Chapter 1: New challenges facing the Turkish economy
Over the past two decades Turkey has successfully implemented a growth strategy based on competitive markets. The strategy nurtured a highly dynamic and vibrant private business sector. However, this new growth trajectory remained vulnerable to deep and recurrent macroeconomic shocks. At the same time, driven by the high level of FDI and other capital inflows, the Turkish currency tended to appreciate very strongly in real terms – except during periods of international capital market turbulence or internal political tensions. Trend currency appreciation helped with disinflation but also amplified the competitive challenges that industry faced from lower-cost countries. Turkey has the resources required for resuming a more balanced and stronger growth path. However, this can only be achieved by irreversibly consolidating the macroeconomic policy framework and providing the entire business sector – both its modern and less productive segments – with a significantly more growth- and employment-friendly microeconomic business environment.
Chapter 2: Shifting to a pro-growth fiscal strategy
Following six years of very tight fiscal policies, Turkey is faced with a fiscal policy challenge: how to i) preserve a rigorous fiscal policy stance, while ii) both improving the quality and cost-efficiency of key public services and developing the country’s infrastructure, and iii) simultaneously reducing the most distortive aspects of the Turkish tax system. In response to this challenge the government is trying to develop a new pro-growth fiscal strategy. Turkey is in a strong position to move towards such a new strategy. Thanks to past fiscal restraint, public debt is on a robustly sustainable path, and a major law on Public Financial Management and Control has established a state-of-the-art institutional framework. However, important spending drifts occurred in 2007, and were identified only with some lag, giving a warning signal on the urgency of full implementation of the new framework. There is a case for shifting the anchor for fiscal policy to an expenditure rule with binding multiyear ceilings, supported by a primary surplus target (as at present) that is consistent with the long-term sustainability of public debt. Strong political commitment is also needed for clarifying Turkey’s functional spending priorities, shifting to more efficient supply arrangements in key public services and closing the most blatant tax loopholes and strengthening tax enforcement.
Chapter 3: Monetary policy: facing the challenges
Monetary policy has been one of the main pillars of the post-2001 stabilisation programme. Encouraged by its success, the Central Bank shifted from implicit to explicit inflation targeting in 2006 and set a medium-term inflation target of 4%, applicable from end 2007. However this objective faced with two important challenges: On one hand, inflation inertia settled in and non-tradable inflation stagnated at more than 10%, further fuelled by persistent surge in global commodity and energy prices and. On the other hand, real interest rates remained high, continuing to fuel strong capital inflows and currency appreciation, and undermining the competitiveness of labour-intensive segments of the economy. Turkey is, therefore, faced with the classic dilemma of successful catching-up economies: Inflation inertia requires a tight policy while competitiveness losses appear to go beyond the absorption and adaptation capacity of large segments of the economy. This chapter argues that resolving this issue requires monetary policy to be supported by broader policies, including proactive competition policy to reduce costs and prices in services, enforcement of a credible multi-yearly spending framework to consolidate confidence in fiscal stability, and employers’ and employees’ commitment to anchor prices and wages more on the inflation target. Success with such supportive policies would help shift the burden away from the Central Bank’s interest rate as the only available instrument to increase the credibility of the inflation target.
Chapter 4: Enhancing competitiveness by fostering the growth of the formal sector
The Turkish business sector’s successful post-crisis performance has come under strain. Competition from low-cost countries and strong real currency appreciation have together undermined the performance of the trade-exposed sector, in particular of the segments dependent on low-skilled labour and domestic inputs. The resulting competitive squeeze spilled-over to trade-sheltered activities, slowing down GDP growth. The competitiveness of the economy should not be expected to be restored as a result of a permanent reversal of trend real currency appreciation. Enterprises’ capacity to accelerate productivity growth, moderate wage increases, and successfully differentiate products (in order to be able to charge higher prices than lower cost competitors) are longer-term sources for improving Turkey’s competitiveness. The chapter argues that important competitiveness reserves remain latent in the business sector, and should be mobilised. They arise from a large part of economic activity still being carried out in the informal and semi-formal sector. If more resources can be shifted to the formal part of the economy, aggregate productivity and competitiveness would be enhanced. Formal firms draw more effectively on the technology, skilled labour, capital and FDI resources available in the rapidly globalising Turkish economy. Two top priorities in facilitating the growth of the formal sector are further reform of labour market regulations and progress with the modernisation of capital markets.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Turkey 2008 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 Gönenç, Rina Battacharya, Olcay Culha and Cafer Kaplan, under the supervision of Andreas Wörgötter. Research assistance was provided by Béatrice Guérard.