Türkiye’s traditional growth drivers, based on factor accumulation, will be limited since investment levels are already high and the demographic dividend is set to fade. Future growth will depend on higher productivity growth, but productivity has slowed in recent years and remains below the OECD average, undermining international competitiveness. The economy remains specialised in medium-tech sectors and lacks competitiveness in high-skilled manufacturing and services. A successful continuation of economic convergence will require improving the performance of the innovation system by boosting the diffusion of new technologies, for example through better research-business collaborations. In addition, the distribution of workers’ skills could be improved. Reducing barriers to high-quality lifelong learning would support the employability of older adults, while skills mismatches could be tackled by providing incentives for universities to better align their programmes to labour market needs, and by reducing the emigration of skilled workers. Finally, easing the significant barriers that remain to business dynamism, in particular through large interventions of the state in business activities, would boost productivity, FDI, and competitiveness.
OECD Economic Surveys: Türkiye 2025
Abstract
The next stage of economic convergence will require boosting productivity, enhancing competitiveness, and bolstering services exports. Improving Türkiye's growth prospects will require boosting total factor productivity growth, as the ability to grow through more capital and labour is shrinking. In general, growth can rely on increasing labour and capital inputs, or improving the efficiency in using these inputs. Over the last decades, Türkiye has benefited from a young population and relatively high capital accumulation (Figure 4.1) .There is still potential to increase women's employment (see Chapter 2). However, growth in the working age population is expected to decline steadily over the next 25 years (see Chapter 1). Consequently, margins to increase GDP through additional labour input will gradually narrow. The potential for further capital accumulation is also limited. The investment rate in Türkiye is already high relative to OECD countries: in 2022, fixed capital formation relative to GDP was 30% higher than the averages in Europe and the OECD. As a consequence, sustaining dynamic economic growth in the future will largely depend on improving productivity growth.
Contributions to potential output growth
Source: OECD calculations based on OECD Economic Outlook No. 116 long-term database.
GDP per employed person has increased faster in Türkiye than in other OECD countries in the past two decades, and in 2022 it was around the median of OECD countries when measured at purchasing power parity. However, the convergence process has recently slowed down and improvement in recent years has partly reflected imbalanced growth as discussed in Chapter 1. Indeed, when productivity is measured in terms of potential GDP per employed person, the convergence process has slowed down in recent years and productivity levels remain lower today than in other OECD countries (Figure 4.2, panel A and B). Low productivity within each sector has been the main factor behind the aggregate productivity gap vis-a-vis other OECD countries. The educational attainment of the workforce is still particularly low compared to other OECD countries. Investment has been flowing into less productive areas such as housing, while the share of investment in intellectual property products (around 10% of domestic fixed capital formation) has been half that of Europe (around 20%) over the last decade. Over the past 20 years, total factor productivity growth has been slow and has contributed less to growth than in similar countries (Dincer, Eichengreen and Tekin‐Koru, 2022[1]; Rab et al., 2019[2]; Yilmaz, Yasar and De Rosa, 2017[3]; OECD, 2023[4]; Acemoğlu and Üçer, 2020[5]; Sevinç et al., 2022[6]). Related to that, the economy remains specialised in relatively lower tech sectors. For example, the share of workers employed in skill-intensive manufacturing and services jobs remains one-third lower than in Europe (Figure 4.2, Panel C and Rab et al. (2019[2])).
Further development will require improving productivity, particularly in services sectors. Higher productivity will help shift Türkiye’s competitive edge from industries relying on low-cost labour to higher value-added production. This will allow to continue increasing wages durably and thus improving living standards. Today, Türkiye’s lack of competitiveness in these high-skilled manufacturing and services industries is reflected in the relatively low level of its exports’ technology intensity (Figure 4.2, Panel D). The share of high-technology exports in manufactured exports is particularly low, around 3.5% over the last 12 years against more than 20% in upper middle-income countries. However, progress has been made recently: the share of medium-high technology exports has increased from 32.2% in 2015 to 37.5% in 2024 and in recent decades Türkiye has gradually upgraded into advanced manufacturing (World Bank, 2022[7]). In services, transport and tourism represent around 80% of exports against less than half on average in OECD countries. Further upward integration into global value chains (GVCs) will require technological progress, workforce upskilling, and structural reforms to respond to global demand (OECD, 2023[4]).
Note: In Panel A and B, data are converted in USD at 2021 purchasing power parities and 2021 exchange rates. In Panel D, unweighted average of 38 countries for the OECD aggregate.
Source: OECD (2024), OECD Economic Outlook 116 database; Eurostat; and World Bank World Development Indicators.
This chapter discusses how Türkiye can boost total factor productivity growth and ensure a continued rise in living standards while improving competitiveness to boost manufacturing and services exports. Increasing productivity growth will require a three-pronged strategy: (i) encouraging innovation and promoting the adoption of new technologies, (ii) enhancing the skills of current and incoming workers, and (iii) reducing barriers to business dynamism, notably through trade openness.
Technological advancement and innovation can help unlock potential productivity gains and enable companies to gain a competitive edge in the international market (OECD, 2024[8]). However, the performance of the innovation system in Türkiye significantly lags behind that of its European peers (European Commission, 2024[9]). Although public and private investment in R&D activities in Türkiye has increased significantly over the last decade, it remains at almost half of the OECD average (Figure 4.3). This is reflected in relatively weak innovation outcomes. Only one-third of Turkish companies reported introducing an innovation in 2018-2020, compared to around half of the companies in the average OECD country (OECD, 2024[10]). Business-based R&D in Türkiye, resulting in patent applications with international significance, is relatively weak. Moreover, innovative outcomes are weak relative to spending, suggesting inefficient use of resources. Indeed, the number of patent applications relative to business-based R&D spending is among the lowest across OECD countries (see Figure 4.3, Panel C). Similarly, Türkiye's performance in other intellectual property indicators, such as trademarks and design applications, is considerably lower than the EU average (European Commission, 2024[9]). In some areas, though, the country is showing promising development, such as design applications and trademark registrations. This reflects growing awareness of the importance of intellectual property protection. Despite relatively lower patent applications compared to R&D spending, Türkiye is making progress in strategic sectors, including defence and high technology, where notable international patents have emerged. As a result, Türkiye performs relatively well compared to other middle-income countries and was one of only four other middle-income economies among the top 40 Global Innovators in 2024 according to the World Intellectual Property Organization’s office (WIPO, 2024[11]).
Innovation and the diffusion of new technologies depend on both firms’ capabilities and incentives. To promote innovation among Turkish companies, the authorities need to make (i) government support more targeted and efficient and (ii) promote wider adoption of new technology among Turkish companies by promoting collaboration between research institutions and companies.
4.2.1. Government support for R&D should become more targeted and efficient
The government has already recognised these challenges and has significantly increased its efforts to improve the innovation system in Türkiye, supported by numerous government initiatives and investments in this area. Indeed, overall government support for R&D has increased from 0.03% of GDP in 2006 to almost 0.23% in 2021, around the OECD average. This support consists of direct funds, tax incentives (see Box 4.1), and assistance through public procurement.
Direct funding of R&D is at the OECD average, and the government has rightly made a steadfast commitment to enhancing its research capabilities. In addition, there are a number of institutions providing grants through universities and other public and private organisations, supporting researchers with scholarships and awards. In recent years, new measures have been introduced to expand mission- and project-based grants. For example, the electric car “TOGG” received substantial investments through the project-based investment incentive program, including allocated land free of charge for the investment project.
Expanding research grants is a step in the right direction, but more needs to be done in terms of evaluating these programmes. Türkiye has recently built up a broad system of impact assessment for support programmes, and most programmes aimed at fostering technology-based entrepreneurship and innovation are evaluated for economic impact. Since 2021, the Scientific Technological Research Institution of Türkiye (TÜBİTAK), a national institution within the Ministry of Industry and Technology, has been implementing a Commercialisation Monitoring Process for supported projects through its Technology and Innovation Support Programs Directorate (TEYDEB). In addition, the Directorate General for State Aids of the Presidency of Strategy and Budget also monitors and evaluates the effective implementation of government support programmes conducted by the Ministry of Industry and Technology’s Impact Assessment Department and TÜBİTAK. Assessments and evaluations can be further expanded. One approach could be to adopt a system based on the experience of the Research Excellence Framework (REF) in the United Kingdom, which helps identify good practices and challenge areas, and assesses both the quality of scientific contributions and their social impact. Under this framework, institutions are required to submit “R&I impact case studies” demonstrating the impact of their R&I activities on wider society (OECD, 2023[12]; OECD, 2019[13]).
Note: In Panel B, OECD calculations based on the 2023 OECD survey of national Innovation Statistics and Eurostat Community Innovation Survey (CIS-2020).
Source: OECD (2024), Main Science and Technology Indicators (MSTI database), July; and OECD 2023 Innovation Indicators Dataset, based on the 2023 OECD survey of national Innovation Statistics and Eurostat Community Innovation Survey (CIS-2020).
In addition to direct funding, Türkiye is also using tax incentives to promote R&D (Figure 4.4). In general, R&D tax incentives and direct funding are equally effective in raising business R&D investment, and small, credit-constrained R&D performers tend to show a greater responsiveness to R&D tax support (OECD, 2023[14]). However, they are more effective at boosting investment towards incremental development than more transformational, higher spillover-potential knowledge (OECD, 2024[15]). Empirical evidence in Türkiye confirms that R&D tax incentives in the country increase business sector R&D intensity, but their effectiveness is limited, and government funding partially substitutes business investment in R&D which would have happened nonetheless (Tas and Erkan, 2024[16]). These findings suggest that there is room for better targeting R&D support to firms with higher innovation capabilities and growth potential. Evidence from OECD countries shows that R&D tax credits primarily favour incumbent firms rather than start-ups. Cash refunds, which could benefit start-ups, should be considered to strengthen the effectiveness of R&D tax credit incentives in Türkiye. Indeed, a new policy design analysis suggests that firms’ responsiveness to tax support is nearly twice as large when refund provisions are available, and three times as large when tax incentives are redeemable against payroll taxes and thus disconnected from the profit situation of firms (OECD, 2023[14]). As payroll taxes are also typically payable at a more frequent basis, such incentives allow for quicker and more regular tax relief payments than corporate tax offsets. For these reasons, payroll tax offsets may have a bigger effect on business R&D expenditure than other corporate tax offsets. The effect of tax incentives on experimental development is found to be more than three times as large as the effect on basic and applied research (OECD, 2023[14]).
The Twelfth Development Plan of Türkiye outlines the country’s strategic vision for research, development, and innovation, emphasising the importance of the green and digital transformation to enhance global competitiveness and achieve sustainable development goals. The plan highlights critical technologies, including Artificial Intelligence, Internet of Things, Big Data, Quantum Technologies, Cybersecurity, Advanced Materials, Robotics, Micro/Nano/Opto-electronics and Chips, Biotechnology, Hydrogen Technologies, Genome Editing, and Next-Generation Nuclear Reactors. These technologies are identified as enablers for achieving sustainable development goals, addressing global challenges such as climate change and the energy transition, and supporting Türkiye’s long-term economic and social development.
Direct funding
Selected grant schemes:
The Scientific and Technological Research Council of Türkiye (TÜBİTAK) is a major funding source of R&D and innovation support programmes in the country. The number of R&D project applications went from 260 in 2001 to 3035 in 2023. Beyond its role as a funding agency, TÜBİTAK plays a pivotal role in strengthening Türkiye’s national R&D and innovation ecosystem through its research centres and institutes, which focus on conducting research and developing technologies in strategic areas. Operating across a broad spectrum of activities, including university-industry collaboration, fostering the entrepreneurship ecosystem, supporting high-technology platforms, and advancing artificial intelligence projects, TÜBİTAK aims to enhance Türkiye’s global competitiveness and contribute to achieving sustainable development goals.
