10/7/14 - Turkey’s economy will grow stronger in the coming years, but remains overly dependent on domestic consumption funded by foreign finance, according to the latest OECD Economic Survey of Turkey. Turkey should rebalance growth through monetary and financial policies that keep inflation, exchange rates and credit levels on sustainable paths, the OECD said.
The Survey notes that Turkey’s short-term economic outlook has improved: buoyed by the projected global recovery, growth is set to pick up over the coming two years. Turkey’s longer-term prospects, however, hinge on the authorities’ ability to achieve disinflation and preserve the credibility of public finances, while implementing structural reforms that boost productivity and competitiveness across the economy.
A better overall regulatory framework is essential if the business sector is to remain a driver of strong and inclusive growth. Structural change in the business sector would strengthen competitiveness, exports, employment, income and savings, help rebalance domestic and external demand, and move the economy toward an externally sustainable path.
Turkey should strive to make its product and labour market regulations more growth-friendly while continuing to reduce regulatory obligations related to company size.
Small businesses, which employ the majority of workers, often circumvent much of the regulatory framework. In contrast, large institutional firms, which can reap economies of scale and are more productive, face heavier legal and regulatory burdens, particularly as concerns tax and social obligations. The resulting segmentation of the business sector hinders productivity gains and creates a social divide between the workers of formal and informal firms.
Regulatory and tax reforms should aim to bring about a convergence in business conditions, for all firms, regardless of size, toward OECD standards. Enforcement should become more predictable. Economy-wide productivity, competitiveness and income would improve considerably if a higher share of the working age population were employed in the more efficient firms.
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The Survey also underlines that rigid labour market rules are holding back growth across the business sector. Eliminating the restrictions on different forms of employment – including temporary work, employment through work agencies, home-based work and remote work – would make it easier to hire low-skilled workers, who form the majority of the working age population, while fostering job creation in the formal sector. Such reforms would also encourage women to participate in the labour force and offer them greater access to higher-quality jobs in formal firms.
To further improve trust in a rules-based environment, Turkey should also implement the legislated, but not yet operational state aid monitoring system. Evaluation of support programmes for SMEs and workers affected by structural change should lead to a focus on the most successful programmes.
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