Economic Policy Research Institute TOBB Economics and Technology University Structural Transformation of the Turkish Economy: The new agenda for adjustment, risk management, and competitiveness Güven Sak Ankara, 26 April 2006
Slide 2 Agenda The on-going structural changes in the Turkish economy Emerging risks and sustainability of the growth process current account deficit unemployment creative destruction Towards a brand new agenda and the role of the EU process adjustment management risk management raising competitiveness Building capacity TOBB-ETÜ Economics and Technology University TEPAV Economic Policy Research Institute
Slide 3 New climate & contrasts What s new? What has changed?
Slide 4 Where do we come from? The Turkish economy in the 1990s Despite huge potential, Turkish economy significantly underperformed in the 1990s: boom and bust cycles in growth high and chronic inflation high public sector deficit fiscal indiscipline high levels of uncertainty (political and macroeconomic) very high interest rates three economic crises, internal conflict, 1999 earthquake the 2001 economic crisis = GDP shrank by 10%
Slide 5 Every crisis brings both opportunities and risks A new process after 2001? Growth without inflation Interests rates are falling Productivity is rising No net job creation 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Non-inflationary growth (1999-2005) Industrial Production Interest Rate Inflation Oca.99 Oca.00 Oca.01 Oca.02 Oca.03 Oca.04 Oca.05 Inflation and Interest Rates Productivity and Employment Trends 100% 80% 60% 40% 20% 0% -20% -40% -60% inflation nominal interest real interest rate 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 Employment Production Labor Productivity economic program 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: State Statistics Institutee
Slide 6 Reforms lead to a new incentive structure Features of the economic program after the 2001 crisis Monetary Discipline (coupled with Central Bank independence and floating exchange rate regime) Fiscal Discipline Public Administration Reform Banking Sector Reform-Corporate Restructuring Results and Outcomes: Impressive growth without inflation Rising Productivity as the driver of growth Unemployment does not decrease Move from implicit to formal inflation targeting Currency appreciates Current account continues to deteriorate Of course, presence of some external factors help speed up the process (growing competition from East Asia, global liquidity etc.)
Slide 7 And the new incentive structure changes the rules of the game at the corporate sector Old environment Competitiveness need for cheap labor cost and price based very limited research and development limited marketing Investment Climate: High Inflation Generous incentives, subsidies Pegged Currency (95-01) New enviornment Competitiveness: need for qualified labor-force quality-based focus on research and development marketing innovations Investment Climate: Low inflation Limited incentives, prudent banking sector Floating Currency (post 2001)
Slide 8 Reflections on the economy The story on competitiveness Integration into the EU economy New trends, new risks
Billion $ Transformation of the Turkish Economy: The New Agenda for Slide 9 The new game: Integration into the global economy Growth rate of trade volume 1989-2001: %8.5 2002-2005: %29 Increase in import of intermediate inputs 1989-2001: %8 2002-2005: %33 100.000 Turkey in global economy increasing trade of goods and services increasing foreign direct investment change in the sectoral composition in exports and in manufacturing value added Import and Export of Intermediate Inputs, 1989-2005, billion $ 80.000 Export Import 60.000 Customs union 2001 crisis 40.000 20.000 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: Central Bank of Turkey 2005
2000-2004 annual growth rate of exports (CAGR) Transformation of the Turkish Economy: The New Agenda for Slide 10 Competitiveness of Turkish Industries: Promising but also challenging 60% 50% 40% 30% Emerging Sectors Petroleum Products Automotiv e TVs and Telecom Size of the bubbles indicate export volume in 2004 Star Sectors 20% Electrical Machinery Metals Güç kaynakları (makinalar) General machinery Iron&Steel Non mettalic minerals Fruit&Vegies Plastic Materials Textiles transportation equipment Apparel 0% Snail Sectors Traditional Sectors 10% 0% 1% 2% 3% 4% 5% 6% World market share % Source: United Nations COMTRADE
2000-2004 annual growth rate of exports (CAGR) Transformation of the Turkish Economy: The New Agenda for Slide 11 challenging because China does not only mean cheap labor 60% 50% 40% Emerging Sectors Size of the bubbles indicate export volume in 2004 Star Sectors Office Equipment 30% 20% 10% 0% Scientific Equipment Industrial Machinery Electrial Machinery Furniture Iron and Steel Metal productsi Automotive Metal-dışı ürünler Snail Sectors TVs and Telecom Textiles Coal products Traditional Sectors Aparell 0% 5% 10% 15% 20% 25% 30% 35% World market share %
Slide 12 The EU is Turkey s largest trade partner Imports Total USD 116 billion, 2005, (42% EU share) Exports Total USD 73 billion, 2005, (52% EU share Africa Asia 14 Spain 11 Germany 7 Italy Spain Germany 14 United Kingdom 9 Middle East USA 5 7 6 Russia 11 Other Europe 11 8 17 France Other EU Other Africa Middle East 8 5 13 USA 8 3 Russia 11 26 Other Europe Other EU Source: Undersecretariat of Foreign Trade
Share of EU's most dynamic 20 goods in manufacturing exports (%) Transformation of the Turkish Economy: The New Agenda for Slide 13 Fast integration into the EU: Could it be even faster? The share of the EU s most dynamic 20 goods in Turkey s total exports is rising. (vertical axis) This means trends in Europe increasingly change the production structure in Turkey. Turkey s markets share in these markets also rise, but slower than those of Czech Republic and Poland. (horizontal axis) Market share in EU s most dynamic 20 exports and the level of integration: 1995 vs. 2004 35 30 25 Czech Republic 2004 (5.0) Poland 2004 (7.7) 20 15 10 5 Romania 2004 (2.2) Romania 1995 (0.7) Czech Republic 1995 (1.4) Poland 1995 (2.3) Turkey 1995 (2.1) Turkey 2004 (6.2) Bubble site indicates countries' export value for the EU's 20 most dynamic imports (billion USD) 0 0,5 1 1,5 2 2,5 3 3,5 4 Market share in EU's most dynamic 20 goods (%) Source: United Nations COMTRADE
