 1990s. If this path can be maintained, this would represent a significant break from the past decades of short-lived economic booms, followed by sharp downturns or recessions.
… but the economy remains vulnerable to external and domestic disturbances
Turkey’s positive macroeconomic performance between 2002 and 2005 was also supported by a favourable international environment, characterised by strong world trade and - despite higher oil prices - relatively low inflation, low interest rates and a strong global appetite for emerging market assets. In early-to-mid 2006, however, interest rate hikes in major industrial countries prompted a change in the risk appetite of the international financial markets. This significantly affected the Turkish economy: the currency depreciated significantly, long-term interest rates rose sharply and inflation accelerated. More recently pressures weakened and the exchange rate recovered somewhat and long-term interest rates declined again. Turkey was not the only country hit by the reduced risk appetite of international investors, but it was among the group of emerging market economies that was most affected. One reason for this was Turkey’s large and widening current account deficit, fed by large capital inflows, including a large share of portfolio capital, which had fuelled an appreciation of the currency. Furthermore, Turkey’s relatively short history of responsible macroeconomic policies makes it vulnerable to external shocks. Last but not least, market uncertainty may also have been fuelled by concerns about the independence of key institutions, further progress in structural reforms and some emerging political tensions within Turkey. Sustained strong economic performance in this more difficult international environment will require the bolstering of confidence in macroeconomic policy and political commitment to structural reform.
A significant pick-up in structural reform would accelerate Turkey’s catching-up and facilitate the negotiation process with the European Union
A broad-ranging reform package, such as that recommended above, would minimise the risk of Turkey falling back into a boom-bust cycle and would also help transform the economy from one with a low average level of human capital and a significant duality between relatively few highly productive enterprises and a large number of low productivity enterprises, to one that operates with a more even playing field, permitting a more rapid catch-up in living standards. Such success would also enhance perceptions of Turkey as a country that can absorb and productively employ its rapidly growing working age population and contribute to Europe’s prosperity. In turn, this would facilitate the negotiation process with the European Union.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Turkey 2006 is available from:
For further information please contact the Turkey Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Rauf Gonenc, Anne-Marie Brook, Ugur Ciplak, Gökhan Yilmaz and Rina Bhattacharya under the supervision of Wilhem Leibfritz.