Türkiye participates in international funding programmes, such as the EU’s Horizon Europe Research and Innovation Funding Program.
The Turkish National e-Science e-Infrastructure (TRUBA) in Türkiye provides high-performance computing and data storage to research institutions and researchers.
The Ministry of Treasury and Finance (MoTF) has implemented two programs to foster innovation and support high-growth, technology-driven ventures that face financial access challenges. First, it has established Fund of Funds, including the Turkish Growth and Innovation Fund (TGIF) and the Development and Investment Bank of Türkiye Fund of Funds. Second, it includes direct resource transfer to venture capital funds, through the Tech-InvestTR Venture Capital Support Program in cooperation with TÜBİTAK. These initiatives drive investment in venture capital funds targeting SMEs and startups in strategic, innovation-focused sectors, aligning with national development plans.
Tax incentives
Income based tax incentives for R&D and innovation:
Technology development zones regime: CIT exemptions in Technological zones (for profits derived from the software activities or products developed as a result of the R&D activities).
5/B regime: Corporate income tax exemption for 50% of income from inventions and software development attributable to R&D performed in Türkiye.
Income tax exemption - Income exemptions (100%) on salaries of R&D, design, and support personnel on 'supported programs' declared by the Ministry or activities in techno parks.
Expenditure-based R&D tax incentives:
R&D tax allowance: Incremental R&D expenditures above the previous year level of R&D spending can be deducted at a rate of 50% from the CIT base.
Social security premium support (50%) - Half of the employer portion of social security premiums for R&D, design, and support personnel (with a ceiling) will be funded by the MoF.
Accelerated depreciation of R&D capital assets.
VAT exemption on machines and equipment acquired for R&D and design activities.
Türkiye should also evaluate the effectiveness of its so-called “patent box” (Regime 5/B). The patent box allows companies to apply a lower rate of corporation tax to profits earned from patented inventions. While this scheme supports local firms and SMEs, contributing to enhanced innovation and research, there are concerns that patents are likely to accrue mainly to multinational firms. Patent boxes may push firms to focus on innovations that lead to outcomes susceptible to protection by IP rights, thereby distorting the focus towards more applied research on products closer to market introduction (Akcigit, Hanley and Serrano-Velarde, 2013[17]; Appelt et al., 2016[18]). Moreover, patent boxes could distort firms’ incentives to protect its intellectual property, encouraging firms to apply for patent protection when they might not have done so in the absence of the measure.
Innovation could be supported by easing access to new sources of capital. Currently, equity financing is low in international comparison and venture capital expenditures are among the lowest in Europe relative to GDP (European Commission, 2024[9]). Empirical research confirms that ensuring easier access to equity capital is essential for innovation, especially for young firms. Access to equity capital is also associated with higher MFP growth for firms below the productivity frontier (Corrado et al., 2021[19]; Andrews, Adalet McGowan and Millot, 2017[20]). OECD research confirms that the productivity of Turkish companies would benefit from increasing the availability of venture capital (Sorbe et al., 2019[21]). Some remaining distortions implied by corporate taxation disincentivising investment financed by equity could be eased. For example, Türkiye has reduced the debt-bias in the corporate tax system by introducing in 2015 an allowance for corporate equity via a notional interest deduction on half of newly-issued equity. As discussed in the 2021 OECD Economic Survey of Türkiye, this allowance could be raised and extended to retained earnings (OECD, 2021[22]). More generally, continuing efforts which lower risk premia, such as the recent amelioration in the predictability of the macroeconomic policy framework (see Chapter 1) and improvement in the economic institutions, will help to stimulate the demand for equity capital, thereby reducing the reliance on debt to finance capacity-enhancing investments.
Direct government funding and tax support for business R&D, 2021
Note: Data on government tax relief includes subnational tax support for Canada, Hungary, and Japan.
Source: OECD (2024), OECD R&D Tax Incentives Database, https://oe.cd/rdtax, July 2024.
4.2.2. Promoting knowledge transfer and technology diffusion
Despite relatively generous government support, there is only limited adoption of new technology among Turkish companies. More needs to be done to promote links between research activities and broader technology adoption.
One important way to promote technology diffusion is to involve the business sector in the innovation process. This makes research more applicable, increases the chances of successful adoption, and aligns scientific progress with industry or societal needs. However, despite several support programmes such as the University-Industry Cooperation Support Program, collaboration between science and business is an area that Türkiye needs to develop further. Only around 0.8% of higher education expenditure on R&D is funded by businesses, one of the lowest rates in the OECD (Figure 4.5, Panel A). Additionally, the low rate of innovative SMEs collaborating with others and the low number of public-private co-publications indicate a significant gap in research collaboration between the public sector and private enterprises (European Commission, 2024[9]). In 2024, public-private co-publications per capita were only one-tenth of the European average. Furthermore, international research collaboration, which can provide opportunities for firms to absorb the latest technologies and scientific knowledge from the global frontier, is also weak (see Figure 4.5, Panel B).
Programmes that promote research-business collaboration should be expanded. Empirical research identifies financial support as one of the main barriers hindering university-industry collaboration in Türkiye (Kleiner‑Schaefer and Schaefer, 2022[23]). Financial support can help improve companies' absorptive capacities, enabling them to make better use of external technologies. While there are already programmes in Türkiye that promote collaboration (Box 4.1), their share needs to be expanded (RIOT, 2020[24]). One example of an effective science-industry program is Austria's COMET Competence Centre Programme, which funds cooperation between science and industry and makes a significant contribution to the innovative output of the companies involved (Dinges, 2015[25]).
Note: In Panel A, OECD estimate for the OECD aggregate (see the documentation on MSTI for details). In Panel B, unweighted average for the OECD aggregate.
Source: OECD (2024), Main Science and Technology Indicators (MSTI database), July; and OECD calculations based on Scopus Custom Data, Elsevier, Version 1.2024, April 2024.
Another way to incentivise such cooperation and collaborative research projects is through performance contracts in higher education institutions (HEIs). These contracts set performance targets and tie a portion of block funding to reaching those targets, aiming to promote knowledge transfer by providing incentives for universities and public research institutions to engage with industry and commercialise research results. The share of block funding subject to performance contracts varies from 1% in Denmark and 4% in France to 7% in Latvia and the Netherlands, and up to 94-96% in Austria and 100% in Finland (OECD, 2019[26]). For example, in Austria, the government uses a "funding cooperation indicator”, which allocates funds to projects that aim to increase universities’ cooperation activities. These funds are competitively allocated; universities must apply for the money to fund up to one-third of the costs of projects designed to strengthen collaboration/cooperation (CHEPS, 2015[27]).
In the OECD, new policy approaches to promote science-industry links are shifting toward a more interactive, longer-term model of knowledge “co-creation” that involves multiple stakeholders from industry, civil society, research, and government and aims to solve broader societal challenges (OECD, 2019[28]). For example, collaborative laboratories in Portugal integrate activities of research institutions and private companies, while the French LabCom programme supports the establishment of joint labs for universities/PRIs and firms (OECD, 2019[26]).
Another important tool for promoting knowledge transfer between academia and business is the mobility of human capital. This involves creating conditions for two-way mobility, allowing researchers to temporarily join the private sector and business sector researchers to participate in university activities. This mobility is important, as OECD research has confirmed that start-up firms founded by students or academics significantly contribute to the commercialisation of knowledge developed through public research (OECD, 2019[26]). Academic entrepreneurship is a significant component of innovative entrepreneurship. Türkiye provides incentives to promote mobility and knowledge transfer from academia: for example, 95% of the salaries of design and support personnel with PhD or a master’s degrees in fundamental science working in R&D centres and technology development zones are exempt from income tax through the Law on Supporting Research, Development, and Design Activities. Approaches like the Sector on Campus Program also promote collaboration between universities and the private sector by having credit-bearing courses taught by industry experts. However, more needs to be done to foster mobility, as more than 95% of researchers with a doctorate remain working in universities. This is in sharp contrast with countries like Austria or Korea, where one-third of researchers with a doctorate work in the business sector (OECD, 2023[29]).
OECD countries have implemented various measures to promote researchers' mobility, including industrial PhD programmes based on joint supervision and co-financing; sabbatical periods for professors; professional secondments for university professors; and adjunct professorships for industry professionals. Türkiye’s Industrial PhD Fellowship Program, which provides fellowships for PhD students and employment grants for the private sector, could be expanded. For example, Portugal launched a contract for the legislature 2020-2023, with the expectation that at least 50% of new doctorates by 2030 will be carried out in ‘co-work’ environments with a diverse range of public and private institutions (OECD, 2023[29]). This program aims to promote the professionalisation of researchers in academia. Norway has developed a new national strategy for recruiting researchers and career development with a strong emphasis on intersectoral mobility, including schemes to increase cooperation between academia and industry (OECD, 2023[29]).
Another significant barrier to university-industry collaboration according to Turkish companies is a lack of information, as firms have insufficient knowledge about collaboration opportunities (Kleiner‑Schaefer and Schaefer, 2022[23]). Türkiye has in place incentives such as the Infrastructure Information System (LABS), which provides information about laboratories, and the University-Industry Collaboration Centers Platform (ÜSİMP), which works to transform industries into technology producers and exporters while facilitating closer ties between academia and industry. Established in 2007, ÜSİMP aims to foster collaboration and technology transfer, but many firms remain unaware of the potential benefits of engaging with academic institutions. More generally, this lack of information calls for increased attention to technology transfer offices (TTOs) in Türkiye, which are intermediary organisations placed in universities to implement knowledge transfer policies. Their numbers should be expanded and complemented by digital platforms that promote and organise interactions among different actors—facilitating matchmaking between academic and industry partners (OECD, 2019[26]). Other tools include strengthening outreach activities to raise awareness, such as conferences and seminars. Networking events, such as workshops and fairs where firms can express their technology needs and scientists can present the results of their research, can also help promote collaborations.
Another potential tool to better transfer knowledge to companies is the open innovation approach, which allows firms to use external knowledge and external paths to market to advance and commercialise their technology. This approach will create a level playing field among firms in accessing relevant data, as data portability has the potential to boost competition and foster data-driven innovation. Evidence from current initiatives across OECD countries suggests that coordinated efforts and the establishment of common standards facilitated by governments can promote the adoption of data portability (Reimsbach-Kounatze, 2024[30]).
Empirical analyses across countries show that skills are at the forefront of successful innovation and technology adoption (Andrews, 2017[31]). Qualified personnel help innovative firms expand R&D, collaborate with research institutions, and maximise the returns on innovation.
Türkiye has made significant progress to improve the skills of the future workforce as tertiary education participation has been increasing significantly. Still, many challenges lie ahead. According to the European Innovation Scoreboard, Türkiye lags behind other countries in its human resources (European Commission, 2024[9]). Turkish companies in the survey also confirmed that human resources represent a major challenge for successful digital transformation and technology diffusion (Gajo and Akyuz, 2023[32]). The number of tertiary-educated graduates is increasing steadily but it remains relatively low and their skills do not fully reflect labour market demand. A relatively large number of educated individuals leave Türkiye each year. The country’s access to a workforce with digital skills beyond basic proficiency is significantly lower than in other EU countries, and it lacks ICT specialists (European Commission, 2024[9]). Participation in lifelong learning can be further strengthened given that current trends in Türkiye suggest that in order to ensure the country’s talent transformation, 21.1 million workers will need to improve their skills in the face of new technological trends (McKinsey, 2020[33]).