Slide 14 Emerging Risks & Sustainability of the Growth Process Current account deficit and its structural components Employment Trends Demographic window of opportunity (or threat?) Structural transformation across sectors: Decline in agriculture Rising creative destruction Structural transformation within sectors: Move from traditional toward modern in retail industry
Current Account Deficit / GDP (%) Current Account Deficit (billion USD) Transformation of the Turkish Economy: The New Agenda for Slide 15 Current Account: at scary levels? 4,0 5 2,0-0,0-2,0-4,0-6,0-8,0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Current Account Deficit / GDP Current Account Deficit (billion USD) -5-10 -15-20 -10,0-25 Source: Centrai Bank of Turkey
Fast growing sectors import more: Coincidence or curse? It s a fact and a serious risk generating factor The current account deficit seems to have a structural component and an external trigger (i.e. China), which are closely linked More modern sectors tend to be more dependent on intermediate good imports. They are also the engine of export growth. Currency appreciation plays a role Cheap alternatives from East Asia Lack of strong local clusters in modern sectors (role of industrial policy) Bottom-line: Production process are getting more global, but accounts remain national; and hence vulnerabilities. Average Growth (2002-2005) Import Dependency Slide 16 office, accounting and computing machinery 37% 0.268 radio, television and communication equipment 27% 0.234 chemicals and chemicals products 11% 0.228 medical, precision and optical instruments 15% 0.226 Leather 1% 0.151 apparels -1% 0.132 Textiles 0% 0.13 Ttobacco products 0% 0.093 Source: State Statistics Institutee
Slide 17 Declining market shares in traditional sectors The traditonal sectors that tend to grow slower in the recent years also face rising competition from China The textile industry for instance, which makes up %12 of the manufacturing value added is going through hard times Textile and Apparel Exports to EU-15 Countries: Turkey and China Market Share 1995 Market Share 2002 Average Growth in Market Share (1995-2002) Market Share 2004 Average Growth in Market Share (2002-2004) Turkey %4,6 %6,5 %5,1 %6,9 %3,6 China %2,9 %5,3 %9,4 %6,5 %10,9
AS A SHARE OF GDP Transformation of the Turkish Economy: The New Agenda for Slide 18 Financial integration coupled with trade integration can mitigate risks FDI inflows increase as a result of global value chain integration trade credits will increase more as a by-product Portfolio investments increase (ISE) Central bank reserves increase consistently 6% 5% FDI OTHER INVESTMENT PORTFOLIO INVESTMENT CENTRAL BANK RESERVES 4% 3% 2% 1% 0% -1% 2002 2003 2004 2005
Slide 19 Recent employment trends: sometimes good is not enough Growth in recent years does generate jobs. But it s not enough, unemployment persists. Declining share of agriculture Both trends will continue = Rising working age population risk generating factors Plus: strong competitive pressures, high tax wedges, high productivity growth 140 130 120 110 100 Sectoral Employment and Demographic Trends, 1999-2005, 1999 indexed to 100 Industrial Production Index Service Employment Manufacturing employment Working Age Population Total Employment 90 80 70 1999 2000 2001 2002 2003 2004 2005 Agriculture employment Source: TÜİK and WDI
Slide 20 Modernization inevitably leads to decline in agriculture EU accession process will surely accelerate transformation (plus globalization and trade liberalization) Turkey s total population = 70 million Agriculture (33 %) = 23 million Services (43 %) = 30 million Industry (24 %) = 17 million Sectoral Distribution of Employment in Turkey, 2004 Services 43% Industry 24% Agriculture 33% Economic Structure before and after EU accession in Greece, Portugal and Spain Before Accession After Accession 1981 1986 1986 2001 2001 2001 Greece Portugal Spain Greece Portugal Spain Agriculture 31 22 16 16 12 6 Industry 29 34 32 23 35 31 Services 40 44 52 63 53 61 Source: World Development Indicators
(%) Transformation of the Turkish Economy: The New Agenda for Slide 21 Demographic trends create opportunities as well as risks The share of working age population in the overall population in Turkey has started to increase significantly. This stands out as a very critical advantage when compared to the demographic trends of Europe. This ratio is at a decreasing trend for the EU countries, while it s rising in Turkey. Ratios of both EU and Turkey will be equal in 2010, and then Turkey will overtake Europe. Key challenges: Achieving above-normal growth rates for job creation Raising labor participation rates for seizing the opportunities Share of Working Age Population in Total Population, World Bank Estimates 2005-2050 75 70 65 Turkey 60 55 Western Europe 50 45 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Source: World Development Indicators 2040 2045 2050
Slide 22 Is Creative Destruction in place? Closer look at the companies closing down Floating exchange rate as a sweeping mechanism? As a mechanism to break the inertia As an igniting mechanism for creative destruction? 1995-2005 Number of Companies Closed Down 5000 4500 # of companies closed down 4000 3500 3000 2500 2001 Crisis 2000 1500 1000 500 0 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Source: State Statistics Institutee
Slide 23 Is Creative Destruction in place (2)? 1995-2005 Number of Companies Started and Closed Down 40000 35000 30000 25000 20000 15000 10000 5000 0 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 # of companies opened # of companies closed Jun-03 Jun-04 Jun-05 Source: State Statistics Institutee
Slide 24 Structural Transformation of the Services Sector: An example from retailing
A projection for the future: Comparison of Spain and Turkey If Turkish retail market structure is the same as in Spain by 2010, 86,000 traditional retailers would go out of business.
