TURKEY MAY NOT ESCAPE FROM THE MIDDLE INCOME TRAP FOR A LONG TIME

Seyfettin Gürsel and Barış Soybilgen

Recently, “the Middle Income Trap” has become one of the mostly debated topics on Turkish Economy. In the last decade, per capita income increased from $3,000 to $10,500 in Turkey. But the question is, will this striking increase continue in the next decade, and lead Turkey to the group of high income countries, or will the increase in per capita income decelerate, and force Turkey to remain in the group of middle income countries? The government, optimistically, predicts that per capita income in Turkey will reach $25,000 in 2023. However, some economists argue that the increase in per capita income will be much slower from now on, and Turkey will get stuck in the Middle Income Trap. In this research brief, we try to contribute to the discussion by decomposing GDP growth into employment ratio, labor productivity and working age population ratio components.

There are three sources of growth considering the factors of production: capital accumulation (in other words the increase in production capacity through investment), the increase in employment, and productivity gains. In the early stages of economic development, capital accumulation and increases in employment are main sources for growth. However, when per capita income exceeds $10,000, high productivity gains are needed to sustain high growth rates. In this stage (Middle Income), the contribution of capital accumulation and labor force decelerate due to diminishing returns. If productivity gains per worker remains low, per capita income growth also slows down. Before the global crisis (2002-2008), Turkey experienced high growth rates due to strong investment spending (high capital accumulation), increase in non-agricultural employment, and large productivity gains. In addition to these developments, the appreciation of Turkish Lira against USD also helped per capita income to increase quickly. After the crisis until 2012, contributions of the increase in employment ratio and labor productivity gains to high growth were equal. However, per capita income growth declined sharply in the last two years. In the same period, labor productivity first fell and then increased again. In spite of last increases, the contribution of labor productivity to per capita income growth was null in the last two years. If we ignore the limited contribution of the increase in working age population ratio, the increase in employment ratio has been the sole positive contributor to per capita growth in the last two years.

If economic actors and policy makers can’t find a way to increase labor productivity in the coming years, per capita income growth will remain low. This means that it could take a very long time for Turkey to escape from the middle income trap.

doc. ResearchBrief169

pdf. ResearchBrief169

Labor Market Outlook: June 2014

NON-AGRICULTURAL EMPLOYMENT INCREASED DUE TO INCREASE IN SERVICES EMPLOYMENT

Seyfettin Gürsel, Gökçe Uysal and Ayşenur Acar

Seasonally adjusted labor market data shows that non-agricultural unemployment rate remained the same at 11.0 percent in the period of Mart 2014 compared to the period of February 2014. Increases observed in employment for the period of March 2014 were mostly due to the strong increases in services employment. The increase in the services sector was the strongest increase observed in the last two years. However, job growth in other sectors remained weak. Employment increases in manufacturing decelerated, while employment in the construction sector decreased in this period.

doc. LaborOutlook2014M06

pdf. LaborOutlook2014M06

Economic Outlook & Forecasts

EconomicOutlook2014M07  Rapid Decline in the Current Account Deficit

Zümrüt İmamoğlu and Barış Soybilgen

 In May, seasonally adjusted Industrial Production Index (IPI) declined by 1.0 percent from the previous month. Export volume index increased by 0.1 percent, and the import volume index increased by 2.6 percent. Indicators show that the revival in consumer and investment remained weak in the second quarter. Gold-excluded exports and imports increased almost at the same pace, therefore, contribution of net exports remains limited. Due to the fall in the IPI, we revise down our forecast for the second quarter. We reduce our quarter on quarter (QoQ) growth forecast from 0.8 percent to 0.4 percent, and the corresponding year on year (YoY) forecast from 3.8 percent to 3.4 percent.

The current account deficit continues to fall rapidly due to fall in gold imports. The current account deficit in May was $3.4 billion. 12-month rolling current account deficit declined by $4.2 billion in May, and fell to $52.6 billion. We expect the current account deficit to GDP ratio to fall to 6.4 percent at the end of the second quarter, and the gold-excluded current account deficit to be 5.8 percent.

PUBLISHED NOTES 

EconomicOutlook2014M05 Foreign Demand Driven Growth in the First Quarter

EconomicOutlook2014M04 Export-Led Growth

EconomicOutlook2014M03 Domestic Demand Under Pressure

EconomicOutlook2014M02 The Positive Outlook in the Last Quarter Reversed

EconomicOutlook2014M01 Economic Outlook Improved in November

EconomicOutlook2013M12 Growth Stagnates in the Last Quarter

 

 

Growth Review: 2014, 1st Quarter

FOREIGN DEMAND LED GROWTH

Seyfettin Gürsel, Zümrüt İmamoğlu, ve Barış Soybilgen

Turkey’s real GDP increased at a rate of 4.3 percent in the first quarter of 2014 from the same quarter of the previous year. Year-on-year growth in Turkish economy has been above 4.0 percent for the fourth consecutive quarter now and quarter-on-quarter growth accelerated. Seasonally adjusted GDP increased 1.7 percent in the first quarter from the previous quarter. This rate was 0.9 percent in the previous quarter.

Main sources of growth in the first quarter were exports and government spending (qoq). Government spending increased by 4,8 percent and continued its significant contribution to growth since 2012.  Exports increased by 7 percent led by European recovery, while imports fell 2.4 percent. Consumption and investment expenditures, on the other hand, decreased from the previous quarter. Consumption declined 0.5 percent and investment decreased 2.8 percent.

The 12-month current account deficit (CAD) to GDP ratio, which was 7.9 percent at the end of 2013, fell to 7.5 percent at the end of the first quarter. Gold excluded current account deficit fell to 6.4 percent from 6.5 percent.

doc. Growth2014Q1

pdf. Growth2014Q1

Labor Market Outlook: April 2014

UNEMPLOYMENT CONTINUES TO DECREASE DUE TO EMPLOYMENT INCREASES IN CONSTRUCTION AND SERVICES 

Seyfettin Gürsel, Gökçe Uysal and Ayşenur Acar

Seasonally adjusted labor market data shows that non-agricultural unemployment rate decreased from 11.6 percent to 11.3 percent (0.3 percentage point decline) in the period of January 2014. Seasonally adjusted labor market series show that employment increased in all sectors. Employment increases in services had slowed down in the third quarter of 2013, but they have accelerated since the last quarter of 2013. Also, we observe that employment increase in construction sector has accelerated since the period of August 2013. It increased from 1 million 672 thousand in the period of July 2013 to 2 million in the period of January 2014.  An increase of approximately 20 percent that is observed in a 6-month period, indicates that the labor market needs to be carefully analyzed.

doc. LaborOutlook2014M04

pdf. LaborOutlook2014M04

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