Policy Brief: Economic Survey of Turkey, 2008

Far-reaching institutional and structural reforms following the 2001 crisis underpinned an unprecedented period of high growth until 2007. More recently, however, tensions arose and growth slowed down as a result of loss of competitiveness in large areas of the economy, the deterioration of international conditions, and a weakening of confidence domestically. New government initiatives to strengthen the macroeconomic policy framework, and upgrade the competitiveness of industry and its capacity to create jobs, would help the economy resume a stronger growth course. The main challenges in this respect are:

• Preserving the gains of fiscal consolidation and making fiscal policy more compatible with higher growth.

• Resuming disinflation and better aligning structural policies as well as fiscal policy with the inflation targeting framework.

• Reducing barriers to formal employment in order to mobilise the productivity potential and improve the resilience of the Turkish economy.

Consolidating macroeconomic policies
In the area of fiscal policy, the gains of recent fiscal-institutional reforms and vigorous fiscal consolidation should be preserved, and credibility enhanced, in the wake of transition from IMF monitoring. This can be achieved by enforcing multi-yearly spending ceilings combined with a primary surplus target, aimed at continuing to reduce the public debt ratio.

In the area of monetary policy, the disinflation strategy of the Central Bank needs the support of more comprehensive policies to improve inflation expectations, including the full implementation of a robust fiscal framework, competition reforms to moderate service price growth, and encouraging social partners to adopt the inflation target as an anchor in pricing and wage behaviour.

Bolstering the competitiveness and job-creation capacity of the business sector
The business sector has to cope with rising competition from low-cost countries, and trend real currency appreciation, by accelerating productivity gains, keeping wage growth in line with profitability, and innovating and differentiating products. This should be achieved not only in the most sophisticated segments of industry, but also in traditional labour-intensive activities.

Latent productivity and competitiveness potential should be mobilised by facilitating formalisation, thereby encouraging firms, which make fuller use of modern technology, skilled labour, capital and FDI resources.

Two top priorities in fostering the growth of the more productive part ofthe economy are: i) reforming labour market regulations to overcome the divide between law-abiding but rigid and very flexible but law-breaching employment practices; and ii) upgrading corporate finance markets to permit firms joining the formal sector to rapidly improve their capital base, productive capacity and productivity.By deepening the recently started reform initiatives in these areas, Turkey can improve employment prospects for the growing urban working-age population, restore full confidence in its growth prospects, improve risk premium and its credit-rating, and thereby move to a faster catching-up path.

OECD: OECD and Turkey http://www.oecd.org/country/0,3731,en_33873108_33873854_1_1_1_1_1,00.html

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