Seyfettin Gürsel and Barış Soybilgen
Recently, “the Middle Income Trap” has become one of the mostly debated topics on Turkish Economy. In the last 10 years, per capita income increased from $3,000 to $10,000 in Turkey. But the question is, will this striking increase continue in the next 10 years, 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 and productivity components during the recent past.
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, there 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.
In the coming years, it is not likely that the Turkish economy will experience another high growth period. Due to high current account deficit and the end of abundant global liquidity, it is hard for the Turkish Lira to appreciate. More importantly, this research shows that the increase in labor productivity has stopped in the last two years. Our findings clearly show that Turkey is on the brink of the Middle Income Trap. For a plausible increase in per capita income, labor productivity should contribute to growth positively and significantly. “How do we make this possible?” is a critical question for the Turkish economy.
doc. ResearchBrief154
pdf. ResearchBrief154