Economy

Pushing ahead for reform in Turkey: Launch of the 2016 Economic Survey of Turkey

 

Remarks by Angel Gurría,

Secretary-General, OECD

15 July 2016

Gaziantep, Turkey

(As prepared for delivery)

 

 

Deputy Prime Minister, Ministers, Ambassador, Ladies and Gentlemen,

 

It is a great pleasure to be here with you in Gaziantep to launch the 2016 Economic Survey of Turkey. Let me take this opportunity to thank Deputy Prime Minister Mehmet Simsek and his team for their support and input.

 

Challenging global conditions

 

Right across the globe, countries are facing up to a challenging context of slow growth, weak improvements in international trade and investment, as well as a climate of increased uncertainty.

 

All of this matters for Turkey. GDP growth in the OECD area is expected to reach just 1.8% in 2016, whilst the expansion of world trade has been sluggish, particularly in Europe - Turkey’s backyard. And let’s not forget that the Brexit shock involves Turkey’s largest market in Europe: the UK. Turkey is also faced with important regional strains, not the least across the border, 40 kilometres from here.

 

But there is also a silver lining: the Turkish business sector is demonstrating resilience and outstanding versatility. Exports are being re-oriented to more promising markets. The recent reopening of Russia is of course great news and there are good signals from Iran. I am confident that Turkey’s vibrant business sector and its young, dynamic, and now better educated population can cope in these difficult global times, and can seize new opportunities.

 

Turkish economy stayed strong despite headwinds

 

GDP growth has been resilient in Turkey in recent years despite many global and regional headwinds. Annual growth averaged 4.4% in the last four years. Compared to before the global crisis (to 2007) real GDP is 33% higher and 6.4 million net new jobs have been created. This comfortably puts Turkey near the top of the class in terms of post-crisis performance amongst OECD countries.

 

Strong growth has also helped to further social inclusion. Employment expanded most in lower income regions over the past decade, to the benefit of the most vulnerable workers. The employment rate of men and women with low educational backgrounds increased from 59% to 62% for men, and from 18% to 24% for women, over the period 2008-2014. Clearly, the gap is still very large and we have to work on closing it! At the same time, the absolute poverty rate fell from 13% in 2006 to less than 2% in 2014. The average income of the lowest income household decile increased by 20% in real terms between 2007 and 2013, showing some convergence with higher income groups, even if absolute income differentials in level remain large.

 

Diversity of growth dynamics has held up as one of Turkey’s greatest strengths. Export-oriented manufacturing expanded across many regions, sectors and export markets, in the East, West and South! Turkey has gained export market shares in several markets, from Eastern Asia to the MENA region, and in the US. The diversification of economic activity will help moderate the challenges which are likely to arise in specific sectors this year, notably in tourism.

 

The growth pattern should be rebalanced

 

Still, Turkey cannot simply continue down its current path. Growth is imbalanced, with demand still being driven by household consumption to too great an extent. Private consumption grew by as much as 8-10% year on year over the previous decade – a very high rate! Moreover, the share of household consumption in GDP, at 69%, is the second highest in OECD.

 

Strong credit expansion has spurred private spending. Outstanding consumer loans grew by a staggering 33% per year in 2010 and 2011, before being reined in by welcome macro-prudential regulations which saw the rate of growth of consumer loans slow to 26% in 2013 and 9% in 2015. This may have slowed down growth, but it has successfully prevented further heightening of external imbalances.

 

Under the prevailing consumption-driven growth, the external deficit has reached around 8% of GDP in years with strong growth. Foreign debt has soared and Turkey’s international asset position has deteriorated with net liabilities increasing to 51% of GDP in 2015, against an EU average of 32%. Going forward, Turkey needs to reduce its twin dependence on domestic consumption and foreign savings and seek to raise domestic savings.

 

For this to happen without slowing growth - and without keeping it below potential - exports must increase. The rebalancing of growth towards exports and less reliance on private consumption is Turkey’s great task ahead.

 

Rebalancing requires increasing the Turkish economy’s productivity, external competitiveness and participation in global value chains. There is great potential for this in Turkey, which has not yet been fully exploited. The industrial structure contains too many low-productivity small firms, and not enough high-productivity medium-to-large firms. The share of FDI firms which diffuse new technologies and know-how through the economy is also low. This structure undermines aggregate productivity and weakens the quality and cost-efficiency of inputs, preventing Turkey from increasing exports at full potential and participating fully in global value chains.

 

The most productive and most promising firms ought to grow faster. At present, the business environment displays a number of shortcomings which entrench the current structure. These distortions in the business environment give incentives to small firms to remain small, and promote informality. Small firms do not comply with many of the costly regulatory rules, while larger formal firms incur all of them. This is why an upgrading of the business environment along international best practices is crucial to free-up the growth of most promising enterprises and achieve structural change.

 

Turkey’s Development Plan 2014-18 and the 2016 Action Plan show that policymakers are fully aware of the need for far-reaching reforms. These plans mention the expected gains from structural change by way of additional growth and higher living standards. We very much welcome that the 2016 Action Plan has been retained by the new government.

 

Priorities according to the OECD

 

Let me now turn to some of the recommendations from this Survey that can help put Turkey on a path to more sustainable long-term growth:

  • First, on education and human capital. OECD recommendations for Turkey’s education policies span a very wide set of areas. Despite a sharp increase of public spending in education since 2005 (of nearly 60%), and a concurrent increase in student enrolment rates, education spending per student still falls far short of OECD averages. Good education practices such as high autonomy and accountability at school level have not yet been implemented. We recommend that Turkey use international evaluation instruments such as the OECD’s PISA and PIAAC performance assessments, in order to develop policies based on actual outcomes in pupils’ and adults’ skills and capabilities.
     
  • Second, on product and labour market regulations. Turkey still exhibits large gaps in the quality of regulations according to OECD indicators. This implies substantial benefits could be attained from: i) labour market reforms; ii) a more balanced utilisation of the minimum wage; and iii) easing business licencing. We recommend that Turkey undertake an OECD Competition Assessment Review to identify market areas where there are obstacles to competition, as part of a broader package of reforms to boost competitiveness.
     
  • And last but not least, on basic governance. Turkey appears to lag behind other OECD countries, with respect to the standing of basic governance institutions. Three areas stand out in particular: i) the judiciary system should be perceived to produce more dependable outcomes; ii) corruption perceptions should be curbed; and iii) the transparency of state aid should be reinforced.

 

Ministers, Ambassador, Ladies and Gentlemen,

 

Turkey has done remarkably well over the last few years, but as I have hinted this morning, this is no time for us to rest on our laurels! Turkey’s to-do list remains formidable, but getting to work on it promises to spread the benefits of an ever more sustainable and thriving economy to all parts of Turkish society.

 

Thank you.