Transcript Opportunities and Pitfalls for Turkish Economic Growth

Opportunities and Pitfalls for the
Turkish Economy
Daron Acemoglu
Charles P. Kindleberger
Professor of Applied Economics,
Massachusetts Inst. of Technology
Outline
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The global context
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Skill-biased technical change
Globalization
Institutional background
Resistance to change
Potential for Turkish economic growth
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Problems
Prospects
The Global Context
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Two major economic trends of the past 20 and next 20
years:
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Skill-biased technical change
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New technologies replacing tasks previously performed by
unskilled labor, and complementary to indicated, skilled and
specialized workers
Globalization; international trade, outsourcing, foreign direct
investment and financial integration
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A more integrated world, through trade, within-company
outsourcing, increasing foreign direct investment and capital
market liberalization.
Skill-biased technical change
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Technical change, such as introduction of computers,
robotics, new information processing systems, require
a more skilled workforce.
More educated workers and countries with sufficient
supply of educated unskilled workers are the economic
winners.
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Increased demand for skills and wage premium to skilled
workers in both high and middle-income countries.
Slower transfer of technology to countries without a
sufficient supply of skilled managers and engineers.
Globalization
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Greater competition in the world economy.
Although standard international trade theory predicts
that globalization may reduce demand for skills in
middle and low-income countries, the current wave
associated with transfer of technologies and
outsourcing, typically increasing the demand for skills.
Skill-upgrading as a result of international trade,
especially associated with outsourcing
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A process similar to skill-biased technical change, favoring
countries with skilled managers and engineers.
Globalization challenges
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Globalization an opportunity for most countries, but
also a challenge.
Incorporation of China, India, Pakistan and Indonesia
into the world economy means competition for low-cost
producers for middle-income countries like Turkey.
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No longer possible to be competitive with low wages alone.
Need to move up the quality ladder towards more skillintensive products
Again, pitfalls of shortage of skills.
Institutional Background
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Throughout history, a set of institutions protecting
investors and producers and creating a level playing
field important for investment and economic
development.
Institutions particularly important during periods of
rapid technological change and new opportunities, in
order to ensure entry by new firms and individuals with
the right comparative advantages.
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E.g., importance of institutions during the age of industrial
growth, the 19th century; countries with institutions allowing
free entry and secure property rights prospered, while many
others stagnated.
Importance of Institutions Today
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We are in an age of new technologies and new
opportunities
Globalization also makes capital and technology more
footloose, or increasing the importance of institutions.
Imperative to improve both supply of skills and the
institutional environment to attract foreign capital, new
technology, encourage the right type of investment and
ensure progress up the quality ladder of products.
Political Economy
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Countries don’t always end up with the right
institutions, nor show a tendency to reform
dysfunctional institutions because of political economy
reasons.
The process of economic growth intertwined with the
process of creative destruction.
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There are economic and political losers, whose profits, rents,
privileges get eroded as new and better firms enter into
markets and the mix of activities shift.
Political resistance to change.
Example: resistance to free trade from inefficient monopolies.
Political Economy in a Changing
World
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Political economy concerns and resistance to change
heightened in the world of rapid technological change
and globalization.
Both the (social) benefits and (private) costs of
institutional reform increase.
Functioning political system essential to make sure that
potential losers do not block efficient change.
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Prevent alliance between politicians and incumbents resisting
change
Important to provide secure property rights to foreign business,
reduce the power of the state, reduce corruption, reduce the
power of large incumbent companies, financial development
for small businesses
The Turkish Context
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Turkey middle-income country, with a lot of
promise, but in need of:
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More capital
Better technology
Better organization of production
Improved skills
Greater barriers still institutional, despite
important reforms.
