Turkey’s business sector dynamism has underpinned broad-based and inclusive growth in the 2000s.
However, the business sector is highly segmented, with a relatively small core of modern high-productivity
corporations, and myriad small, less formal and low-productivity entities. This hampers efficient resource
allocation and tends to entrench social inequalities. It also makes it difficult to build on-the-job human
capital for the large number of low-skilled. This segmentation needs to be overcome to raise productivity
in the informal, low-skill and low-productivity sector, and to facilitate resource transfers from low to
higher productivity businesses. This ought to be achieved by aligning Turkey’s formal regulatory and tax
framework with OECD best practice, rather than through “second-best” arrangements where noncompliance
with rules co-exists with selective subsidies to parts of the formal sector. Labour market and
business taxation reforms are particularly important to enable all categories of enterprises to operate
flexibly on a rule-based, level playing field and to achieve productivity enhancing and socially inclusive
restructuring.
