Emerging Turkey: Lessons from an Economy in Transition

December 10, 2014

  • Turkey’s solid economic performance over the past decade is a source of inspiration for many emerging markets and offers some valuable lessons for their policy makers.
  • A new Report analyzes Turkey’s progress to the threshold of high income and finds that it has three fundamental sources: (i) successful integration with the world economy based on the anchor provided by trade relations with Europe; (ii) solid public finances in the wake of the 2001 crisis, which have allowed the country to move from debt service to public service; and (iii) a dynamic private sector buoyed by broadly market-friendly policies. As a result of the combination of these three factors rising prosperity in Turkey was shared.
  • Despite Turkey’s significant achievements, the transition to high income status is not completed yet. In particular, Turkey needs to reform its economic institutions to create a playing field that encourages innovation and investment and thus allows the country to shift to a new growth model and “escape” from middle income.

Turkey is a country in transition. The country has experienced solid economic growth for decades, but its recent socio-economic advancement can be dated back to the economic liberalization initiated in the 1980s and the subsequent financial, fiscal and public sector management reforms after the 2001 crisis.  At more than $10,000, per-capita income today is more than double what it was at the turn of the millennium and Turkey is now on the cusp of emerging as a high-income country, poised to become the 12th largest economy in the world by 2060.

Economic growth has trickled down, thanks to improved public services, but also thanks to the process of urbanization and job creation in industry and services, which has opened up new opportunities for Turkey’s traditionally poorer rural population. Poverty has fallen by half since 2002 and the share of the middle class has more than doubled from 18% in 1993 to 41% in 2010. Incomes among the bottom 40% in the country have increased at the same rate as those for the population as a whole – in other words prosperity has been shared.

" We hope Turkey’s experience enriches the choice of policy options for other emerging markets "

Martin Raiser

World Bank Country Director for Turkey and Lead Author of the "Turkey's Transitions: Integration, Inclusion, Institutions" report

Turkey’s achievements are a source of inspiration for policy makers from many emerging markets. In the past two years alone, with assistance from the World Bank Group, nearly 20 delegations from countries as far flung as India, Uzbekistan, Kosovo, Kenya, and Ukraine have come to Turkey to learn about health care reform, secondary education, banking restructuring, public finance management, and a range of other areas where Turkey has improved in recent years.

Despite the many challenges Turkey still faces, the interest of the many visitors confirms the value of capturing emerging lessons of development in real time, from countries which like Turkey are still in the middle of their own transition. A new publication by the World Bank Group does just that. It examines Turkey’s path toward rising incomes, increased international integration, and social inclusion. Turkey’s Transitions: Integration, Inclusion, Institutions offers a multifaceted look at a country in transition – providing in-depth analysis of lessons from Turkey’s ongoing transition toward high-income status for policy makers - both inside and outside of the country. 

“We hope Turkey’s experience enriches the choice of policy options for other emerging markets,” says Martin Raiser, World Bank Country Director for Turkey and Lead Author of the report.

“By situating Turkey’s specific achievements in a variety of areas in a broader historical narrative of Turkey’s transition to upper middle income status, we also hope the book can serve as a reference for the domestic policy debate about the challenges that lie ahead.”

Of the many factors that have fuelled Turkey’s progress, according to the report, three stand out. First, a shift in employment away from agriculture and into industry and services has resulted in increased productivity and helped reduce regional income inequality. A combination of trade liberalization, a Customs Union agreement with the European Union, reforms to the banking sector and other business regulations, and rapid urbanization helped create the conditions necessary to drive productivity growth around the country. Between 1990 and 2009, the share of employment in agriculture declined by 24 percentage points, while the share of industry increased by 4.6 percentage points.

Second, thanks to fundamental fiscal and public sector reforms introduced in the wake of the deep crisis of 2001, Turkey has been able to shift public resources from debt service to public service. Gaps in access to health, education and municipal services have been reduced and outcomes have significantly improved. For instance, life expectancy in Turkey has increased by 10.6 years since the 1990s and infant mortality rates have fallen six fold. Secondary education enrolment rates also nearly doubled between 1998 and 2012 - from 38% to 67%, respectively. These improvements have made economic growth more socially inclusive.

Finally, the private sector has played a key role during this transformation, buoyed by a political consensus that favors market-based solutions. The political and economic crisis that emerged at the end of the 1990s gave rise to a series of institutional reforms that promoted growth in the private sector. This growth was strengthened by the prospect of the process of Accession negotiations  with the European Union which provided an anchor for these reforms.  

All of these conditions have helped Turkey achieve economic and social success in a broad range of areas. However, these advances provide no guarantee of enduring success. Indeed, Turkey’s economy faces a number of challenges that should be addressed if the country wants to complete the transition to high income status. The sources of productivity growth need to shift from the reallocation of labor to greater innovation and the adoption of new technologies. This will require better skills and a competitive business environment to encourage Turkey’s entrepreneurs to try new things. But most importantly, it requires the government to build the institutional foundations of a high income country, including the rule of law, arms’ length and independent regulation, and prudent, transparent and accountable public sector management. Turkey does not make it into the top 40 on any of the indicators measuring the quality of a country’s economic institutions. For a country that aspires to join the top 10 economies in the world, this is clearly not good enough.

Turkey’s Transitions have attracted the attention of many policy makers in emerging markets. By addressing the remaining challenges and completing the transition to high income, Turkey’s authorities would ensure that their country remains a valuable case study of successful development for years to come.