Economy

Recent developments in OECD economies and implications for Turkey

 

by Angel Gurría, OECD Secretary-General
delivered at a dinner hosted by the Turkish Industrialists' and Businessmen's Association (TÜSİAD) during an official visit to Turkey
Istanbul, 17 October 2006

Dear TÜSİAD Members,

It is an honor and a pleasure to be with you tonight. TÜSİAD and OECD share a common commitment to democracy and market economy and we have co-operated on many occasions. For us, TÜSİAD is a uniquely valuable source of well-pondered insights and viewpoints on Turkish economic policy issues. All the presentations I will be making during my trip to Turkey received your useful contributions and I thank you for that.

I was invited to offer some comments on “Recent Developments in OECD Economies and Implications for Turkey”.

I will not dwell on cyclical developments as we are currently preparing our updated information on the OECD economy. I would rather focus on recent developments concerning the structural determinants of growth in the OECD area and the country policies affecting them. I will draw on a new exercise that we have launched to monitor structural performances and policies more systematically. This exercise has provided additional insights on how certain structural areas impact economic performance. These three areas are openness to market competition, upgrading of human capital and the flexibility of the labour market.

Openness to market competition

The unique stimulus that full competition provides for productivity growth is now much better understood and was reflected in many policy initiatives over the recent years. Barriers to entry have been reduced, the competition legislation has been strengthened, and controls on foreign direct investment have been eased.

Since most of the new action takes place in Europe, as it was also the region that needed to advance more. Significant steps have already been made with the development of competition policy at the European Union level and more recently, with the “Services Directive” (the famous Bolkestein Directive), voted in early 2006. 

Despite these progresses in Europe and other OECD areas, there are further steps that need to be taken in certain areas. The most important ones where reform is necessary are: 

  • Energy and telecommunications sectors, where there are still regulatory barriers
  • Professional Services still need further opening to competition in in a smaller number of countries
  • The rules and procedures to obtain sectoral licenses remain still opaque and the administrative burdens to start up a business are still costly in a further smaller number of countries
  • Markets for agricultural products remain highly distorted in a large majority of countries.

Upgrading of human capital

Quality education  is now recognised as an essential ingredient of the growth performance in all countries, notably for the diffusion of new technologies. However, while both the quantity and quality of output from the education system are vitally important, it is a fact that we still know relatively little about the policy settings that contribute to get good results in this area. Nonetheless, some priorities have been identified on the basis international comparisons of education policies and performances:

  • Reinforcing early childhood education is essential, to upgrade educational contents for primary school entrants
  • In secondary education the number of drop-outs is often too high. As a remedy, vocational education should be strengthened and the autonomy and the accountability of schools should be increased
  • In universities, graduation rates (the rate of completion of the courses) are too low in many countries. Students’ incentives could be increased, notably via registration fees combined with granting loans. Universities should also be granted more autonomy in the management of human resources and programmes.  

Labour market reform

Even if this is hard to believe, approximately one-third of the total working age population is today either unemployed or inactive in the OECD area. But certain countries do much better than others in this area. When comparing internationally labour market performances, three areas appear particularly important:

First: labour taxes and social security contribution rates are still very high in many of our Member countries. These taxes usually increase effective employment costs and reduce labour demand. There is a need to introduce reforms to make the tax and social security system more employment-friendly.

Second: the pension, unemployment insurance and other income-support schemes are in many countries designed in ways which weaken incentives to participate in the labour market, above all for underrepresented groups. Therefore, it is necessary to redesign the schemes to introduce incentives to work.

Third: employment protection regulation and collective wage agreements are often too rigid and reduce labour market flexibility. Labour markets are therefore not able to cope with increased international competition which requires shifting resources from declining to growing activities. The way some countries have dealt with this is not satisfactory, as recent reforms eased regulations in temporary contracts without relaxing those on permanent contracts. The result is the the emergence of dual labor markets. We advocate a single and more flexible employment contract. 

An encouraging finding from our most recent review is that many European countries which have traditionally suffered the relatively most serious rigidities in product and labour markets and in the education system finally begin to address these problems. This will help raise growth potential and better cope with the ageing of the populations. However, within Europe, differences of structural policy frameworks and productivity and employment outcomes persist. Our latest analysis of the Euro area had still to conclude: “Resilient economies in the Euro area tend to thrive, whereas inflexible ones have a rough ride.”

Implications for Turkey: Is Turkey flexible enough to continue on a steep growth path?

My short answer is: it much depends on how committed the government and the population at large remain to structural reform. I will be brief here because this is the main theme of our new Survey of Turkey that will be published tomorrow. I will only make three points:

First, according to OECD’s standard evaluation and measurement methodologies, Turkey happens to have the most rigid product and labour market regulations of the OECD area. This includes intricate sectoral licencing rules, one of the highest social security contribution rates, the highest severance payments for permanent workers, very restrictive rules for temporary employment contracts, and the highest minimum wage/median wage ratio of OECD economies. On the face of it these are not good news: this situation may have confined Turkey in a very rigid economic framework. But this has not been the case.

This has not been the case, and this is my second point, because these rules are applied only in limited areas of the economy: in the public sector, and in the largest, most modern and most law-abiding firms of the private sector. They are not actually in force in very large zones of the economy – this is the famous “informality” issue. The emergence of a new brand of medium-sized half-formal enterprises which have flourished through the past two decades and succeeded in domestic and international markets is a testimony to this high de facto flexibility.

But requiring a large informal sector to cope with rigid regulations is not an optimal solution. Not for business and not for the government. As business managers and policymakers know well, time has now come for Turkey to exit from this very peculiar model of resilience. The flexibility of the economy should be re-founded on formal, legal and institutional grounds. In our Survey we insisted that this is both inevitable and highly desirable:

It is inevitable, because Turkey is moving towards (this is our common hope) a new macroeconomic framework characterised by less cyclical volatility, lower inflation, a more stable currency, and much more systematic law- and rule-enforcement. This new era, which is also driven by the institutional convergence process with the European Union, calls for a more flexible formal economic framework. 

It is highly desirable because the future competitive performance of the business sector will depend on additional structural reforms in product and labour markets and in the social security system. Large and modern firms - which you represent at TÜSİAD - need such reform for more level-playing competition with rivals based in less rigid and less costly countries. Informal and half-formal firms need such reform in order to join the formal sector at lower costs, and to have normal access to the formal financial market, to the judiciary system and to partnerships with international counterparts. We think, and I am sure you will agree, that Turkey’s potential for a growth acceleration is truly huge if the reform of the formal economic framework is made a priority in order to allow for  these developments to take place.


Further reading:

 

 

 

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