4.3.1. Better matching graduates’ skills with labour market demand
Tertiary education is essential for stimulating the adoption and improvement of technological innovations in an increasingly knowledge-driven global economy. Tertiary educational attainment in Türkiye remains low compared to many other OECD economies (OECD, 2024[34]). Higher earnings for tertiary-educated workers suggest the need for more graduates with higher education. The relative earnings of tertiary-educated workers compared to those with below-secondary education is around 50% higher, close to the OECD average (OECD, 2024[35]). Additionally, the share of occupations requiring at least a college degree is estimated to increase by at least one percentage point, corresponding to an additional 1.6 million tertiary-educated graduates needed by 2030 (McKinsey, 2020[33]).
Improving the quality of graduates and aligning their skills more closely with labour market needs can importantly complement efforts to increase the number of graduates. Türkiye has significantly increased the number of graduates since 2006, partially satisfying demand, but also leading to higher mismatches. Some empirical research suggests that the sharp increase in university graduates has resulted in a high likelihood of mismatch, especially among recent graduates (Ege and Erdil, 2023[36]). Efforts are currently under way to address the issue. The new skills transitions are currently prioritised by the Higher Education Council and the higher education system has recently been updated at the programme level to enhance digital and green skills in particular. Türkiye is pursuing initiatives to improve graduates’ skills levels and reduce skills mismatch through programmes such as METEK III, funded jointly by the EU and Türkiye, which focuses on improving vocational education for example by setting up quality assurance boards in 25 provinces and broadening vocational teacher training. An interesting example in this regard is the recent reform of vocational education in Spain in 2022 which enabled flexible educational pathways from micro-trainings to specialised certifications, encouraged the recognition of past professional skills acquired through work experience to advance workers’ qualifications, emphasised career guidance, and promoted international mobility for vocational graduates (OECD, 2023[37]). Initial results suggest that the reform has led to a significant reduction in youth unemployment and sped job entry for new graduates.
Around half of all tertiary enrolments are in short-cycle courses provided by vocational and technical tertiary institutions, which are perceived to be of lower quality and status than bachelor’s programmes (Kitchen, H. et al., 2019[38]). A relatively low share of tertiary graduates holds degrees in natural science, mathematics, ICT, and engineering (STEM) fields (see Figure 4.6). In 2022, around 70% of companies in Türkiye reported difficulties finding the talent they need, particularly in the IT sector (Manpower, 2022[39]). In contrast, Türkiye has one of the highest shares of students in the arts and humanities among OECD countries and a large proportion studying humanities, business, administration, and law (OECD, 2024[40]). However, as noted in the previous OECD Economic Survey of Türkiye, these study choices do not align well with employment outcomes. For example, more than 60% of business management graduates earn only around the minimum wage (OECD, 2023[4]). Türkiye has the largest skills gap for workers with tertiary education among OECD countries. There is a persistent mismatch between the skills acquired in the education system and the requirements of the labour market, especially those relevant to digital transformation (European Commission, 2023[41]).
Share of tertiary education graduates in fields of natural science, mathematics, ICT and engineering, 2022
Note: Tertiary education graduates cover those with bachelor's, master's and doctoral or equivalent degrees.
Source: OECD (2024), "Education at a Glance 2024: OECD Indicators".
These mismatches have negative consequences for the Turkish economy. Empirical research by the OECD confirms that higher skills mismatches are associated with lower labour productivity due to a less efficient allocation of resources, as more productive firms find it more difficult to attract skilled labour at the expense of less productive firms (Adalet McGowan, 2015[42]). At the individual level, it affects job satisfaction and wages, with earning penalties for mismatched workers in Türkiye being among the highest in the OECD. Overqualified workers in Türkiye earn around one-fourth less than well-matched workers with the same qualifications (OECD, 2017[43]). Tertiary education must therefore ensure that graduates develop the skills needed in the labour market to maximise the return on their human capital investment.
One way forward is to influence students' field of study choices by providing high-quality data and analysis about graduate labour market outcomes. Türkiye has already made significant progress in this regard. The "Mesleğim Hayatım Projesi" (My Job, My Life Project) carried out by the Ministry of National Education provides relevant information. Moreover, an innovative online tool developed by the Human Resource Office of the Presidency helps students obtain information on labour market outcomes of different study choices, offering detailed information on expected wages and time to find a job. As highlighted in the previous OECD Economic Survey of Türkiye, this online tool should be expanded and promoted through awareness campaigns. Another complementary approach could be to implement a signalling framework for quality assessment. For example, England’s Teaching Excellence Framework scores institutions based on student feedback and employment outcome metrics (Gunn, 2018[44]).
Widespread information should also be further promoted through effective career counselling. Türkiye has established the legal and administrative infrastructure to ensure students have access to career information. The Ministry of National Education employs school psychologists and counsellors in all secondary education institutions, with an average of 1.5 guidance counsellors per school, to carry out activities aimed at guiding students toward higher education and employment. However, while Türkiye has made significant progress in providing career information, advice, and guidance, the effectiveness of counselling can still be improved. In particular, the system is hindered by a lack of suitably trained and competent guidance counsellors, particularly in state schools (Yesilyaprak, 2017[45]). One solution could be to strengthen employer engagement in career guidance. International evidence shows that secondary school students whose career guidance is enriched by engagement with employers and people in the workforce often experience better outcomes in adult employment (OECD, 2021[46]). For example, in the Canadian province of New Brunswick, the provincial government collaborates with employers to help primary and secondary school students understand and prepare for employment opportunities in areas of strategic economic importance. In some OECD countries, national STEM initiatives are common, designed to help students see the breadth of careers linked to Science, Technology, Engineering and Mathematics (OECD, 2021[46]).
University students in Türkiye do not pay tuition fees, as they were abolished in 2012. No tuition fees are charged to daytime or distance education students enrolled at state universities, provided they do not exceed the standard duration of their programmes. The tuition fees for these students are covered by the state. Reintroducing tuition fees, particularly for programmes with poor labour market outcomes for graduates, could be considered. For example, the “Job-Ready Graduates" package in Australia introduced in 2020 aims to align university funding with labour market needs by incentivising students with both reduced fees to enrol in courses that address national skills shortages, such as STEM, teaching, and nursing, and higher fees for courses deemed less aligned with job market needs (IRU, 2022[47]).
In addition to measures influencing students' choices, the authorities should strengthen incentives for tertiary education institutions to offer courses more aligned with labour market needs. Today, the current tertiary funding system in Türkiye does not sufficiently reflect labour market demands. The financial resources of state universities mainly depend on the national centralised budget. The amount of financial resources allocated to a university is determined after a series of negotiations with the central government each year, based on the previous year’s budget. While performance indicators are generally used in Türkiye, in practice universities determine their own performance indicators. As a consequence, performance-based budgeting could be further expanded, strengthened and made more homogenous. (Altundemir and Gungor-Goksu, 2017[48]).
Several options are available to address this. One would be to link public funding of higher education institutions to performance indicators such as the labour market outcomes of graduates (see Box 4.2). Tying funding to these outcomes would encourage universities to offer more programmes aligned with labour market needs. Another strategy is providing one-time capital funding to support the development of skills that are in high demand. Moreover, several studies of performance funding in Europe find evidence that performance funding has led to higher rates of faculty research productivity. This is the case in Denmark, the Netherlands, Norway, Switzerland, the United Kingdom and Hong Kong (OECD, 2020[49]; Dougherty, 2019[50]).
Many OECD countries have moved away from enrolment-based funding systems for tertiary education and instead align funding models with performance goals. Some countries include graduates’ labour market outcomes in the funding formula.
In the US, most states now have a funding formula or policy in place to allocate a portion of funding based on performance indicators, including measures of the labour market success of recent graduates. For example, in Minnesota, 5% of base funding is reserved until institutions meet three out of five performance goals. For Minnesota State Colleges and Universities, one of these goals is to increase the employment rate of graduates by at least 4%. In Florida, the university performance funding model adopted by the Board of Governors allocates a part of funding based on the percent of bachelor’s graduates employed and/or continuing their education one year after graduation, as well as on the median average full-time wages of undergraduates employed in Florida one year after graduation.
In Finland, the funding models of universities reflect the labour market outcomes. In the funding formula, the weight of the provision of university’s degree programmes is 4% for labour market outcomes of graduates. This weight is 6% for Universities of Applied Sciences.
France allocates 20% of funding for higher education institutions on the basis of performance measures, including graduate employment.
Estonia uses a new funding model for higher education which will allocate up to 20% of funds based on performance. One of the six indicators is the labour market outcomes of graduates.
Source: OECD (2017), Financial Incentives for Steering Education and Training, Getting Skills Right, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264272415-en
4.3.2. Lifelong learning can address skill gaps to promote innovation
Targeted and relevant adult learning can help address skill gaps, particularly among older adults whose qualifications are more exposed to the risk of depreciation as the demand for different skills is constantly changing. This learning should be lifelong, accessible to everyone at any age, and life-wide, encompassing learning outside formal education systems.
The authorities are aware of the importance of lifelong learning and have launched several programmes to promote it. There are a total of 1 032 non-formal education institutions in all provinces and districts of Türkiye, including 1 000 official public education centres and 32 maturation institutes, and the e-Yaygın online platform provides thousands of certifiable courses. All HEIs in Türkiye have Continuous Education Centres that offer certified academic, vocational, and professional courses, as well as seminars and conferences for all ages and subjects. In addition, public education centres within the Ministry of National Education provide training for adults and the remote learning platform Public Education Centers Information Network (HEMBA) has been launched. HEMBA aims to strengthen the IT infrastructure of Public Education Centers (PECs), enhancing digital education opportunities and enabling the digital transformation of lifelong learning. This initiative supports the integration of individuals across Türkiye, particularly disadvantaged groups, into the information society by equipping them with digital skills. Training in specialised areas is also available in Applied Research Centres (OECD, 2020[51]). As in other OECD countries, employers (40%) are the main providers of adult learning in Türkiye, followed by non-formal education and training institutions (30%) and formal education and training institutions (14%).
Participation in lifelong learning in Türkiye has increased significantly but remains much lower than in other OECD countries (Figure 4.7, Panel A). The level of training provided by Turkish companies, including digital training, is among the lowest in the OECD. The prevalence of training provision declines with firm size, as in other countries, but the share of firms providing ICT training is the lowest regardless of size (Figure 4.7, Panel B).
The potential benefits of adult training include greater employability and access to better quality jobs, but only if training programmes are of high quality to ensure successful learning outcomes. Therefore, the quality assurance of these training programmes is crucial. Türkiye adopted its National Qualification Framework (NQF) in 2015 to accommodate all quality-assured qualifications. However, principles such as self-assessment and external evaluation remain limited in Türkiye, and greater attention to adult learning will require new methods of recognition that go beyond the current qualifications outlined in the NQF (ETF, 2021[52]). Additionally, the impact of the adult learning system in Türkiye is weaker than in other OECD countries, as measured by a multi-dimensional concept that includes self-reported satisfaction, skill use, labour market outcomes, and wage returns from training participation (OECD, 2019[53]). Therefore, more must be done to strengthen the quality assurance of its programmes, and training providers in Türkiye could benefit from support in implementing quality measures, as well as monitoring and evaluation systems (see Box 4.3).
High-quality training programmes should be expanded. Authorities can either expand regular funding transfers or provide one-time grants to promote specific adult learning programmes. Most financial incentive schemes across OECD countries include a co-financing element where employers and individuals contribute to part of the cost to reduce deadweight losses. For example, many OECD countries use training levies to incentivise investment in training. Firms can "earn back" their levy contributions by providing training that meets the fund’s criteria (OECD, 2019[54]). Another way to address capacity constraints is to use economies of scale by providing training in collaboration with other enterprises. In Ireland, “Skillsnets” funds demand-led training through a network model and is largely operated with funding from a national training levy. Company networks representing specific geographic regions or industries jointly deliver training programmes tailored to labour market demands (OECD, 2019[53]).
