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Turkish Economy 2000-2010: A Decade of Transition

Turkish Economy 2000-2010: A Decade of Transition

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This policy brief discusses views on what changed in Turkey's economy and what did not.
This policy brief discusses views on what changed in Turkey's economy and what did not.

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Categories:Types, Research
Published by: German Marshall Fund of the United States on Mar 11, 2013
Copyright:Attribution Non-commercial


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There is a widespreadperception that the past decadehas been transformationalfor Turkey’s economy. Thisarticle discusses views onwhat changed and what didnot, what old problems wereaddressed and what newproblems emerged, and whatparts of the transformation setthe stage for permanently bettermacroeconomic performanceand what parts were moreephemeral.
 Turkish Economy 2000-2010: A Decade of Transition
by Dr. Sena Eken and Susan Schadler 
March 11, 2013
Washington, DC
Tere  a wdepread percepto thatthe pat decade ha bee traorma-toal or rkey. I late 2011, expertdraw rom the eld o ecoomc,poltcal cece, ocology, jor-alm, vetmet bakg, adhtory coveed  Itabl, Br-el, ad Wahgto, DC to dcthe atre o the chage  rkey’poltcal ecoomy  the pat decade.T artcle dce the ma cocl-o rom thee meetg.
Morepeccally, t portray vew o whatchaged ad what dd ot, what oldproblem were addreed ad whatew problem emerged, ad whatpart o the traormato et thetage or permaetly better macro-ecoomc perormace ad what partwere more ephemeral.
Macroeconomic and Financial PolicyChanges Were most Obvious andClear
Te macro evromet had reacheda crecedo o tablty at the tro the cetry: ato had hovered
1 This article is an excerpt from a recently publishedbook,
Turkey 2000-10: A Decade of Transition — Discus- sions Among Experts
arod a growth-deyg 80 percetor year; avg rate had alle; theacg o oarg cal dect hadphed pblc debt, real teret rate,ad captal ow to taablelevel; ad rk-takg by der-captalzed bak wet crbed. Tperect torm o vlerablte pavedthe way or rkey’ mot devatatgpot-war ecoomc cr  2001,preg the ecety or a broad pot-cr reormlato o macroecoomcpolce ad ttto.Improvemet  macroecoomc adacal polcy ramework  theaermath o the cr were mpreve.Fcal polcy wa achored o a targetor the prmary rpl. Te moetary polcy ramework hed to a oatgexchage rate regme. Te CetralBak,  a ew ato-targetgramework, wa grated depedece v-à-v polcy acto. Te acalector derwet pervave reorm:bak were recaptalzed; pervowa tregtheed; pervo adreglatory practce were broght le wth teratoal practce; adew bakg law reed the legaltrctre derlyg thee reorm.Tee chage helped rkey over-come logtadg orce o ta-
The shift to more stablemacroeconomic policies alsoincreased Turkey’s resilience toshocks.
blty ad ecre trog ecoomc perormace drg themddle o the decade. Pblc ector ace tregtheedad the govermet wa able to hold the prmary rplteady arod 5 percet o GDP throgh 2006. Te trogprmary rpl poto ad the greatly redced acgeed, together wth the rempto o GDP growth aer2002, permtted a teady redcto o the pblc debt toGDP rato. By the ed o the decade, et pblc debt wa amoderate 36 percet o GDP, jt above hal t level at thebegg o the decade. Iato wa broght dow togle dgt by 2004.Te h to more table macroecoomc polce alocreaed rkey’ relece to hock. Ideed, the 2008-09global cr ha bee a rt major tet o th relece. Tecope or coter-cyclcal moetary ad cal polce adthe tregth o the acal ector were key gredet o the peed ad tregth o recovery rom the hard mpact o the global cr.
Effects of Greater Macroeconomic Stabilityon Growth Were Questionable
Althogh the ecoomy grew at a average aal rate o 7percet drg 2000-07, the average aal growth o 4.2percet or 2000-10 wa ot hgher tha  the prevodecade ad wa lower tha that  may other emerggad developg ecoome. Moreover, the volatlty growth dd ot decle.However, the geeral percepto wa that, or everalreao, ecoomc property had mproved by moretha mple GDP growth ggeted. Frt, the harp brto growth drg 2002-07 — the atet o ay ve yearperod ce the begg o the Repblc — repreeted adtct break rom the pat. Secod, the real apprecatoo the rkh lra cotrbted to hgher prchag powero wage-earer  partclar. Trd, growth had bee moreclve tha  the pat: ot oly dd come dtrbtomprove lghtly, bt alo the govermet wa ccel brgg bac ervce ad amete to people. Fally, therecovere rom the two cre, helped by approprate polcy repoe ad the rempto o captal ow, were rapdad vgoro.
