OECD Economic Surveys Turkey

1 OECD Economic Surveys Turkey July 2016 OVERVIEW 3 This Overview is extracted from the 2016 Economic survey of Turkey . The survey is published on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD, which is charged with the examination of the Economic situation of member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area OECD Economic Surveys : Turkey OECD 2016 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given.

2 All requests for public or commercial use and translation rights should be submitted to Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at or the Centre fran ais d exploitation du droit de copie (CFC) at 4 OECD Economic Surveys : Turkey OECD 20169 Executive summary Growth has been robust despite adverse circumstances but must be rebalanced Removing structural bottlenecks would boost productivity Deeper participation in global value chains could help rebalance growth1 EXECUTIVE SUMMARYOECD Economic Surveys : Turkey OECD 201610 Growth has been robust despite adverse circumstances but must be rebalancedGrowth has picked up but inflationremains highSource:OECD Economic Outlook 2 has been robust in recent yearsdespite very adverse regional and domesticconditions.

3 Job creation has been strong, inparticular for vulnerable groups and less-developed regions. Turkey is no longerexperiencing boom-and-bust cycles, butexternal deficits expanded and the net externalinvestment position has deterioratedsomewhat over the past decade. To achievestrong and sustainable growth, domestic savingshould be increased and demand rebalancedbetween domestic and external sources. Theneeded competitiveness gains must beachieved by reducing wage and price inflationand boosting productivity growth. Following aperiod of stalling reform progress, theauthorities launched an ambitious economicreform agenda in early 2016 aiming at raisingproductivity and living structural bottlenecks would boost productivityEmployment is concentrated in lessproductive firms1. Increase in productivity, compared to unweighted averageproductivity. 2013 for Turkey , latest available year :Andrews and Cingano (2014); OECD 2 s manufacturing sector hasexpanded considerably, but a core of well-performing firms is still hindered byshortcomings in the policy framework.

4 Asecond category of firms sustain competitionand deliver jobs, but have fallen behind inproductivity. A large, third group of firmsemploy many low-skilled workers, but have lowproductivity and survive in an informalitytrap due to ineffective enforcement of rulesand regulations. Improving this situationrequires a comprehensive upgrading of thebusiness environment to boost productivity andallow the most promising firms to grow participation in global value chains could help rebalance growthA large trade deficit has built up (2015)Source:OECD Economic Outlook 2 the import content of Turkey sexports has increased, Turkey s capacity toprovide intermediate inputs to other countriesremained limited. This partly reflects Turkey sspecialisation in final products, but also hints atobstacles in trade and investment policies,underdeveloped human capital and stillinsufficient investment in innovation, R&D andknowledge-based capital.

5 The adjustmenttowards a more export-oriented economyoperating on a level playing field needs to besupported by social policies to ensure displacedworkers can find productive % changesReal GDPCPI010203040506070 TurkeyTurkey(fully formal)UnitedStatedJapanEUProductivity gains , %-30369 TUR MEX CHL GRC PRT SVK POL CZE HUN% of GDP2 EXECUTIVE SUMMARYOECD Economic Surveys : Turkey OECD 201611 MAIN FINDINGSKEY RECOMMENDATIONSS trengthening macroeconomic resilience, institutions and social cohesionThe economy remained resilient under very adversecircumstances and stronger growth is within authorities rebooted the structural reform processin early implement the reforms of the 2016 Action Planand enact systematic monitoring and reporting onactual credibility of governance institutions could the rule of law, judiciary independence andthe fight against 's participation in the labour force hasincreased but remains very low in child care facilities throughout the liabilities are tilted towards debt.

6 The foreigndirect investment stock remains too barriers to foreign direct saving is too low and inflation haspersistently exceeded the target, exacerbating thedilemma between disinflation and external pricecompetitiveness. The credibility of monetary policycould be improved. Continue to contain consumer credit. Promote private pension savings. Increase foreign exchange reserves. Simplify the monetary policy framework. Tighten monetary policy unless inflation declinesfaster than projected. Encourage minimum wage moderation and engagesocial partners in a wage path consistent withdisinflation and external fiscal prudence successfully reduced publicdebt but there is a need to improve public financestatistics. Publish consolidated quarterly general governmentaccounts according to international accountingstandards. Publish a regular Fiscal Policy Report including allcontingent and long-term structural bottlenecks to boost productivityThe business sector is vibrant but low skills and highemployment costs, amplified by the recent minimumwage hike, foster informality, as the burden of goingformal is too high.