Slide 26 Winners and losers in retailing Winners Losers End-points Organized chains Groceries, traditional shops Distribution Suppliers Wholesalers Transportation Logistic firms Individual truckowners Production Brand-names Informal producers (quality??) Consumers are also winners because competition among organized chains drives prices down
Slide 27 Towards a brand new agenda Setting the priorities, implementing strategies Managing the EU process Building capacity
Slide 28 Towards a new agenda Picture is not bad at all recent growth performance macroeconomic stability a new and healthy incentive structure global integration with also growing regional integration However, risks are serious and require competent management Current account deficit Rising unemployment Creative destruction.. + external factors: (i.e. foreign affairs) There is an urgent need for a new agenda Setting the priorities, strategic action plans, effective delivery Managing the EU process as a mechanism to mitigate risks Building the required capacity for the new environment
Slide 29 Setting the priorities We feel there should be three key areas: Adjustment management Risk management Raising Competitiveness Government needs to have the capacity to set the priorities design strategies implement effectively If managed wisely, EU process will be highly useful
Slide 30 Solving the adjustment problem and the role of the EU The new incentive structure came in too fast if not managed effectively, then adjustment itself becomes a serious risk The corporate sector needs to adjust to the new environment Modernization (Upgrading technologies, M&As) Skills conversion Move from informal to formal activities Urgent needs and the EU Funds + strategy + delivery capacity
Slide 31 Risk management and the role of the EU Current account deficit As the EU becomes a stronger policy anchor, FDI flows will increase (as was the case in all new EU member states) Unemployment and skills training (+skills conversion) EU funds and framework programs can help Inspiration from Korea (IT training for unemployed after the 1997 crisis) (millions of people) Creative destruction EU will set the framework for the public sector reform as well as the restructuring of the services sector A more efficient services sector will ease the pain resulting from creative destruction (of course, if coupled with skills training) Regional disparities EU support programs for the Regional Development Agencies
Slide 32 Agenda for competitiveness and the role of the EU Strategic integration into the global economy public-private dialogue mechanisms for right investment decisions reform of the incentive system foreign direct investment strategy Removing the barriers to investment, doing business, and productivity entry and exit barriers informal economy and scale problems services sector restructuring and input costs Fostering R&D and innovation improving the quality of the workforce quality standards Cluster Development Programs
Slide 33 Building capacity for the new agenda Can the government undertake all of this all alone? Capacity problems both at the decision making and service delivery levels The need for public-private dialogue mechanisms Continuous feeding of the contents of the agendas Removing the binding constraints to effective decision making and service delivery TEPAV Economic Policy Research Institute TOBB Economics and Technology University
Slide 34 TEPAV Economic Policy Research Institute Developing policy tools for dialogues with the government Industrial Policy Document (with State Planning Organization) Investment Climate Assessment (with the World Bank and Treasury) Competition Environment Assessment (with the World Bank, FIAS and Competition Authority) Higher Education Sector Project (with the World Bank) Governance of economic development Decentralization studies, regional development framework (with The Ministry of Internal Affairs and local authorities) Fiscal monitoring and transparency Regional Integration Industry for Peace Initiative (with TOBB) Black Sea and Central Asia Project (with TOBB)
Slide 35 Economics and Technology University Demographic transition started long time ago Skills conversion requirement as severe as skills training Training for the much needed skills All students working closely with the industry Businessmen who can do business globally Multiple languages, interdisciplinary education Engineers who can innovate intense university-industry collaboration Civil servants who can analyze & design policy Master in public policy program (Harvard and SAIS) Case study based education for the region Extensive focus on networking Sectoral Research Institutes
Slide 36 thank you www.tepav.org.tr www.etu.edu.tr