1 Turkey’s Growth Dilemma Prof. Seyfettin Gürsel Bahçeşehir University Center for Economic and Social Research (betam) Director Prepared for Two Tests for Cyprus World Financial Crisis and Identity 4th Seminar 2008/2009 of the European Forum Cyprus Organised in co-operation with Friedrich Ebert Stiftung Nicosia, June 2009

2 Presentation Plan I.Historical Perspective of Convergence II.Growth and Unemployment in Turkey III.Global Crisis and Unemployment IV.Growth Perspective

3 Historical Perspective of Convergence Graph 1. GDP per capita compared to Western Europe and USA (PPP Adjusted)

4 Historical Perspective of Convergence Two possible Models  Southern Europe (Democratic Model)  Asia (Autocratic Model)

5 Historical Perspective of Convergence Growth Potential of the Turkish Economy Total Investment: 20 % of GDP Increase in the Capital Stock (per year): 7 % of GDP Contribution to growth (per year): 3.5 % ( = 0.5) Non-farm Labor Force Increase (per year): 2 % Contribution to growth (per year): 1 % (1 - = 0.5) Increase in Total Factor Productivity Contribution to growth: 0.5 % to 1 % 3.5 % 1 % 0.5 % to 1 % 5 % % Growth

6 Historical Perspective of Convergence GDP Growth TR – EU(27) : 5.5 % - 2 % = 3.5 % Population Growth TR – EU(27) : 1 % - 0 % = 1 % Difference between GDP per Capital Growth 2.5 % Actual GDP per Capita (Eurostat, 2007) TR/EU(27): 40% GDP per Capita Convergence in 10 Years 30% GDP per Capita in 10 Years TR/EU(27): 40% * 1.3 = 52 %

7 Growth and Unemployment in Turkey Source: TURKSTAT

8 Growth and Unemployment in Turkey Graph 2. Industrial Production Index Turkish economy started to follow a low growth path before the global crisis Source: TURKSTAT and betam

9 Crisis and Unemployment Simple Algebra of Unemployment in Turkey Annual increase of the non-farm labor force 3 % (550,000) Necessary increase of the non-farm employment to keep the number of unemployed constant 550,000 Growth – Employment Elasticity 0.5 Necessary annual non-farm growth rate 6 % Necessary growth rate 5.5 % Effect of the global crisis: Labor force continues to increase

10 Crisis and Unemployment * betam estimation Source: TURKSTAT and betam Non Farm Employment Non Farm Unemployment (%)Non Farm Labor ForceNon Farm Unemployed % % % % % % % % % * 16.80%

11 Crisis and Unemployment Graph 3. Crises and Unemployment (2005 – 2009) Source: TURKSTAT and betam

12 Crisis and Unemployment Graph 4. Labor force and Added Worker Effect Female labor force participation rate is increasing. Labor force participation (%) Source: TURKSTAT and betam

13 Crisis and Unemployment Graph 5. Recession – Employment Dynamics Source: TURKSTAT and betam Female employment increases. Male employment decreases.

14 Crisis and Unemployment 2009 Jan2010 Jan2011 Jan2012 Jan Unemployment rate (%)15,518,0 18,6 Non-farm unemplyment rate (%)19,022,122,022,6 GDP growth (year, %)1,1-3,63,34,5 GDP / Non-farm employment elasticity (%)-4050 Non-farm employment growth (%)-1,2-1,41,72,3 Non-farm employment Non-farm labor force growth (%)5,32,51,53,0 Non-farm labor force Increase in agricultural employment Agricultural employment Total labor force Total employment Total Unemployed Non-farm unemployed Population (15+) Participation rate to labor force (%)45,846,145,946,1 Source: TURKSTAT and betam

15 Future of Unemployment Annual Unemployment Estimations betamSPO Source: PAEP and betam

16 Growth Perspective Graph 6. Current Account Balance Structural Current Account Deficit Source: TURKSTAT and betam

17 Growth Perspective Source: TURKSTAT and betam

18 Real Effective Exchange Rate (CPI based)

19 Growth Perspective Dilemma of Turkish Economy 1.Keeping a sustainable current account deficit Smooth transition to Southern Europe Model 2.Zero current account deficit Abrubt transition to Asian Model

20 Southern Europe Model  Less room for exchange rate policy  Manageable current account deficit  Current account deficit financed mainly by FDI  Reforms aim to increase competitiveness (Labor market, education, transaction costs)  Compensated partially by social policy compromises and partially by defense expenditures (peace dividend) Turkey’s EU membership is a must ! Growth Perspective

21 Growth Perspective Asian Model  Zero current account deficit  Competitiveness Competitive exchange rate (How to achieve low inflation rate?) Low labor market costs (Political constraints)  Social policy not a priority Requires autocratic regime