Turkey’s sustainable high economic growth and long-term political stability as a democracy are interdependent national objectives. The government can benefit in its structural reforms from several specific recommendations by the Organization for Economic Cooperation and Development (OECD).
Since 2005 the OECD has published an annual report, Going for Growth (GFG), which provides, complementing its country and sector-specific surveys, a novel structural surveillance under the theme of economic policy reforms. Aimed at raising living standards, the report analyzes 30 member countries’ structural policies and their outcomes in terms of the OECD’s policy priorities and recommendations. The analysis is based on a set of internationally comparable and periodically updated indicators linked to benchmarked performance across these indicators. The benchmarking is predicated on the argument that despite differences in their social preferences, member countries should not rationalize inefficient policies based on their national uniqueness. They can learn from each other’s successes and failures. All GFG reports have underlined the robust empirical finding that the wide gross domestic product (GDP) per capita gaps among OECD members reflect largely the differences in their education systems, labor market institutions and product market regulations as well as tax and social welfare structures. Each GFG report reviews the extent to which member governments have acted on previous OECD recommendations. Performance measurement focuses on GDP per capita, productivity (GDP per hour worked) and employment (labor resource utilization measured as total number of hours worked per capita) indicators. Turkey’s GDP per capita gap, the largest within the OECD relative to the average GDP per capita based on purchasing power parities of the highest 15 OECD countries, can be decomposed into the percentage gaps in its labor productivity and labor utilization.
The 249-page GFG 2010 report, published two weeks ago, comes as we continue to recover from the global crisis that has forced unprecedented emergency actions by governments everywhere. It urges OECD member governments to shift gears by winding down those emergency actions, especially in order to restore fiscal sustainability, and by resuming primarily microeconomic policy reforms delayed but also made more urgent by the crisis. It argues that policy reforms in financial, product and labor markets are essential to mitigating the long-term damage done by the crisis.
GFG 2010 is divided into two parts. Part I, “Taking Stock of Structural Policies in OECD Countries,” contains the four regular chapters “Responding to the Crisis while Protecting Long-term Growth,” “Responding to the Going for Growth Policy Priorities: An Overview of Progress since 2005,” “Country Notes” and “Structural Policy Indicators.” Part II, “Thematic Studies,” contains three special topical chapters unique to the current issue: “A Family Affair: Intergenerational Social Mobility across OECD Countries,” “Getting it Right: Prudential Regulation and Competition in Banking” and “Going for Growth in Brazil, China, India, Indonesia and South Africa [BIICS].” GFG 2010 is the first annual issue to analyze the challenges facing non-member BIICS, with which the OECD has a relationship of “enhanced engagement,” in their attempt to catch up with the OECD standards.
I will focus on the report’s analysis directly concerning Turkey. GFG 2010 lists the following priorities, which the OECD has chosen for Turkey in various years since 2005: Under priorities supported by indicators, (1) “Improve educational achievement”; (2) “Reduce the minimum cost of labor”; (3) “Reform employment protection legislation”; (4) “Reduce the scope of public ownership”; and (5) “Reduce administrative burdens on start-ups.” Under other key priorities, (1) “Simplify product market regulations”; (2) “Reduce early retirement incentives for workers in the formal sector”; and (3) “Implement results-oriented budgeting in core public services.” The report compares the specific OECD recommendations with the specific Turkish government actions.
In light of that comparison, GFG 2010 summarizes Turkey’s basic structural characteristics, and their recent changes are as follows: (1) The GDP per capita gap relative to the upper half of the OECD began to narrow in the 2000s but is still the widest within the OECD. The gap reflects low labor productivity but especially low labor utilization levels. It narrowed due to productivity gains despite deteriorating utilization. (2) In education, secondary school attainment and achievement are still lagging. (3) With reduced administrative burdens, new business creation is simpler. With large-scale privatizations, public ownership is lower. With legal and institutional encouragement, foreign direct investment is higher.
Successful monetary and fiscal stabilization policies, reform of the banking sector after the 2001 financial crisis and start of the EU accession negotiations have been growth-enhancing. (4) But reforms to decrease labor costs and increase labor market flexibility have been very inadequate. Although the minimum wage to average wage ratio has been lowered, employment protection legislation, especially for temporary employment, is still very restrictive. (5) Also, no actions have been taken yet to reduce early retirement incentives, to have young retirees make health insurance contributions and to remove severance payments for retiring workers, as was noted on March 12 by Today’s Zaman.
The crucial cumulative conclusion that emerges from the study of the OECD’s six GFG annual reports is that, besides its serious national savings deficiency, Turkey’s major economic bottleneck in achieving sustainable high growth are the largely policy-imposed constraints on the efficient use of its most important asset, its growing labor force. That is basically the same conclusion reached in my column “A pragmatic guide to competitiveness and growth” two weeks ago.
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