Turkey in Comparative Perspective
(from McKinsey report)
ZWD901_030110_P1E_IS
Exhibit 1
CAPITAL AND LABOR INPUTS AND PRODUCTIVITIES AS LEVERS OF GDP
FTE per worker
GROWTH AT PER CAPITA LEVEL – 1995
146
Employment per capita4
Indexed to US (1995) = 100
100
US
Fr
Ko
Br
Tr
100
140
83
US
100
US
92
86
42
38
Fr
Ko
Br
Ko
Br
Tr1
100
105
Tr1
14
Fr
Ko
Br
23
Ko
Br
83
95
92
66
Fr
Ko
Br
Tr1
Capital inputs per worker
126
24
Tr1
Tr1
Tr1
2
100
US
Fr
Labor productivity
50
Br
16
US
US
77
Ko
47
GDP per capita
100
Fr
Worker per capita
Capital inputs per capita5
100
US
Fr
114
75
Total factor inputs per capita3
United States
France
Korea
Brazil
Turkey
112
100
103
Total factor productivity3
100
58
54
49
36
US
84
100
93
62
Fr
22
Ko
Br
Fr
Ko
Br
Tr1
2
16
US
Tr1
Fr
Ko
Br
25
100
145
2
105
74
1
Calculations for Turkey based on year 2000 data,
US
Fr
Ko
Br
Tr1
indexed to US 2000 data
Assuming an informal output of 20% GDP, which is not captured in the GDP estimation of State Institute of Statistics
Based on Cobb-Douglas production function with capital share of 0.45 (geometric averages of US = 0.33 and Turkey = 0.60)
FTE per capita, including the effect of different average hours worked/employee
Excluding residential component in capital stock
Source: State Institute of Statistics, State Planning Organization, WDI, EIU, BEA, IFS
2
3
4
5
2
Tr1
Capital productivity
162
US
31
1
Low FDI Rates (From McKinsey)
ZWD901_021224_P1E_IS
Exhibit 27
SHARE OF FDI IN SECTORS STUDIED (1/2)
Percent of sector revenues, market share
Automotive parts
Poland
60
Korea
26
Malaysia
30
100
38
Source: Sector case studies
FMCG retail
38
24
83
81
70
86
96
Hungary
Turkey
Dairy
Cement
81
33
13
19
59
?
43
<7
27
Low FDI Rates (continued)
ZWD901_021224_P1E_IS
Exhibit 28
SHARE OF FDI IN SECTORS STUDIED (2/2)
Share of FDI in banking- 1999
Percent of total banking* assets
Chile
48
Poland
44
Argentina
Share of FDI in confectionery – 2000
Percent of sector revenues, market share
Poland
Korea
68
42
Malaysia
Brazil
48
18
Malaysia
14
Korea
80
Hungary
11
Turkey
Turkey**
90
6
3
* Assumed to be indicative of retail banking
** 2000 data
Source: IMF
28
Proximate Causes of Economic
Problems
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A large fraction of the population still in agriculture, with
very low productivity.
Relatively low investment rates, especially private
investment.
Education level of the Turkish workforce low relative to
other comparable economies, such as Brazil, Malaysia,
South Korea and Thailand.
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Especially low is the fraction of GDP spent on education.
2.2 percent in Turkey, 5.1 percent in Brazil, 4.9 percent in
Malaysia, 3.7 percent in South Korea and 4.8 percent in
Thailand.
Underlying Causes
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Mainly institutional.
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Significant political uncertainty; unstable democratic politics
and frequent interventions by the military.
Corruption and patron-client relationships widespread.
Large role of the government in the economy, and resulting
inefficiencies and large government deficits.
According to the Heritage Foundation, in terms of economic
freedoms, Turkey is 119th in the world out of 156. At the same
ranking as Bangladesh, India and below Albania, Ghana and
Niger!
Low levels of financial development.
Widespread corporate governance problems in large
family firms.
The Bright Side
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A rapid process of institutional reform, partly thanks to
relations with European union.
Despite mediocre productivity overall, the leading firms
in Turkey are highly productive.
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Documented in recent report by McKinsey Global Inst.
Effectively a dual economy, with highly productive
modern segment.
Modern segment using frontier technologies, often in
joint venture with FDI and exporting.
Traditional segment, and especially agriculture, much
lower productivity.
Potential Prospects
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Prospects very bright if the modern segment can
expand.
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Very rapid growth possible if less productive firms contract and
more productive ones expand.
Barriers to expansion of the modern segment:
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Political and legal reform.
Informality: many traditional firms not paying taxes.
Solution to corporate governance issues.
More FDI.
Entry of new firms---problem because of financial
underdevelopment and inequality.
Expansion of the educated work force.