Many adults face barriers preventing them from participating in adult learning, such as a lack of time, financial resources, or limited flexibility in training provision. In Türkiye, nearly one-third of individuals cited scheduling as the reason for not participating in training (Eurostat, 2022[55]). Many OECD countries offer flexible learning provisions, including distance learning or modular and/or credit-based formats. Another approach is to provide statutory education and training leave. In Belgium, for instance, full-time private sector employees participating in recognised training and education programmes have the right to up to 180 hours of training leave per year (OECD, 2019[53]). Many other OECD countries have similar leave programmes (CEDEFOP, 2024[56]). For example, in Austria, the ‘Bildungskarenz’ programme provides a 2-12-month training leave paid at the level of unemployment insurance. Another option is a personal account scheme, allowing individuals to save a certain amount of time per year worked for training purposes. For example, France uses such accounts, enabling employees to use training hours to acquire recognised qualifications or basic skills, and the European Union is recommending individual learning accounts for Member States (OECD, 2017[57]).
Note: In Panel A, data refer to the share of adults aged 25 to 64 participated in education and training in the last 12 months. In Panel B, data refer to all sectors except agriculture, forestry and fishing, and mining and quarrying, and financial sector.
Source: Eurostat (2024), Education and training (database); and Digital economy and society (database).
Certifications and quality labels to ensure minimum quality levels. (i) Switzerland's "eduQua" certificate for training providers was introduced in 2000 because the adult education sector in Switzerland was highly heterogeneous, dominated by many small private providers, and lacked nationwide regulation. (ii) In 2018, the French government passed a law requiring all training centres seeking public funds to obtain a new quality certificate—Qualiopi. If non-compliance is detected, the label may be suspended or withdrawn.
Quality awards and prizes. Rather than adopting certification, quality label systems, or external evaluations, some European countries rely on awards and prizes to foster a quality culture in the adult learning sector. For example, in Finland, the Ministry of Education and Culture organises an annual quality award competition for adult education providers. The rationale behind the initiative is to identify best practices that providers across the country can emulate.
Publicising information on providers' quality. In the United Kingdom, the Department for Education publishes summary tables of outcome-based success measures, including sustained employment and learning rates, by provider, on its website. In France, certain public institutions that finance training must review the quality of the training providers they work with and make the outcomes from the review process publicly available.
Improving the quality of teaching staff. The Swiss Federation for Adult Learning introduced the "Train the Trainer" program in 1995. In 2007, Austria established its Academy of Continuing Education (WBA) as a validation system for the qualification and recognition of adult educators.
Source: OECD (2021), Improving the Quality of Non-Formal Adult Learning: Learning from European Best Practices on Quality Assurance, Getting Skills Right, OECD Publishing, Paris, https://doi.org/10.1787/f1b450e1-en
Türkiye should also increase awareness of training support programmes among firms. Various policies, such as awareness campaigns and engagement with social partners, can effectively motivate adults to participate in education and training. Promoting the benefits of adult learning, providing high-quality information, and offering individualised advice and guidance services are some of the ways policies can encourage higher participation. To reach the widest possible audience, campaigns can be delivered through various media channels. In Argentina, for example, the Hacemos Futuro program reaches out to community leaders via WhatsApp (OECD, 2019[53]).
4.3.3. Attracting skilled workers, including returning migrants
Highly skilled foreign workers can also help channel the diffusion of advanced technologies and knowledge embodied in these workers. This has led many OECD countries to design policies to attract immigrants with specific skill sets to support growth and innovation in key sectors. However, talent attractiveness is complex and depends not only on economic factors but also on the ability of migrants to integrate into the host society, as well as the wider economic and social environment.
According to the OECD Talent Attractiveness Index, Türkiye ranked among the least attractive countries for highly skilled migrants in 2023 (Figure 4.8). Factors which particularly penalise Türkiye include the framework for long-term residence, the skills environment and inclusiveness. This is reflected in the low share of high-qualified foreigners: for example, the share of foreign doctorate students is less than half the EU average (European Commission, 2024[9]). Moreover, many highly skilled individuals are leaving Türkiye; the number of bachelor’s degree graduates leaving increased by more than 50% between 2011 and 2020 (Metin, 2023[58]). Additionally, Türkiye is losing its talent to international competition. In particular, AI talent is in high demand and remains a highly mobile workforce, with countries competing for a small pool of highly skilled AI workers.
Improving overall talent attractiveness is a long-term goal, as some areas, such as earnings for highly skilled individuals, will require time to converge with the best-performing countries. Nevertheless, implementing less stringent migration policies can help reduce the gap somewhat compared to the leading countries. Policy simulations show that Türkiye can reduce the difference in attractiveness for highly skilled workers compared to best performing OECD country by around 15% (OECD, 2023[59]).
Türkiye has taken several steps to attract highly skilled migrants. For example, the authorities introduced the “Turquoise Card” as an alternative to annually renewing residence permits. This card is a work permit valid for an indefinite period for foreigners with high qualifications and their families. In addition, recent years have seen the introduction of new programs to attract highly skilled migrants. The International Talent Transfer program aims to accelerate and simplify work permit applications for foreign technology experts. The Tech Visa program provides several benefits for tech employees, such as income tax exemptions and a faster work visa process for family members.
Relaxing migration rules for highly skilled workers could go even further. One barrier to international recruitment is friction in matching, which may be due to information shortfalls and processing delays. Therefore, some OECD countries allow highly skilled migrants to enter the country and seek work, thus improving the quality of the match between job seekers and employers. For example, Chile introduced an “International Orientation Visa” for foreigners with a postgraduate degree from one of the top 150 academic institutions worldwide, allowing residence and work in Chile for up to 12 months. The Dutch “Orientation Visa” is available for master’s level graduates of high-ranked universities (OECD, 2023[60]). However, those visas have tended to be difficult to obtain and have encountered limited success. Since Türkiye has many visa exemptions, an alternative would be to continue simplifying its processes for high-skilled employment in order to streamline administrative procedures, reduce costs and time burdens for skilled professionals, and make Türkiye a more attractive destination for global talent. Recent regulatory changes for high-skilled employment have already made significant progress in that regard. Notably, the Implementing Regulation of the International Labor Force Law, enacted in 2022, has allowed qualified foreign professionals to apply for work permits from within the country. Additionally, as of October 2024, the timeframe for submitting these applications has been made more flexible, allowing submissions at any point during a foreign national's legal stay in Türkiye.
There is also potential to strengthen the processes for recognising foreign qualifications even further. Türkiye has a functioning system for the assessment and recognition of foreign academic qualifications at the associate, bachelor’s, and master’s levels, managed by the Council of Higher Education (CoHE). At the PhD level, recognition is by the Inter-University Council. The statutory processing time for the assessment of foreign qualifications in Türkiye is 90 days. Some OECD countries have taken steps to speed up the recognition procedure, as employers need to fill shortages quickly. For example, Sweden’s fast-track scheme was developed to accelerate the entry of skilled immigrants into shortage occupations such as engineering, technical fields, and the medical profession (OECD, 2017[61]). Additionally, Lithuania provides a shorter statutory period (30 days) for foreign higher education qualifications. Norway has established a fast-track “turbo evaluation” for employers to evaluate job applicants with foreign higher education credentials in non-regulated professions. The online-based procedure is free of charge and verifies within five working days the discipline of the applicant’s qualification, whether the education is accredited in the country in question, and whether the qualification is equivalent to a Norwegian degree (OECD, 2017[61]).
An important source of potential skilled labour is Turkish citizens who have emigrated abroad. These return migrants can bring home skills, networks, and financial capital, which can help spur innovation and growth (OECD, 2008[62]). The number of Turkish emigrants living abroad has been expanding rapidly over the last decade. According to recent estimates, over 6.5 million Turks reside abroad, with around 5.5 million living in Western European countries (Ministry of Foreign Affairs, 2023[63]). Working age Turkish-born emigrants with tertiary education living in OECD countries numbered about 290 000 in 2015. Among graduates, information and communication technology (ICT) graduates, who are in highest demand in Türkiye, are the ones most likely to leave (Turkstat, 2024[64]). Türkiye has also experienced a net outflow of AI talent (OECD, 2024[65]).
OECD Talent Attractiveness Index, 2023
Note: The OECD talent attractiveness framework is the inclusion of migration policy as a factor to measure attractiveness. The index is averaged based on seven dimensions (quality of opportunities, income and tax, future prospects, family environment, skills environment, inclusiveness and quality of life) with equal weights, and does not include the health system performance dimension.
Source: OECD (2023), "What is the best country for global talents in the OECD?", Migration Policy Debates, N°29, March.
Attracting talented citizens back home and providing reintegration assistance have become integral parts of migration management in many OECD countries. The Presidency of Turks Abroad and Related Communities (YTB), established in 2010 to coordinate Turkish citizens living abroad, is developing schemes to attract highly skilled workers back to Türkiye. This includes initiatives in collaboration with private companies, universities, and public institutions to encourage highly skilled children of Turkish emigrants to continue their professional careers in Türkiye. However, compared to some other OECD countries, Türkiye has not established specific schemes to support returnees and their families in reintegrating into society (Sökmen, Kaya and Sánchez-Montijano, 2018[66]).
The longer migrants have been abroad, the less they know about the situation and opportunities in their home country. Therefore, it is important to develop a comprehensive strategy to maintain ties with the large expatriate community. The Irish government has created a “Global Irish” online hub with a regular newsletter that includes details on job, training, and business opportunities in Ireland. Estonia has an internet portal where talented young adults studying abroad can find information about work and internship offers in Estonia, and companies can use the contact network to find employees among those studying abroad (OECD, 2013[67]; OECD, 2018[68]).
One readily available group of high-skilled immigrants are international students, as they have already acquired some cultural and linguistic knowledge during their studies. The number of international students studying in Türkiye grew from around 50 000 in 2013 to over 300 000 in 2023. Scholarships and tuition fee support are offered to international students. Students are allowed to apply for work permits after completing their first year of undergraduate studies and, if granted, may work part-time while studying according to their level of education.
Most OECD countries encourage the temporary or permanent immigration of international students after graduation by providing facilitations in acquiring residence permits. Türkiye enables international students to stay and look for a job upon graduation, with an additional 12 months granted upon request. In Denmark, Estonia, Greece, and Luxembourg, the extension of a study permit is automatic, without request, and students can stay for up to 48 months in Australia. Canada and New Zealand, for example, facilitate the settlement of foreign students who have studied at their universities by granting them additional points in their immigration point systems (OECD, 2011[69]). Spain has improved conditions for students to stay and work post-graduation to encourage employment and self-employment among international graduates from Spanish universities, and Australia has extended post-study work rights for international graduate students from Australian higher education providers in targeted sectors (OECD, 2023[70]).
Türkiye is one of the largest countries worldwide hosting people who fled their countries. In particular, it currently hosts some 2.9 million registered Syrians “under temporary protection” (UTP). Türkiye has already made significant and successful efforts in educational integration, increasing school enrolment, improving Turkish language skills, and boosting academic performance among Syrian children. For example, programmes such as PIKTES funded by the European Union aims to facilitate the integration of Syrian children under temporary protection into the education system through measures such as Turkish language instruction and revision curricula. Approximately 870 000 refugee children are now enrolled in schools (European Commission, 2023[41]). Recent developments in Syria suggest that a large share of the Syrian population could eventually return in their country safely, which is a priority of the Turkish government and would be positive for Syria. There could be potential to increase the skills of the labour force by strengthening labour market policies for remaining immigrants and refugees who lack the skills needed in the local labour market. Efforts could be intensified to improve remaining refugees’ access to the labour market, particularly formal employment, which has been challenging in the past (European Commission, 2023[41]). In this regard, as of October 2024, some exemptions have been introduced to allow specific groups, such as humanitarian permit holders, to formally join the labour market.
