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.