The Turkish Economy

The Real Economy, Corporate Governance and Reform

Sumru G. Altug, Alpay Filiztekin

• Publisher: Routledge
• Year: 2006
• eBook ISBN: 9781134213603
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Including contributions from noted international scholars, this collection of papers provides a strong theoretical and empirical underpinning for the discussion of major public policy issues facing Turkey today. Matters addressed include:

• determinants of growth and productivity
• education and human capital accumulation
• income inequality
• corporate control and government
• performance of the government sector
• impact of major public policy issues on the future growth prospects of the Turkish economy.

This volume relates the impact of major public policy issues on the future growth prospects of the Turkish economy. At a time when Turkey is currently attempting to gain membership to the European Union, this pertinent reference questions whether the country's economy is in fact ready for EU accession and membership.

1 Introduction
Sumru Altuğ

The Turkish economy is known for its inflation in the 1990s and, more recently, its successful stabilization. However, relatively few studies have attempted to understand its “real” economy — the factors that kept the Turkish economy functioning in the face of high and chronic inflation and that have underwritten its dramatic recovery of recent months. The present volume seeks to remedy this oversight through a series of in-depth studies on the “real” side of the economy, along with some on the organization and structure of the corporate sector. This volume will also consider some government sector reform issues. Further distinguishing the volume is its use of state-of-the-art analytic techniques. In sum, the present work seeks to understand the state of the Turkish economy by examining the behavior of its main actors, the “real” or productive sector, the corporate sector, and the government.

In Turkey and elsewhere, considerable popular debate revolves around the link between policy choices and economic outcomes. Several prominent US economists have written extensively on the Turkish economic experience from this perspective. The early study by Krueger (1974) on trade regimes and economic performance is among the most widely known. Turkey’s trade liberalization in the 1980s also attracted several studies (e.g. Aricanli and Rodrik, 1990a,b or Krueger and Aktan, 1992). Numerous other studies examine Turkey’s economic experience in the context of such issues as debt, exchange rate regimes, and stabilization policies (e.g. Rodrik, 1990, or the studies in Sachs and Collins, 1990).¹

Although these studies have provided much insight into Turkey’s growth prospects, one cannot help thinking that some important outstanding issues lie in the “real” economy. A brief enumeration of the salient facts indicates that major challenges are present. The OECD (2004) reports that Turkey’s labor productivity is just 30 percent of the level of United States. Further, Turkey’s recent growth has lagged behind peer countries. The 2000–2001 crisis brought a GDP decline of 7.5 percent — one of the largest in Turkish Republican history — even in the midst of an IMF-sponsored stabilization plan. Whereas many OECD countries witnessed robust sectoral productivity growth during the 1990s, the productivity growth for Turkey in the same period came primarily from sectoral reallocation, with labor moving out of relatively less productive sectors such as agriculture (see table 2.12, Altug and Filiztekin, 2005). The share of the labor force working in agriculture is 34 percent, but these workers contribute just 12 percent of GDP (OECD, 2004, p. 154).

Turkey also suffers from high levels of income inequality: the Gini index for total income was about 0.42 in 1994 (World Bank, 2002). Although extreme examples are higher — Brazil or South Africa — Turkey is nevertheless close to some very unequal countries, such as the Russian Federation (table 3.5, Duygan and Güner, 2005). Education statistics for Turkey are also alarming. In 2001, education expenditures were only 2.2 percent of gross national income, less than half that of many developing countries with similar per capita income (World Bank, 2003). Illiteracy remains shockingly high, especially among women. In the 2001 data, illiteracy was 15 percent of the general population aged 15 years or more and 25 percent among women aged 15 years or more. By comparison, illiteracy in Brazil was 12 percent, despite the fact that this country has a much higher percentage of its population below the one-dollar-a-day poverty line (World Bank, 2003). Even more troubling is the trend. Between 1990 and 2000 the share of education expenditures in total public expenditure declined by half, plummeting from about 18 to 9 percent (SIS, 2002).

Recent Turkish labor market trends are also disconcerting. The analysis in Tunali and Baslevent (2005) reveals that employment growth has been weak. This is true even before the crisis of 2000–2001 hit the economy. Employment growth from 1988 to 1998 was 1.4 percent, despite 3 percent growth in working-age population (20–54 years). When the period 1998–2003 was brought under scrutiny, average aggregate employment growth is negative at 0.6 percent per annum. The Labor Force Participation Rate (LFPR) is also very low in Turkey: whereas the LFPR is near 70 percent for OECD countries, this figure is 51 percent for Turkey. The corresponding figure for women in Turkey is even worse, only 28 percent compared to nearly 60 percent as the OECD average. (See table 3.3, Tunali and Baslevent, 2005.)