Weak business dynamism hampers productivity. Business dynamism in Türkiye as measured by firms’ entry and exit rates as a fraction of the population is one of the lowest in the OECD (Figure 4.9). In addition, it has fallen more than in other countries since the Global Financial Crisis (Calvino, Criscuolo and Verlhac, 2020[71]). Recent evidence also suggests that business dynamism in Türkiye has declined in the last ten years due to a lack of competition and a particular slowdown in the productivity growth of laggard firms (Akcigit et al., 2020[72]).
Number of newly registered and deregistered companies with limited liability, per thousand of working-age population, 2022
Note: Based on administrative data from business registries and statistical agencies. The new and closed business density rates are calculated as the number of new or closed limited liability companies (LLCs) divided by 1000 people aged 15-64. Data for Canada covers Quebec and Nova Scotia only.
Source: World Bank (2024), Entrepreneurship Database.
One of the main barriers to stronger business dynamism is the restrictive regulatory framework. Türkiye’s overall regulatory framework is the most restrictive in the OECD, as indicated by the OECD product market regulation indicator (Table 4.1 and OECD (2023[73])). The involvement of the government is more significant than in other OECD countries in some areas of the economy: state-owned enterprises (SOEs) are relatively more prevalent and their governance framework does not foster a level playing field with private companies. In parallel, barriers to domestic and foreign entry in some sectors limit competition, although the country compares relatively well regarding competition barriers in digital markets. The administrative and regulatory burden for new companies is relatively more significant. Along with the regulation of product markets, employment protection is also particularly tight in Türkiye. In general, evidence has suggested that the combination of restrictive product market and labour market regulations in OECD countries (OECD, 2020[74]) can be particularly harmful not only to productivity (Andrews, Criscuolo and Gal, 2016[75]), but also to investment (Égert, 2017[76]) and employment (Griffith, Harrison and Macartney, 2007[77]; Nicoletti and Scarpetta, 2005[78]; Gal and Theising, 2015[79]).
Türkiye will be able to fully leverage improved productivity only if it can lift these barriers to the efficient allocation of factors. In that regard, there are two priorities which would support the country’s use of its important resources. First, it can boost business dynamism by reducing barriers to domestic and international entry, promoting competition in product markets, and improving the efficiency of the insolvency regime. Second, it can improve the governance environment to bolster competition and trust, and ensure the application of the rule of law to promote confidence and thus investment in all forms of capital.
4.4.1. Facilitating firm entry through a simpler administrative and regulatory framework
Reducing administrative barriers on firm creation would support business dynamism. High costs, lengthy procedures, and the large number of administrative procedures make it hard to set up a company and discourage formalisation (Bripi, 2015[80]). Among OECD countries, only Costa Rica has more barriers than Türkiye for setting up Limited Liability Companies (LLCs) and Personally-Owned Enterprises (POEs). Progress has been made in recent years: for example, the number of public or private bodies to be contacted to start an LLC decreased from 6 to 5 and the government introduced a single webpage presenting information on all procedures required to start a company. A simplified Investment Procedures Guide is reviewed annually and updated in line with legislative changes, and is made accessible to business people for them to understand the required procedures, permits, licenses, and authorisations, and the expected costs associated with those procedures.
However, large hurdles remain. In best-performing countries, only one body needs to be contacted to start a company. In addition, there is no law or regulation in Türkiye indicating a maximum time within which procedures required to start an LLC must be completed, contrary to the majority of OECD countries. Registration costs also remain relatively high: the typical costs to start a POE or an LLC was around TRL 2000 in 2023 (about USD 84). This is almost double the OECD median for LLCs, and half of the OECD countries have cut POE costs to zero (OECD, 2023[73]). Additionally, the minimum capital requirement for LLCs has increased to TRL 50 000 (about USD 2100), while many OECD countries have lowered or eliminated such requirements. For example, Spain reduced the capital requirement to a symbolic level in 2022, and there is no minimum requirement in New Zealand. While lowering those hurdles would be welcome, Türkiye has made progress in recent years, in particular through the establishment of the Central Trade Registry System in 2014 (MERSIS) in particular to support the establishment of LLCs in a centralised information system.
Ranking and scores of Türkiye on the PMR sub indicators, out of 38 countries
Note: Administrative requirements for limited liability companies and personally-owned enterprises; and communication and simplification of administrative and regulatory burden. The rank is based on the 38 OECD countries. For all indicators, a lower score represents a more competition-friendly regulatory regime.
Source: OECD PMR database. See for more details, www.oecd.org/en/topics/product-market-regulation.html.
The administrative burden on existing firms could also be simplified. Regulatory compliance can be costly, especially for small businesses with lower administrative capacity (Tu, 2020[81]). There is room to reduce the procedural burden for companies in Türkiye. The country does not yet apply a “silence is consent” principle for issuing permits and licenses, whereby tacit approval is granted after a fixed period has expired. The principle has now been adopted by a majority of OECD countries. The country keeps an up-to-date inventory of licensing and permitting requirements, but there is no requirement for a regular review, a procedure that four OECD countries have now implemented, although the Coordination Council for the Improvement of the Investment Environment (YOIKK), a platform operating through specialised working groups composed of public and private sector representatives, monitors those requirements continuously. Furthermore, contrary to most OECD countries, Türkiye has not adopted the "once-only" rule, whereby businesses submit data only once to the government, which can then be shared across public bodies provided consent is explicitly given.
4.4.2. Promoting domestic and international competition in certain network and services sectors
Opening the energy and transport sectors to competition
Productivity growth is hindered by barriers to competition in network sectors – in particular energy and transportation. In these sectors, Türkiye is among the most regulated OECD countries according to the PMR network indicators, without significant improvements since 2018. Efficient resource allocation in these sectors is crucial for boosting aggregate productivity since these sectors are essential in supply chains. Reductions in barriers to entry and vertical unbundling in network industries can help reduce input costs for companies, leading to more efficient technology diffusion and innovation. For example, pro-competition reforms in communications are associated with greater adoption of digital technology and reforms in the energy sector are associated with stronger green innovation (Nicoletti, von Rueden and Andrews, 2020[82]; Agyeman and Lin, 2023[83]). Easing regulations in Türkiye in network sectors to levels seen in Austria or the United States could induce a 0.95 percentage points increase in the productivity growth of the average firm in an average infrastructure-dependent sector (Demmou and Franco, 2020[84]).
To promote competition in the energy sector, Türkiye could consider removing the regulation of retail tariffs in the electricity and gas sectors. Retail electricity tariffs are regulated by the Energy Market Regulatory Authority (EMRA) for small end-users, despite their freedom to change suppliers. For example, they were reduced by 15% a month before the elections in 2023 (European Commission, 2023[41]). Retail tariffs for gas are also regulated. In that regard, it is welcome that the Twelfth Development Plan (2024-2028) aims to increase the competitive environment in the energy sector by planning to adopt cost-based pricing practices in electricity and natural gas markets (while providing support to low-income groups). In addition, no vertical separations are required between gas generation and transmission, or between gas transmission and retail supply, with subsequent risks of discrimination. Today, the state-owned Petroleum Pipeline Company (BOTAŞ) is the sole operator of the gas transmission system and has a market share of more than 90% in natural gas imports. It remains a vertically integrated company despite the Natural Gas Market Law which required separation of its operations, but which has repeatedly been suspended.
The efficient use of energy sources is limited more generally by restricted competition in the electricity and natural gas sectors. Expanding the freedom to choose suppliers beyond small end-users could help (IEA, 2021[85]). In parallel, switching suppliers could be encouraged by introducing a comparison tool for consumers to compare offers. Many OECD countries also use demand-side solutions that reward consumers for adjusting their electricity use upon request, typically through contracts with aggregators (Saviuc et al., 2022[86]). Reducing the dominant position of BOTAŞ and achieving the unbundling of the transmission system operator from commercial activities would enhance third-party access to transmission network capacity and promote transparent, cost-reflective, and non-discriminatory pricing.
Türkiye would benefit from liberalising its water and road transport sectors, given its geographic position as a transit hub and freight destination. Liberalisation in network sectors has been shown to boost productivity in the past, particularly in the transport sector. (Arnold et al., 2015[87]). Currently, 80% of Türkiye’s inland freight transport (in tonnes-kilometres) is road-based, with a small share in rail and coastal shipping (ITF, 2022[88]). International trade is mainly conducted through maritime transport: it covered 93% of goods imports and 80% of goods exports in volume in 2023 (Directorate General for Maritime Affairs, 2023[89]). Entry restrictions, such as requiring licenses for road and maritime freight, increase transport costs. Although most OECD countries (except Australia and Chile) also require a license for road freight transport, a third of them do not impose a fixed duration for its validity, contrary to Türkiye. In parallel, only half of OECD countries require notifications to authorities to engage in maritime transport.
Additionally, Türkiye’s restrictive rules in water transport prevent foreign companies from operating domestic routes, which raises transport costs and reduces efficiency. Such restrictions are frequently justified by the necessity to prevent shipping shortages, maintaining a national merchant fleet, facilitating international trade, and protecting national security. However, restrictions in Türkiye are tighter than other OECD countries. In water transport, Türkiye is one of only six countries in the OECD which impose jointly that vessels must have a national flag, must be owned by a domestic company, and must have a crew of Turkish citizens. Restrictive cabotage rules in maritime shipping have been associated with higher costs, reduced internal shipments and higher reliance on imports, and higher energy prices (Olney, 2020[90]; Kellogg and Sweeney, 2023[91]; Agostini, Briones and Mordoj, 2022[92]). In parallel, the relaxation of such rules in the EU and New Zealand in the 1990s suggests that liberalisation leads to efficiency gains and reduced freight rates (UNCTAD, 2018[93]). Opening up transport routes to foreign operators could lower costs and increase productivity in Türkiye.
Loosening regulations in professional services to boost productivity and export
The regulations of the conduct of activity in professional services hamper productivity growth and export potential. As discussed previously, services in Türkiye are less knowledge intensive, and domestic services are used less in services and manufacturing exports relative to other OECD countries (Figure 4.10). This is partly due to strict regulations. The low productivity and the regulation of services can pose particular problems when they are used in the value chains. In particular, the manufacturing sector is increasingly relying on services as inputs, activities within firms, or as output bundled with goods (Miroudot, 2017[94]). Indeed, the liberalisation of services tend to benefit manufacturing firms and export performance (Arnold, Javorcik and Mattoo, 2011[95]; Arnold et al., 2015[87]). Evidence shows that productivity gaps in manufacturing firms in Türkiye appear in firms which have services affiliates in the same areas where services are more restricted, suggesting an inefficiently low level of outsourcing, while in other countries the firms producing services in-house actually tend to be more productive (Haven and Marel, 2018[96]).
Services content of gross exports, 2020
Source: OECD Trade in Value Added (TiVA) 2023 edition: Principal Indicators, shares (database); and TiVA country notes: Türkiye, https://www.oecd.org/en/topics/sub-issues/trade-in-value-added.html .
