Economic Survey of Turkey 2008: Enhancing competitiveness by fostering the growth of the formal sector


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The following OECD assessment and recommendations summarise chapter 4 of the Economic survey of Turkey published on 17 July 2008.



Enhancing the competitiveness of labour-intensive activities remains essential

The business sector’s successful post-crisis performance and employment creation capacity has come under strain, independently from the domestic and international shocks of early 2008. Mounting competition from low-cost countries and strong trend real currency appreciation have severely weakened the trade-exposed sector, notably cost-sensitive activities highly dependent on domestic inputs and low-skilled labour. Since low-skilled labour is the economy’s most abundant resource and these sectors have a large share in total output and employment, as well as exports, these strains spilled-over to the entire economy. Trade-sheltered activities were initially boosted by the household income gains stimulated by real currency appreciation. However, higher than expected inflation and rising unemployment curbed real incomes throughout the economy and also affected the non-tradable sector, contributing to a weakening growth performance. An upturn is only possible with the improvement of the competitiveness of Turkey’s labour-intensive activities.

The improvement of competitiveness should draw on stronger structural foundations

Competitiveness gains needed to re-balance the dynamics of growth cannot come from a policy induced reversal of trend real currency appreciation, which is an integral part of the catching up process. External and internal shocks trigger depreciations but these generally prove to be of short duration while long-term dynamics of capital inflows remain very strong. In these circumstances the necessary competitiveness gains in the business sector can only be achieved by boosting productivity growth, moderating wage increases, and successfully differentiating its output (in order to be able to charge higher prices than lower-cost competitors). In other words, it is a flexible labour market as well as a competition-friendly product market environment which is needed to do the job. The Survey confirms that manufacturing industry has been achieving remarkable performances in these areas but the gains are concentrated in the modern part of the economy. Productivity growth and competitiveness gains need to be generalised to the entire economy with additional reforms.

Productivity potential should be mobilised by fostering the growth of the formal sector

There are large productivity reserves latent in the business sector. They arise from a large part of economic activity still being carried out in informal and semi-formal activities. If more resources can be shifted to formal business activities, the aggregate productivity and competitive performance of the economy would benefit from better access to financial services, opportunities to deepen the division of labour and develop own comparative advantages as well as better incentives to invest in firm-specific human capital. Formal firms draw more effectively on the technology, skilled labour, capital and FDI resources becoming available in the rapidly globalising economy. Overcoming the duality between formal and informal sectors, and accelerating the shift of resources to the formal sector, should be the centrepiece of Turkey’s structural reforms.

Ongoing reforms should be complemented with further measures to reap synergies

The government has launched a range of important initiatives to strengthen the business sector and Turkey has started to move up in various international rankings of doing business indicators. In particular, an Employment Package enacted in May 2008 entailed significant measures for reducing labour tax wedges and promoting national employment services emphasizing the upgrading of the skills of the labour force.

However, progress has been limited in some of the most critical areas, and this also holds back the effectiveness of other reforms. Top priorities in fostering the development of the formal sector are:

  • a thorough reform of labour market regulations along OECD best practices; and
  • accelerating the modernisation of capital markets to increase the benefits of formality and to stimulate investment, productivity and employment growth.

Making product markets competitive and reducing the administrative burdens for doing business in the formal sector should also remain an ongoing objective, in particular in the service sectors where competition remains less vibrant than in trade-exposed activities.

Labour market reforms

Labour market rules remain among the most rigid in the OECD area, even after the implementation of the 2008 employment package. Priority should be given to reforms to:

  • reduce the legal employment costs of low-skilled workers by containing the growth of mandatory minimum wages and creating a framework to differentiate minimum wages across sectors and regions;
  • continue to cut mandatory social contribution rates, and increase the role of voluntary saving schemes in financing the social security system;
  • make permanent labour contracts more flexible by reducing mandatory employment protection and promote negotiated forms; and facilitate more flexible forms of employment such as fixed-term contracts and agency work; and
  • eliminate size thresholds in the application of the labour law.

Capital market modernisation needs fuller financial transparency, but this raises challenges

Corporate finance markets are currently underdeveloped in Turkey. Enhancing financial transparency is the key requirement for the development of markets for medium-to-long term bank loans, corporate debt securities, private equity placements and listed equities. These capital sources all have a role to play in the development of higher productivity and more competitive firms in the formal sector. Three areas are particularly important and have been addressed by the authorities, but progress has been slower than expected:

  • transition to Basel II rules for corporate banking;
  • adoption of a new Commercial Code prescribing that companies of all sizes produce externally audited accounts; and
  • the modernisation of collateral registers and the collateral regime.

The authorities should identify obstacles to progress in these areas and maintain efforts to increase financial transparency for the development of formal capital markets.

Transition to stronger enforcement of rules should go hand-in-hand with the deepening of structural reforms

The enforcement of business regulations has recently been intensified and this is highly welcome. However, if structural reforms are not deepened in parallel, thereby reducing the costs of doing business in the formal sector, this may generate output and employment losses. The government should develop and implement a comprehensive “formalisation strategy” combining continuing structural reforms in top priority areas with the stronger enforcement of rules and regulations.


Performances of well-performing, squeezed and intermediary sectors



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:


Additional information                                                                                                  


For further information please contact the Turkey Desk at the OECD Economics Department at  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.




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