7 Informality and semi-formality, inturn, slow down productivity growth. Implement the education reforms foreseen in the2016 Action Plan to improve curricula and increasethe autonomy of schools and universities. Reduce labour tax wedges and employment costs forthe firms are not growing at fullpotential, due to shortcomings in basic governance, theregulatory framework and business taxation. Enhance the flexibility of employment rules for allfirms. Avoid tax thresholds for higher productivity andlarger small entrepreneurs and workers have low skills,inhibiting the growth of productivity and upskilling programmes for small entrepreneurson basic management, foreign languages low-productivity firms will need to willraise adjustment challenges for their workers andreduce employment prospects for the social safety net for displaced workers byupgrading active labour market programmes, includingthose adapted to the benefits of global value chainsParticipation in GVCs is below potential, consistentwith the low share of exported value-added in Turkey stotal value added and relatively subdued the Customs Union agreement with the EU withthe most open and all-encompassing internationaltrade agreements.

8 And develop similar agreementswith other s export share for intermediate goods in theworld market is particularly low, especially in highvalue-added sectors, reflecting limited human andknowledge-based more in vocational training and stringent environmental regulations may attractpolluting activities, fostering Turkey s participation inglobal value chains for the wrong the monitoring of polluting activities and theenforcement of environmental regulations, and useeconomic instruments such as pollution taxes, carbontaxes and emission Economic Surveys : Turkey OECD 201613 Assessment and recommendations Recent Economic developments and short-term macroeconomic outlook Economic rebalancing to make growth sustainable and more inclusive Strengthening the resilience of the economy Restructuring the tradable sector by upgrading the business environment Reforms and green growth5 ASSESSMENT AND RECOMMENDATIONSOECD Economic Surveys : Turkey OECD 201614 Economic growth has proved remarkably vigorous given the very adverse circumstancesof the past two years, which included four national elections, wars across the southernborder, severe domestic tensions in the Eastern regions, trade restrictions with Russia andthe inflow of millions of refugees.

9 Domestic demand retained momentum. Public spendingpressures were strong but the fiscal deficit was kept in check. The external deficit declinedthanks to falling oil prices and market share gains especially in the European Union, but isstill very large in underlying terms. Growth remains disproportionately centred ondomestic demand and is overly funded by debt-creating capital combination of strong growth and external imbalances has characterisedTurkey sgrowth pattern over the past 15 years. Major institutional and structural reformsintroduced after the 2001 crisis helped overcome the earlier boom-and-bust cycles, butexternal deficits expanded (Figure 1). This pattern has helped draw capital to Turkey , butfeatures two important imbalances: i) private consumption contributes excessively togrowth and reduces domestic savings; and ii) the output and employment composition ofthe economy is skewed to servicing the domestic market, with too low a share of situation creates a tension between strong growth and external sustainability.

10 Torebalance the growth pattern, the international competitiveness of the economy and theexport sector should be considerably shift to a more balanced, sustainable and stronger path, the authorities pushedahead with a wide-ranging reform strategy after the general election in late 2015, buildingon the Priority Transformation Programmes of the National Development Plan 2014-18. AnAction Plan for 2016 was announced in January, containing 216 measures to beFigure macroeconomic performanceSource:OECD (2016), OECD Economic Outlook: Statistics and Projections (database), 2 External imbalances have developedCurrent account balance as % of is no longer experiencing boom-and-bust cyclesReal GDP growth, %6 ASSESSMENT AND RECOMMENDATIONSOECD Economic Surveys : Turkey OECD 201615implemented on a specific schedule (Table 1). This plan is retained by the new governmentestablished in May 2016 and provides a blueprint for important structural initiatives.