Microeconomic and Structural ReformsWere Generally more Timid
Togh the global acal cr mot certaly cotraed the repoe o GDP to macroecoomc tabl-zato, addreed mcroecoomc ad trctral weak-ee were alo a drag o growth.I cotrat to hard deco ad acto o macroeco-omc polce, there were med opportte to do better trctral ad ocal polce, epecally  2005-07, whethe codto were rght or galvazg chage. Whlechage or the better had occrred  everal area, erompedmet to trog ad eqtable growth remaed tobe tackled. Mot mportatly, problem coted to eter the exblty o the labor market ad the eectveeo the edcato ytem. Te egatve mplcato o theeproblem have bee gcat or the cotry’ prodc-tve capacty, t global compettvee, ad the welare o rkh ctze.I the labor market, job growth lagged behd workgage poplato growth ad employmet remaed hgh.Impedmet to job creato clded the ece o rkh lra apprecato ad globalzato alogde trc-tral obtacle ch a exceve reglato geared towardprotectg job  the ormal ector, teep everace pay reqremet, a deretated mmm wage, hghlabor taxe, ad kll mmatche.I the edcato ytem, there were mprovemet  ra-trctre, teret acce to chool, chool erollmet, adcrrclm. Bt the dametal problem — that edca-to remaed too eve  qalty ad too oced othe objectve o ato-bldg at the expee o teachgcrtcal thkg kll eetal to ocal moblty ad tocompetg  the global ecoomy — remaed to be tackled
The central trade-off thatpolicymakers faced was betweenfaster growth and lower current
account defcits.
throgh ovato  both the crrclm ad objectveo edcato.
Pre-Reform Vulnerabilities Were Lowered,but New Ones Emerged
Macroecoomc tablty, whle addreg may o thelogtadg vlerablte — hgh ato, progatecal polcy ad a ragle acal ytem — opeed thedoor to ew vlerablte. Wth greater codece  therkh ecoomy ad  a evromet o ample lqdty,captal ow rged. A a relt, the rkh lra apprec-ated, bak ledg rged, prvate avg coted toall, prvate vetmet roe, ad mport creaed. Teeece created trog prere o the crret accotbalace, whch wa aced too heavly by hort-termcaptal ow. T the ew vlerablte cetered o alarge crret accot dect ad expore to dde top, varable rk premm, ad exchage rate varablty.Te cce o tablzato alo chaged the bac polcy trade-o  tato o overheatg. I the prevodecade, the mot mportat macroecoomc trade-o wa betwee growth ad ato. Drg the pat decade,however, the trade-o wa traormed. Iato targetgwth a exble exchage rate, a ope captal accot,ad globally tame ato meat that epode o excedometc demad gave re to larger crret accot de-ct. I other word, the cetral trade-o that polcymakeraced wa betwee ater growth ad lower crret accotdect. T, a recpe or taable growth ha yet to beod.
Turkey Faced New Challenges Stemming fromGlobalization during the Decade
rkh exporter aced dfclt codto wth prereor pecalzato, competto rom globalzato, ad theapprecato o the rkh lra. Tey were ccel meetg thee challege de  o mall part to rkey’h toward more otward-oreted trade ad pportgdplomacy. T h  perpectve, alog wth tablemacroecoomc codto, cotrbted to reewg exportgrowth, creag rkey’ global market hare, dver-yg prodct le ad market, ad  movg p thetechology ladder.Whle there had bee chage  the compoto o export avor o medm-tech prodct, ch a traormatowa ot acheved  the cae o hgh-tech prodct, whchhave hgh growth potetal. Moreover, whle the peetra-to o ew market, epecally  the Mddle Eat adNorth Arca, had bee hghly avorable or export, rkhexport have ot bee able to peetrate ad take advatageo market wth the mot growth potetal.
The Goal of EU Accession was a Profound Forcefor Change
Te EU memberhp proce had mportat eect  polt-cal, ocal, ad legal phere drg the decade ad hadcotrbted mportatly to ecoomc ccee
However,the vgor ad gle-mdede o the ph to adoptchage reqred by the EU aded aer the mddle o thedecade becae o exteral actor, drpto  dometcpoltc, the dfclt atre o remag reorm, ad thedrop  pport or EU covergece  rkey.It  ot clear what th wll mea or the tre. Wll therkh people ad ther poltcal leader recommt to theproce o memberhp? I ot, the abece o a EU phcold elmate teret  the coted prt o may tttoal chage. Alteratvely, chage early  thedecade  repoe to the drve or EU acceo cold et moto a proce that wold evetally reme. T, theEU acceo proce wa the begg o a major traor-mato, wth a yet clear ecoomc mplcato or thetre.
Substantial Challenges Remain for the Next Decade
Chage, eve oe that edre a decade o challege, cabe dermed a they ecoter ew crcmtace
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