There is ample room to reduce regulations in professional services to improve economy-wide productivity and boost business dynamism. In the professional services covered by the PMR indicators (lawyers, notaries, accountants, architects, civil engineers, and real estate agents), barriers to entry are generally in line with the average OECD country. Two barriers could be lowered. First, there is a requirement of Turkish nationality for lawyers, notaries, accountants, and for some activities for architects. Second, there are typically fewer pathways to access those professions than in other OECD countries. Beyond entry barriers, restrictions on foreign entry and on the conduct of activity in professional services are the highest in the OECD (Figure 4.11). They are common among professions:
As opposed to most OECD countries, fees are regulated in all professions in Türkiye: in particular, fees for lawyers and notaries are typically not regulated in OECD countries;
All other countries covered by the PMR database restrict advertising and marketing in fewer sectors that Türkiye. All forms of marketing and advertising are allowed for lawyers and notaries in most countries;
In most OECD countries, there is no restrictions on the legal forms for accountancy and architectural firms, while Türkiye imposes limitations on the trading of shares on the stock market. In addition, ownership and voting rights in most professional services enterprises are restricted to members of the profession in Türkiye;
Membership in professional organisations is mandatory in all of these services, which is only the case in Austria and Indonesia among the 47 countries covered by the PMR indicators. Such occupational licensing can increase wages but tend to reduce employment significantly, while delaying the entry of younger workers into those occupations beyond the increase in years of education (Kleiner and Soltas, 2023[97]).
All of these restrictions also more generally limit the sources of funding and skills that professional services firms can access. In addition, they can reduce business dynamism significantly, which could partly explain the low level of dynamism of services firms relative to industry firms in Türkiye compared to other OECD countries (Bambalaite, Nicoletti and von Rueden, 2020[98]; Canton, Ciriaci and Solera, 2014[99]).
Türkiye’s position in PMR indicators in professional services
Note: The PMR sub-indicators are normalised to range between 0 (best) and 100 (worst) according to the following formula: (indicator value - minimum value) / (maximum value - minimum value) x 100. Data on real estate agents is not available for entry regulation: foreign entry.
Source: OECD PMR database. See for more details, www.oecd.org/en/topics/product-market-regulation.html.
Opening services sectors to international competition to boost competitiveness
Additional restrictions on services trade and foreign direct investment (FDI) reduce competition and hamper the development of services exports. Despite efforts to attract FDI through a 2021-2023 strategy targeting high-tech services, both services exports and inward FDI remain low relative to the country’s GDP. In addition, as discussed previously, services exports are concentrated in transport and tourism while inward services FDI consists mostly of transportation and storage, and real estate services, while the share of ICT and professional services is relatively low (Figure 4.12, Panel A and B). Services trade and foreign investment are determined significantly by factors that go beyond regulations. To attract more FDI, Türkiye needs consistent macroeconomic policies (see Chapter 1) a more competitive domestic environment (see section above), and stronger rule of law (see section below) (U.S. Department of State, 2024[100]; EIU, 2024[101]). However, domestic regulations can also play a significant role. Restrictions on services trade have a significantly negative impact on imports and even more on exports, while regulatory barriers to FDI inflows are negatively associated with higher productivity and higher value-added exports (OECD, 2023[4]; Nordås and Rouzet, 2016[102]). Estimates suggest that the barriers to services trade in Türkiye were equivalent to ad-valorem tariffs of 78% in business services (Benz and Jaax, 2020[103]).
Türkiye’s restrictions on foreign entry in some specific services sectors hinder services exports and FDI. While Türkiye has a liberal FDI regime for industry sectors, there are more restrictions on foreign participation in services sectors relative to other OECD countries (Figure 4.12, Panel C and D, and WTO (2023[104])). For example, in the air transport sector, a majority of shareholders of aircraft operators needs to be of Turkish citizenship, and a Turkish aircraft must be owned by a Turkish citizen or a company or cooperative where a majority of the governing board and of the ownership is Turkish (Civil Aviation Act No. 2920). In media, foreigners cannot own more than 50% of media service providers and are not allowed to be the direct shareholders of more than two providers (against four for Turkish nationals) or own privileged shares.
Additional requirements on citizenship and physical presence thwart trade and investment. Beyond statutory FDI restrictions, broader restrictions on foreign participation in services trade in practice, as measured by the Services Trade Restrictiveness Index (STRI) of the OECD, hamper services trade and FDI. In that regard, it is welcome that the government has planned to ease visa restrictions for early-stage entrepreneurs as part of its FDI Strategy for the next four years. Sizeable barriers remain:
Beyond restrictions on board membership based on nationality as mentioned above (in most business services, a majority of board members have to be Turkish nationals), in accounting, broadcasting, or warehousing for example, there must be at least five Turkish employees for each foreign citizen. Media services are particularly restricted as managers in broadcasting need to be Turkish citizens;
The acquisition of land for any project is allowed under specific conditions, but subject to relatively tight regulations. Only citizens of countries designated by the President can acquire land. The total size of land that can be acquired by foreign individuals cannot exceed 10% of the total surface area allowed for private ownership in the same district, and 30 hectares in total;
Commercial presence is typically required to provide cross-border services, for example for accounting and legal services. In addition, local presence is also required for broadcasting services;
To protect the value of the currency, a recent decree mandated business services exporters to bring their export proceeds to Türkiye within 180 days of the export date, while exporters were initially free to dispose of revenues as they wished.
Following up on the implementation of an efficient investment dispute mechanism would also help attract FDI. Surveys of investors typically suggest that grievances related to adverse regulatory risks are the most important government actions leading to FDI cancellations (Echandi, Nimac and Chun, 2019[105]). While in 2021, Türkiye’s Economic Reform Plan proposed creating a new investment dispute institution, the “Investment Dispute Authority”, to strengthen investor protection, this authority was never established and Turkish authorities recently concluded that a new institution was not the most effective solution to improve dispute settlement after consultations with public and private sector bodies. Therefore, it is encouraging that the new FDI Strategy for 2024-2028 plans to develop "alternative resolution mechanisms". The World Bank has provided practical guidance for establishing an effective investor-state grievance mechanism. This includes empowering a dedicated government agency, which would use an early alert system and tracking tools for potentially problematic investments (such as Canada's Trade Law Bureau in the Department of Foreign Affairs or the Committee on Foreign Investment in Chile). It could also serve as a repository of information and help ensure consistency in dispute settlement provisions included in investment agreements (World Bank, 2022[7]; UN CITRAL, 2023[106]).
Reducing tariffs and non-tariff barriers
Reducing barriers to trade more generally would improve productivity. Turkish importers and exporters show significantly higher productivity growth than non-importers or non-exporters and evidence suggests that the average productivity of exporters increases when they actually enter the export market. Both within- and between-firm productivity in Türkiye has also tended to grow faster in trade-intensive sectors all the more when those are strongly integrated in GVCs (World Bank, 2019[107]).
Türkiye proposes tariffs in line with world averages but complements them with additional duties. Türkiye’s tariff rates are higher than most OECD countries but do not differ with levels in upper middle-income countries and are lower than those in Brazil, India, and South Africa for example. In particular, tariffs levels are pulled down by the Türkiye-EU Customs Union (CU) (Figure 4.13, Panel A). Still, imports of some products from non-EU countries, including those transiting through the EU, face “additional duties” above the EU common external tariff (CET). Since 2011, Türkiye has imposed those additional duties on an increasing range of products. They go up to 30% of products’ values and affect around 30% of Türkiye’s tariff lines at the Harmonised System’s 10-digit level (WTO, 2023[104]). In addition, since 2017 Türkiye has levied “additional liabilities”, representing today 5% of all tariff lines including agricultural, fish and fishery products, arising from the difference between Turkish tariffs and tariffs applied as part of the EU’s Generalised Scheme of Preferences.
Türkiye’s tariff barriers have increased in recent years. Overall, there has been a significant decrease in the share of tariffs falling below 10%. Tariffs can be particularly high for some agricultural products not covered by the CU: the highest tariffs of 225% apply to 68 products. 31 tariff lines still exceed the maximum applicable agreed to at the WTO. Because of those additional duties, unilateral changes to tariffs have been relatively frequent (World Bank, 2022[7]). While the declining trend in tariffs from the mid-1990’s and the mid 2010’s has recently plateaued worldwide, Türkiye’s average effectively-applied tariff has evolved less favourably than the countries covered by the PMR indicators.
Non-Tariff Barriers (NTB) have also increased in the last 10 years, although the most recent rise since 2020 has been in line with other OECD countries and partly temporary because of the pandemic (Figure 4.13, Panel B). In 2022, the World Bank reported that Türkiye had the 12th highest frequency of NTBs on imports worldwide with a large use of anti-dumping measures and safeguards. In 2023 Türkiye was the heaviest user of safeguards in the world (World Bank, 2022[7]; Thompson, 2023[108]). In particular, sanitary and phytosanitary measures, along with anti-dumping measures and bilateral safeguards, are allowed under the CU. In 2018, the OECD quantified the impact of those NTBs as equivalent to a 14% tariff, mostly due to technical barriers (Cadot, Gourdon and van Tongeren, 2018[109]). The European Commission has recently complained of an increasing use of the import surveillance mechanism (a requirement to obtain a surveillance license prior to imports if the price is below a certain threshold unit value) and an increase in complaints from EU companies experiencing excessive requests for documentation and submission of test results when importing into Türkiye (European Commission, 2023[41]). The relevance of the current stock of NTBs could thus be reviewed.
Restrictions on foreign participation to public procurement have recently been tightened. Public procurement, a market of 4.8% of GDP in 2022 in Türkiye, features some strong national preference. Participation in procurement processes can be limited to domestic bidders if the tender’s value is below a certain threshold. Domestic bidders may be granted up to 15% price advantage in procurement of services or works. Moreover, both domestic tenderers and foreign tenderers offering domestic products in procurement of goods may be granted up to 15% price advantage. This 15% price advantage is mandatory for some high-tech and software products since 2016. In 2023, 48% of the value of international tenders (and 40% of tenders) used the domestic price advantage (WTO, 2023[104]; European Commission, 2024[110]). Local content requirements have been frequently included in government tenders, particularly in the ICT and pharmaceutical sectors (EIU, 2024[101]). The government has also expanded the use of offsets – which were traditionally used for military procurement – in public procurement for civilian use via the Industry Cooperation Programme. This now applies to sectors such as energy, transportation, medical devices, and telecom sectors. In particular, for public contracts above USD 5 million, companies must invest up to 50 percent of the contract value in Türkiye and “add value” to the local sector (U.S. Department of State, 2024[100]). Such non-military offsets are, in principle, contrary to EU law.
The EU is Türkiye's biggest trading partner. Therefore, the Customs Union with the EU has a large impact on Türkiye’s trade policies. With the Customs Union, Türkiye has aligned with the EU’s common external tariffs in industrial products (excluding coal and stell products) and the industrial component of processed agricultural goods. Moreover, in industrial products, customs duties and quantitative restrictions are removed between the Parties.
Note: In Panel B, some countries with no triangles have incomplete information to compute the detailed sectoral shares of FDI. Panel C shows average STRI score by policy and country, based on the STRI simulator (https://oecd-main.shinyapps.io/STRI_Explorer/). The STRI database records measures on a Most Favoured Nation basis. The indices are based on laws and regulations in force on 31 October 2023.
Source: OECD (2024), OECD Balanced trade in services (BaTIS); OECD FDI main aggregates, BMD4; OECD FDI by counterpart area and by economic activity, BMD4, OECD Services Trade Restrictiveness Index Explorer; and OECD FDI Regulatory Restrictiveness Index -Archive; and World Bank (2024), World Development Indicators.
The scope of the Customs Union remains relatively limited. Trade in services is not included in the CU or any preferential agreement, and thus follows WTO rules. Trade in non-processed agricultural products is governed by a separate preferential agreement. Under this agreement, the EU phased out most tariffs on agricultural products, while Türkiye kept relatively higher tariffs. In 2022, for example, the effectively applied tariffs on agricultural imports from France to Türkiye averaged 20.2%, while Türkiye’s agricultural exports to France faced only tariffs of 0.9% on average (World Bank, 2024[111]). Similarly, public procurement can be restricted to domestic tenders both in the EU and Türkiye since the CU does not include relevant provisions in this regard (Weyerstraß and Ertl, 2022[112]; Yalcin, Aichele and Felbermayr, 2016[113]).
