DEVELOPMENT CHALLENGES
In 2001, the country suffered a banking crisis that caused a 5.7% contraction of GDP, prompting the Government to undertake various policy reforms. Between 2003 and 2007, annual GDP growth averaged nearly 7%, and GNI per capita increased from US$7,470 in 2006 to US$9,890 in 2010, placing Turkey in the “upper-middle” income country grouping. Between 1990 and 2007, Turkey also generated the largest Human Development Index (HDI) improvement in the region of Eastern Europe and Central Asia. Today, it ranks 92nd of 187 countries with a “high” HDI of 0.699. While the country was directly and severely affected by the global financial crisis (GDP fell by 4.8% in 2009), it also showed considerable resilience thanks to the important 2001 reforms and had the strongest recovery in the OECD area (GDP grew by 8.9% in 2010), fuelled by robust export and private consumption growth. Yet Turkey still faces some development challenges.
Poverty and inequality
Between 2002 and 2009, the proportion of the Turkish population living below the poverty line has decreased dramatically, from 27% to 18%. By 2006, extreme poverty had also been completely eradicated. However, progress has been very uneven, with large and persistent disparities between and within regions. Poverty is less prevalent in urban areas than rural areas, where 34.6% of the population lives in poverty. Gender inequalities are also present, with women being at greater risk of poverty.
High unemployment
Another challenge to Turkey’s development is low labour productivity and activity rates. Due in part to the lag between population growth and employment increase, unemployment increased from 7.6% to 14% between 1995 and 2009, but fell back down to the pre-crisis level of 9.4% in early 2011. Youth have higher-than-average unemployment and inactivity rates (about 18% and 37% respectively). Less than a quarter of working-age women are employed (the lowest among OECD countries), and this proportion has declined from 34% in the late 1980s.
Skills gap
Over the past decade, Turkey has made considerable progress in improving access to education, with primary school enrolment rising from 92.2% in 2000 to 98% in 2010. This has been instrumental in increasing adult literacy from 92.8% in 1990 to 97.4% in 2008. Similar strides have been made in pre-school and secondary enrolment. However, although the enrolment gap between boys and girls is closing, fewer girls than boys are in the formal education system at both primary and secondary levels. Regional differences also persist: net primary enrolment in the eastern part of the country (79%) is lower than the national average. Moreover, despite recent changes in primary school curricula and efforts to improve school infrastructure and teachers’ qualifications, the insufficient quality and relevance of education in Turkey has resulted in serious skills mismatches and an inadequate command of basic skills, creating problems in later stages of education and in work life.
KEY TRADE ISSUES
Market concentration and trade deficit
Whereas Turkey has been a member of the WTO since 1995, its economy is highly reliant on EU markets. Although enterprises were remarkably flexible during the financial crisis and diversified their exports into other markets, given the weakness of EU markets, 47% of total exports still went to the EU-27 in 2010. The country also suffers from a trade deficit resulting from its high energy import dependency.
Limited access to finance
Despite an increase in domestic credit to the private sector, from 31.8% of GDP in 2008 to 43.7% in 2010, access to finance remains one of the main constraints to growth of SMEs, with informal firms disproportionately affected. While risk premia and domestic interest rates have decreased, improvement in the country’s credit ratings has been comparatively slower since the onset of the financial crisis. In addition, the country relies heavily on external financing, but foreign direct investment (FDI) inflows have fallen from 3-4% of GDP during the period 2005-2008 to 1% in 2009 and 2010.
Cumbersome regulatory and business environment
Despite steps taken by the Government to implement its reform agenda, the growth of SMEs continues to be hindered by regulatory hurdles, with top management spending close to 30% of time dealing with red tape. Rules change frequently and are implemented in a discretionary and unpredictable fashion. Turkey also has one of the OECD’s most protective and most costly labour legislation environments. Product market regulations also discourage market entry and investment in higher-productivity sectors. As a result, Turkey ranks 71st and 80th of 183 economies on the World Bank’s respective “ease of doing business” and “trading across borders” indicators.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the 2010 Millennium Development Goals Report for Turkey; Turkey’s Ninth Development Plan 2007-2013; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2010 OECD Economic Survey of Turkey; and the 2011 World Bank-Turkey Partnership Country Program Snapshot.