Q&A on Enhancing the Role of Exports in Turkey

July 10, 2014

Kamer Karakurum Ozdemir

What was the driving purpose or motivation behind the report?

The World Bank regularly publishes core economic reports on key policy themes in Turkey. After recovering from the 2001 crisis and the uninterrupted growth episode through 2007, widening external deficits has led to increased concerns about sustainability of growth, especially post-2008 global crisis. The authorities have important targets for 2023, the 100th anniversary of the foundation of the Republic. Becoming one of the 10 large economies in the world and achieving $25,000 per capita income (from about $10,000) are the overarching objectives. In this context, the authorities also envisage a significant role for exports on the way to becoming a "high-income" country. Exports are expected to rise to $500 billion by 2023, coupled with a significant increase in the global market share of Turkish exports. This report aims at informing the government's policies towards these objectives. It analyzes Turkey's export competitiveness and provides policy options to enhance competitiveness and increase the contribution of exports to growth. It may also be worth noting that this report complements the previous Country Economic Memorandum from March 2012 on the role of domestic savings in sustaining growth.

Historically, what has driven Turkey's economy, and where has export strength factored in over the years?

The high growth period of 2002-2008 was very much an outcome of the strong reforms in the post 2001-crisis in both the public sector and the financial sector, a strong fiscal consolidation, helped by robust global economic environment. Exports also performed well during the last decade; they grew 15 percent a year on average in dollar terms, more than six percentage points above the average global growth of exports, and as much as the pace of expansion in Brazil, Russia, and India.  Turkey diversified both its export markets and its export product mix. At the same time, its global market share also rose substantially while the quality of exports improvedIn 2002, a majority of exports (64 percent) was concentrated in products that were sold at a unit price in the bottom third of the price distribution in the same destination market.  By 2010, the majority of products (55 percent) were sold at the middle or high end of the quality range.  Export quality has improved remarkably in those sectors where quality standards matter most, such as machinery. However, challenges remain in reaching the 2023 goals.

You say that Turkey's export performance has strengthened, yet there are "plenty of challenges." What are these challenges, and why?

Despite favorable export performance over the last decade, exports have not been a main driver of growth, and Turkey specializes in mid-tech sectors (such as automobiles and auto-parts), which have experienced relatively slow growth in global demand.

For "trading up to high-income" Turkey will need to move up the global value chains. The way forward for Turkey is to upgrade its exports by implementing micro reforms that focus on enhancing productivity. Upgrading the existing export basket is unlikely to benefit from policies that "pick winners" among products and sectors. Instead, addressing the factors that limit productivity growth will be important to avoid the middle income trap. 

What can be done to address these challenges?

The main policy recommendations can be grouped as follows: (i) link the country further with international markets, including by helping bring larger inflows of foreign direct investments (FDI), particularly into the manufacturing sector; (ii) promote innovation through steps such as by encouraging a large role for private companies in research and development (R&D); (iii) upgrade the skills of the existing work force and new entrants; and (iv) improve access to finance, particularly long-term, with a view to unlocking the potential of the dynamic SME sector. Finally, if the right cross-cutting policies are in place, export promotion and further trade integration (for example, in services trade) may play a complementary role.

What were the most surprising findings of the report?

There were two possibly surprising findings of the report. One is the argument that underscores the limits of "market diversification". While diversifying its export destinations away from EU and towards MENA has clearly helped Turkey, particularly at the peak of the Euro-crisis, the report argues that the importance of the large and sophisticated EU market remains very clear and distinct. Furthermore, the report finds that there has not been a "switch" of firms from EU markets to MENA, but rather, an expansion of the activities of firms that were already present in these markets. The second surprising finding was the role of imports in export competitiveness. The analysis suggests high quality imported inputs are a determinant of high quality exports. This latter finding suggests a potentially negative impact of import restrictions on export competitiveness, although this is largely mitigated by the inward processing regime under which key inputs imported for production of exported goods are exempt from trade remedies.

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