Expanding the Customs Union could significantly improve trade, increase investment, and boost productivity. Extending coverage to the agriculture and services sectors would grow bilateral trade significantly. Recent estimates suggest that Turkish exports to the EU could increase by almost 70% and GDP could be 1.8% higher (Yalcin and Felbermayr, 2021[114]). Discussions on reforms of the CU have already known fits and starts in 2016 and 2020 and should be pursued. In that regard, it is welcome that a new High-Level Dialogue on Trade has met for the first time in July 2024 to discuss strengthening the CU, and that Türkiye has officially requested to upgrade the CU to include trade in services. Both Türkiye and the EU have already implemented such agreements with wider scope with different countries. For example, the Türkiye-Singapore Free Trade Agreement (TRSFTA) signed in 2015 covers goods, services, public procurement, investment, and intellectual property. In particular, public procurement is open to both countries and there are no foreign equity limits on foreign investors. Similarly, the EU agreements with Chile and Canada (CETA) also cover several services and facilitate the participation of EU firms in public procurement.
Note: In Panel A, data are based on the average of applied and most favoured nation rates weighted by the product import shares corresponding to each partner country. Most-favoured nation (MFN) tariffs rates are the highest that WTO members promise to charge one another. The “applied” tariffs are the lowest rates that are effectively available. Data refer to 2017 for the World (WLD) and Upper Middle Income (UMC) countries. In Panel B, data are based on the total number of policy instruments harming foreign commercial interests of a given nation or customs territory, considered by the Global Trade Alert. It covers trade in goods and services, investment as well as labour force migration. See the source for the details on the list of harmful trade measures.
Source: World Bank (2024), World Development Indicators; and Global Trade Alert, https://data.globaltradealert.org/threads/harmful-trade-interventions.
Changes to the EU-Türkiye Customs Union should also ensure the creation of a well-functioning trade dispute resolution mechanism (DSM). This could be based on examples from existing Free Trade Agreements, like those the EU has with Japan and Canada. Today, trade disputes between the EU and Türkiye are rarely solved within the existing DSM. In principle, the Ankara Agreement includes a DSM for a wide range of potential conflicts. However, it requires a mutual consent of both parties to initiate a dispute settlement. Another DSM within the CU agreement is limited to disagreements on the duration of safeguard measures (Weyerstraß and Ertl, 2022[112]; World Bank, 2014[115]).
Even with a stronger Customs Union, Türkiye will need to improve existing trade deals and negotiate new ones, especially with countries that have Free Trade Agreements (FTAs) with the EU. The EU has signed more bilateral FTAs with third countries in recent years. As a consequence, Turkish companies face more competition from third-country exporters, while EU exporters may find it harder to use Turkish inputs as part of their agreements with third countries. To address this, Türkiye should prioritise negotiating FTAs with countries that already have FTAs with the EU. Aligning its FTAs with the EU, in addition to deepening the CU to agriculture and services, could boost Türkiye's GDP by 2.5%, thanks to a rise in exports (Yalcin and Felbermayr, 2021[114]).
Negotiating new FTAs or deepening existing FTAs outside of any CU-related policies would still be highly beneficial. Most of Türkiye's FTAs cover goods only. In the past, Türkiye’s merchandise exports with a partner country increased by 180 percent in the five years after a trade agreement came into force. Expanding existing agreements (outside of the CU) to the levels of coverage in the broadest agreement signed by Türkiye to date could increase exports by 10% (World Bank, 2022[7]). In that regard, it is welcome that the country is currently negotiating with the Gulf Cooperation Council, Japan and Indonesia, and with the United Kingdom to expand and update the existing FTA.
Beyond tariff and non-tariff barriers, technical and legal procedures for products entering or leaving the country could be streamlined. Facilitating trade can help boost trade by reducing hidden trade costs: for example, the OECD has estimated that shifting to best trade facilitation practices could reduce trade costs by 15% (Moïsé and Sorescu, 2013[116]). Surveys typically find that burdensome procedures are among the top obstacles to international trade in particular for SMEs (López González and Sorescu, 2019[117]). Although Türkiye has made significant improvements in recent years in facilitating trade, in particular in digitalising customs procedures, there is still room for progress (Figure 4.14). For example, in the latest Logistics Performance index, while Türkiye performs relatively well in its ability to arrange competitively priced shipments, it ranks 6th lowest among OECD countries in the perceived efficiency of the customs clearance process.
One way forward could be to improve coordination with customs agencies of trade partners, which is underdeveloped (Moïsé and Sorescu, 2013[116]; UNCTAD, 2023[118]). In particular, formalities and procedures with neighbouring countries at border crossings are still not fully aligned, the alignment of working hours is only at a planning stage, and there are no common facilities at border crossings or one-stop border posts. Türkiye already made some efforts in this area and signed a protocol with Azerbaijan and Georgia to enhance customs cooperation and enforcement and facilitate trade (WTO, 2023[104]). Türkiye could also improve the digitalisation of exchanges of trade-related information across borders. While it has fully implemented the recommendations of the WTO’s Trade Facilitation Agreement regarding the digitalisation of trade procedures, it is still lagging in enabling cross-border mutual recognition and the exchange of trade-related data and documents in electronic form.
More support could also be given to SMEs, as the fixed costs of trading can be more burdensome for them. Although Türkiye has now fully implemented a single window system (a single portal through which trade documents can be submitted to customs authorities) for trade-related information and procedures, it has not made it more accessible to SMEs. For example, Thailand has developed a training programme for SMEs to access and use its single window (UN/ESCAP and ITC, 2016[119]). The UN has recently suggested the implementation of an Integrated Services for SMEs in International Trade (ISMIT) which would help SMEs in the provision of standardised information and documents to the national single window. For example, China established the OneTouch system in 2010 to provide support – specifically targeted to SMEs – for services such as customs clearance, VAT refunds and logistics, connected to the Chinese Single Window (UN/CEFACT, n.d.[120]). Other helpful measures could include options like deferred duty payments and reduced fees and charges. The United States, for example, has an expedited shipments program that sets a minimum value for applying import duties on goods. Furthermore, a single window system for trade finance – connecting financial institutions and authorities, can make it easier for SME to access funds (UNCTAD, 2023[118]).
Note: The OECD trade facilitation performance indicators are composed of eleven variables measuring the actual extent to which countries have introduced and implemented trade facilitation measures in absolute terms, but also their performance relative to others. The UN Trade Facilitation Survey consists of a set of sixty digital and sustainable trade facilitation measures. Each aggregate index averages the scores for its sub-indices. The OECD number is an average of 34 OECD countries with available data.
Source: OECD (2024), OECD Trade Facilitation Indicators 2022 edition; and United Nations (2023). Digital and Sustainable Trade Facilitation: Global Report 2023.
4.4.3. Improving the efficiency of the insolvency regime
A more efficient insolvency regime would enhance business dynamism by boosting renewal of business. As barriers to entry and to conduct activity are eased, the exiting of non-viable, unproductive firms could also be facilitated. An efficient insolvency regime supports productivity by reducing the share of capital sunk in zombie firms, a speedier recovery of temporarily non-viable firms, and by facilitating innovation and experimentation by encouraging risk-taking (André and Demmou, 2022[121]; Adalet McGowan and Andrews, 2018[122]). Addressing insolvency frameworks also has important financial stability implications as, for example, a high prevalence of non-performing loans can act as a constraint on the supply of credit by banks and the allocation of financial resources. In Türkiye, the insolvency regime appears particularly inefficient for services firms where exiting firms tend to actually have higher productivity than remaining ones (World Bank, 2019[107]). In the latest available data of the Doing Business Survey from the World Bank, the time for resolving insolvency was five years in 2019 against 1.8 years in the OECD, and the recovery rate was 10.5% against 27.3% in MENA countries and 70.2% in OECD high income countries.
The insolvency regime in Türkiye can improve on standard policies which can help smooth the transitions (Figure 4.15). The treatment of failed entrepreneurs is fairly generous, with a discharge time in line with the OECD median and generous asset exemptions. However, Türkiye lacks an early warning mechanism such as training to firms or on-line tests to assess their financial position, and financial and debt counselling to companies with financial difficulties. For example, in 2006, France introduced a 'safeguard' procedure for firms that are not yet insolvent but are experiencing financial difficulties. If a court accepts their application, these firms follow a process similar to traditional insolvency, significantly improving their chances of successful restructuring (Epaulard and Zapha, 2022[123]).
Furthermore, Türkiye’s insolvency system does not have a streamlined system targeted towards SMEs. For example, the United States recently introduced a restructuring procedure specifically for small businesses allowing debtors to retain control over their operations and empowering courts to override dissenting creditors for firms with debts below USD 2.7 million. Colombia implemented simplified restructuring and liquidation procedures during the pandemic, which included mandatory mediation meetings early in the insolvency process and tighter timelines for small companies (André and Demmou, 2022[121]).
While Türkiye has recently modernised its insolvency framework to align with global best practices, it still imposes barriers to restructuring which could be loosened:
Before 2023, Türkiye was one of only nine OECD countries where creditors could only initiate liquidation while only debtors can initiate restructuring. This could reduce the probability of successful restructuration in a timely fashion. However, the Financial Restructuring Framework Agreements reintroduced in December 2023 established a financial restructuring framework that enabled creditors to restructure debts of viable companies facing temporary financial difficulties;
There is no limit on the length of stay on assets in financial restructuring proceedings while most OECD countries impose a time limit, but amendments to the Enforcement and Bankruptcy Law introduced a temporary respite period during concordat proceedings (a court-supervised restructuring process);
Since 2019, the framework allows the overriding of the votes of a minority of creditors voting against a restructuring plan. Still, it does not guarantee that they receive as much under restructuring as in liquidation. This is the case in a majority of OECD countries;
Credit obtained by the debtor after the initiation of insolvency proceedings is not given priority over either secured or unsecured creditors. This can limit the possibility to inject new capital to facilitate internal reorganisation. Two thirds of OECD countries give priority to new financing over unsecured creditors.
4.4.4. Providing a sound institutional framework for the economy
The government plays a major role in the economy not only through its significant interventions in the conduct of business activity, but also more directly through the importance of state-owned enterprises. In order to provide a level playing field for the private sector and limit potential distortions of economic activity, the government needs to make sure that a rationale exist for its involvement in business activities, and ensure that the institutional setup is in place to protect decision makers against undue influence.
Rationalising the role of the state in the economy
While Türkiye went through several waves or privatisations in the last 40 years, state ownership of companies remains relatively large compared to other OECD countries. A recent estimation from the World Bank suggests that SOEs are present in almost half of all business sectors. In addition, the state owns more than 10% of companies in 80% of business sectors (World Bank, 2023[124]). For example, public companies hold significant positions in network sectors (e.g. telecommunications; oil, gas and electricity transmission) where there are natural monopolies, and in strategic sectors like defense. However, they are also present in banking, and in industry and manufacturing sectors such as the manufacturing of rail vehicles (TÜRASAŞ), the manufacturing of meat and milk (ESK), or the processing of tea (ÇAYKUR) where the public policy role is less justified. For example, state-owned banks’ assets represented 38% of the banking sector’s total assets in 2023, the sixth highest in the OECD (U.S. Department of State, 2023[125]).
OECD Insolvency indicator, main components, 2022
Note: The scores for the three main sub-categories are scaled from zero to one, with lower scores indicating more favourable frameworks.
Source: André, C. and L. Demmou (2022), "Enhancing insolvency frameworks to support economic renewal", OECD Economics Department Working Papers, No. 1738.
High SOE presence can hamper productivity when they do not solve market failures. While countries have typically shifted away from full ownership of SOEs, most Turkish SOEs are wholly owned by the government – an important consideration as private involvement in SOEs is associated with higher productivity (IMF, 2020[126]; Ministry of Treasury and Finance, 2023[127]). State ownership can be justified to address market failures – such as the existence of a natural monopolies because of strong economies of scale, the provision of public or merit goods, and the existence of externalities – or based on other social objectives (Szarzec, Dombi and Matuszak, 2021[128]; OECD, 2005[129]). However, the prevalence of SOEs can threaten fair competition in commercial activities where market failures are limited. In Türkiye, sectors with state involvement have fewer new businesses, higher market concentration, slower job growth, and lower productivity. Those sectors also appear to be significantly more protected from outside competition: sectors with strong state involvement have significantly higher import tariffs and nontariff barriers (World Bank, 2023[124]).
As a consequence, governments should transparently present strong grounds for the ownership of enterprises in commercial sectors. However, despite its wide coverage, Türkiye does not provide a publicly accessible document detailing the rationale behind state ownership. For example, in Norway a whole-of-government state ownership policy is expressed as a white paper which is renewed every four years after each parliamentary election. The White Paper includes the overall objectives for state ownership and for each individual company in which the state is a shareholder, and states how the government intends to exercise its ownership. In Germany, the portfolio of SOEs is reviewed every two years and state ownership must be justified or the enterprise will be privatised (Lewis et al., 2022[130]).
Creating a clear rationale for state ownership could help identify areas for potential future privatisations in Türkiye. The large number of SOEs and the relative underperformance in sectors where they operate suggest room for more privatisation. In addition, since 2017 many Turkish SOEs have struggled to cover their financial expenses (including interest expenses and foreign exchange losses) with operating profits. Evidence suggests that the privatisation of such “zombie firms” could be particularly beneficial (Wang et al., 2024[131]).
In the past, the country went through several waves of privatisations, but the pace has slowed down in recent years. 210 companies out of 278 once owned by the government have been privatised since the first law on privatisation was passed in 1984. Overall, revenues from privatisation were around USD 5 billion per year between 2005 and 2015, but fell to USD 504 million in 2022 or less than 0.1% of GDP. Revenues were projected to be 0.05% of GDP in 2023 mostly deriving from the sale of infrastructures belonging to the Electricity Generation company EÜAŞ. In the past, privatisations have typically tended to improve profitability and efficiency, at least when realised in economies with strong economic institutions in place (Guriev and Megginson, 2006[132]). For example, the privatisation of cement plants in Türkiye between 1983 and 1999 has been associated with higher productivity (Okten and Arin, 2006[133]). The OECD has provided a privatisation guide for policymakers and a stock-taking of country experiences (OECD, 2018[134]; OECD, 2019[135]).
Türkiye could consider the privatisation of several SOEs which were in the original scope of privatisation programmes but were never transferred to the private sector. For example, the state-owned banks Ziraat Bank and HalkBank were planned to be privatised in 2004 but are now held by the Türkiye Wealth Fund (TWF) established in 2016 (Box 4.4). Likewise, Turk Telekom had been partly privatised in 2005 but TWF now holds 62% of the capital; and Türkiye Sugar Factories was included in the scope of privatisation in 2000 but was removed in 2021, with its shares transferred to TWF (Ministry of Treasury and Finance, 2023[127]).
For the enterprises which are kept in the state’s hands with a rigorous rationale, their governance should be aligned with OECD guidelines to ensure a level-playing field (OECD, 2015[136]). Evidence at the micro and macro level suggests that the positive impact of SOEs on growth and productivity is highly dependent on the actual and perceived quality of governance and institutions (OECD, 2020[137]; Szarzec, Dombi and Matuszak, 2021[128]; IMF, 2020[126]). In that regard, it is welcome that the latest medium-term program has proposed a review of SOE governance. This is important because, despite the relatively broad coverage of SOEs, Türkiye strays away from some of the good practices set up in the OECD Guidelines on the Governance of SOEs. For example:
It is important to separate ownership from regulation and policies. In Türkiye, line ministries that manage SOEs often also regulate the sectors where those SOEs operate, leading to potential conflicts of interest (Edwards and Waverman, 2006[138]; World Bank, 2023[124]). Centralising SOE ownership can help separate ownership from regulation and policy. Brazil, for instance, created a Secretariat in 2016 to manage SOEs independently from line ministries (OECD, 2020[139]). Türkiye made some progress with the creation of the Türkiye Wealth Fund (Box 4.4). However, the TWF’s governance could be more transparent, as companies established by the TWF or by its subsidiaries are not audited by the Turkish Court of Audit (but companies which were transferred to the TWF and have public ownership above 50% are audited by the Turkish Court of Audit), and its audits have not been published since 2021.
Independence of the management of SOEs should be strengthened. In Türkiye, public authorities appoint the CEOs of SOEs, and there is no requirement that at least part of the board of directors must consist of independent members. This lack of independence can lead to conflicts of interest in decision-making. Additionally, politicians can serve as board members, which poses a risk if they have the power to influence the SOEs’ operations (OECD, 2013[140]; OECD, 2019[141]). Most OECD countries have stricter rules to support board independence (OECD, 2020[139]).
SOEs should broaden its measurable targets to add targets on their rate of returns. Many OECD countries have formal rate-of-return targets set by their owners and boards. As part of proposed governance reforms, Türkiye is considering using performance-based methods to enhance SOE accountability.
Most commercial SOEs in Türkiye have access to explicit guarantees from the Ministry of Finance for borrowing from international financial institutions, while most OECD countries provide no or very limited guarantees on contracted debts.
The TWF has quickly acquired a broad portfolio of companies
The Türkiye Wealth Fund (TWF) was established in 2016 with a capital of USD 15.6 million. In 2017, TWF acquired the license for the national lottery and the Treasury’s shares in the two largest public lenders Ziraat Bank and Halkbank, the Turkish Petroleum Corporation, Turkish Airlines, and Turk Telekom. In 2020, it acquired the shares of the public insurance companies and 26% of the mobile phone operator Turkcell. Today, the fund has (usually full) participation in 30 companies. More than 70% of its assets are shares in financial services companies. An additional 12% are invested in energy companies and 10% in transport and logistics companies. Its assets were evaluated to TRL 5600 billion (37% of GDP) at the end of 2022.
TWF has benefited from strong government support
TWF has been funded by the transfer of SOEs through equity injections, and by bond issuances. The fund benefits from a full guarantee of the Treasury on 95% of its syndicated euro loan contracted in 2020 (30% of outstanding debt in February 2024) and has benefited from funding from the Treasury to recapitalise its state-owned banks. The TWF also benefits from tax exemptions. The Law on the Establishment of the Türkiye Wealth Fund Management Company states that “the Türkiye Wealth Fund and the companies and sub-funds to be established by the Company are exempt from income and corporate tax.”
The transparency of TWF could be improved
The TWF has been chaired by the President of the Republic since 2018, who also appoint the auditors performing the audit of the fund. The fund is not audited by the Turkish Court of Accounts (TCA) but by an independent audit firm, and not all companies in TWF’s portfolio are audited by the TCA. The 2021 audit report distributed to Parliamentarians was designed as secret in 2021 and audit reports have not been published on the TWF websites since then.
TWF ranked slightly below the average and the median of 52 sovereign wealth funds in the Linaburg-Maduell Transparency Index, an index developed by the Sovereign Wealth Fund institute on 10 transparency indicators (including the provision of up-to-date, independently audited annual reports).
Increasing transparency in government action
The large role of the state in the Turkish economy emphasises the importance of tight lobbying regulation to avoid economic distortions. Improving the regulation of the lobbying process is important to strengthen competition. Public policies that respond only to the needs of a special interest group undermine competition as these groups can interfere with competitors’ businesses or to secure economic advantages. Moreover, high perception of unfair competition can dismantle trust, increase uncertainty, and deter investments. Therefore, it is important to set standards and principles for the lobbying process to provide a level playing field by granting all stakeholders fair and equitable access to the development and implementation of public policies.
There is room to improve transparency in decision-making in Türkiye. To enhance scrutiny of public decisions, transparency measures should be applied to all actors attempting to influence decision-making. However, Türkiye still falls short compared to other OECD countries in following proper lobbying principles (OECD, 2021[143]). Currently, lobbying activities in Türkiye lack transparent regulations. For instance, lobbyists are not required to register or disclose their activities. Some OECD countries also place requirements on public officials who are being targeted by lobbying activities to disclose information on their meetings with lobbyists, either through a registry (Chile, Peru, Lithuania and Slovenia), “open agendas” (Lithuania, Spain, United Kingdom and the EU), and/or by requiring public officials to disclose their meetings with lobbyists to their superiors (Hungary, Latvia, Lithuania, Slovenia) (OECD, 2021[143]). In addition, in Türkiye it is not mandatory to disclose the names of the members of permanent advisory bodies. Unlike most OECD countries, the country has not set up regulations specifically dealing with conflicts of interest for members of cabinet, senior civil servants, appointed public officials, and members of parliament.
Strengthening anticorruption efforts
Beyond the economic distortions created by lobbying, the potential for corruption can have a significant impact of productivity. Corruption affects key determinants of productivity growth, including innovation and diffusion of new technologies, competition and private investment decisions. Surveys consistently show that citizens believe corruption is prevalent in various sectors, including business, and public services. According to Transparency International, the perception of corruption worsened in 2023 and Türkiye now ranks 115th among 180 countries surveyed. Other indicators confirm high corruption perception in Türkiye (Figure 4.16).
A strategic approach to anti-corruption allows governments to identify the main challenges, establish objectives and define specific actions for achieving desired results. As outlined in the OECD Anti-Bribery Convention, Türkiye had created several anti-corruption strategies, but they have not been maintained or updated. Many are no longer in force and have not been replaced, resulting in a lack of national strategic policies on either domestic corruption or foreign bribery (OECD, 2024[144]). Moreover, a fully-fledged corruption prevention policy still remains to be developed and Türkiye has also not made progress to introduce whistleblower protection legislation.
The legal framework and institutional architecture also need to be improved. Türkiye has not set up anticorruption bodies in line with the United Nations Convention against Corruption (European Commission, 2023[41]). In addition, Türkiye, contrary to most of the OECD countries, does not have an independent body with a mandate to oversee political financing (OECD, 2024[145]). This might help to provide effective oversight institutions with the independence and legal authority to meaningfully regulate potential violators.
Transparency is essential for reducing the perception of corruption. When citizens have access to public information, they can better understand government activities, which encourages public officials to act responsibly and increases accountability in policymaking. High levels of public access to information are linked to greater trust in government and satisfaction with public services (OECD, 2024[145]).
Most OECD countries have clear procedures for requesting information and regulations ensuring that all public institutions and individuals performing public duties must provide access to that information. In contrast, Türkiye lacks such regulations and does not have a "default open government data" policy OECD, 2024[144]). Additionally, there is limited parliamentary oversight of the budget, leading to low budget transparency (European Commission, 2023[41]).
Note: Panel B shows the point estimate and the margin of error. Panel D are based on the OECD Public Integrity Indicators (PIIs), https://oecd-public-integrity-indicators.org/. How to read: As measured against OECD standards on anti-corruption strategy, Türkiye fulfils 27% of criteria for regulations and 13% for implementation compared to the OECD average of 45% and 36%, respectively. The country does not fulfil any criteria on regulations and practice to mitigate corruption risks related to lobbying, as there is no legislation in this area, while it fulfils 56% of criteria regarding regulations on OECD standards on conflict of interest and does not track the necessary data in practice.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: OECD Anti-Corruption and Integrity Outlook 2024 – Country Notes: Türkiye.
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