Perhaps the most surprising aspect of these findings is that they occurred at a time when policy changes were meant to unleash the growth potential of the economy. The purpose of this volume is to account for these observations and to examine their implications for the future. We examine the determinants of productivity and growth, the role of educational attainment in income and consumption inequality, female labor supply and participation decisions, and relative price variability.

The second topic considered in this volume pertains to the impact of corporate governance and corporate structure on firms’ investment decisions and performance. As the chapters on this topic make abundantly clear, Turkish listed firms often have very weak corporate governance, exhibiting problems such as highly concentrated family ownership, divergence of cash-flow and voting rights, pyramidal structures, and business groups. Linking these factors to investment behavior can help answer questions regarding the determinants of Turkey’s overall economic performance. This research can also have potential implications for the impact of corporate governance on real outcomes more generally.

Our third topic is the government sector, considering three main areas that usually inform structural adjustment programs: privatization, social security reform, and banking sector reform. The purpose of these studies is to describe the nature of decision making at the governmental level and to understand the political economy considerations that have helped to shape real outcomes in Turkey. Different facets of the recent policy experience in Turkey have been studied already, for example, Kibritçioğlu, A. et al., 2002, discusses inflation and alternative disinflation programs. Whereas such studies consider various endogenous outcomes as a source of macroeconomic risk, the approach in this volume is to identify the underlying factors lead to macroeconomic instability and risk.

In our view, the importance of the present volume stems from its potential to illuminate upcoming policy decisions regarding a key set of issues now facing the Turkish economy. The December 17, 2004 summit in Brussels where Turkey obtained a date to begin membership negotiations with the European Union marks a turning point. The question of European Union (EU) accession and European Union membership is becoming the focal point of policy discussions in Turkey.² It is also beginning to receive attention in the mainstream Economics literature. (See, for example, Flam, 2003.) The question of whether the Turkish economy can converge to the levels of per capita income observed in European Union countries is a key part of the recent discussion (see Dervi,§ et al., 2004; see also Altug and Filiztekin, 2005). The entry of the Republic of Cyprus into the European Union on May 1, 2004 is leading to new debate regarding the reunification of Cyprus. The issue of economic convergence between the formally separated parts of Cyprus figures in this debate. (See the report by Eichengreen et al., 2004 on the economic aspect of the Annan Plan.) Our analysis contributes to this discussion by examining broad characteristics of the Turkish economy.

Turning to the individual chapters in more detail, the topic of the first chapter is a new study on productivity and growth for the Turkish economy since the inception of the Republic in 1923. The chapter describes the impact of policies such as import-substituting industrialization practiced throughout the 1970s versus the program of trade and financial liberalization instituted in the 1980s on productivity growth. It includes an analysis of regional convergence and growth as well as an international productivity comparison. Altug and Filiztekin, Chapter 2, use both long time series and sectoral data to conduct a growth accounting exercise, and analyze the behavior of the broad sectors of the economy using production frontier methods. They argue that productivity growth is a key indicator of an economy’s long-run growth prospects, and it also has ramifications for cyclical fluctuations. In the Turkish context, they note that productivity growth is crucial for the sustainability of economic reform programs and that the rate of productivity growth will also be an important determinant of the ability of the Turkish economy to converge to per capital income levels in developed countries.

The chapter utilizes the modern approach to productivity measurement to analyze the determinants of productivity growth for the Turkish economy. The study begins by providing existing theoretical definitions of productivity. It also seeks to incorporate new decompositions and approaches. Total factor productivity (TFP) is measured as the difference between the growth rate of output and the share-weighted growth rates of inputs. An alternative approach to the growth-accounting framework for productivity measurement is based on production frontier methods, which allow for differences between technological catch-up (efficiency improvements) and technological change (shifts in the production frontier). Various authors have also suggested that productivity movements may be accounted for by the sectoral re-allocation of inputs to more productive uses rather than an increase in productivity in individual sectors.

The chapter discusses the implications for exogenous versus endogenous models of growth for the purpose of explaining the Turkish experience. It also discusses the recent literature that seeks to incorporate the effects of greater openness and trade on productivity growth and convergence. The chapter presents an analysis of other determinants of productivity such as firm size, capital accumulation, and the role of macroeconomic/political instability observed in the 1990s. One of the main findings of the chapter has to do with the relatively weak record of capital accumulation in the Turkish experience. The chapter also highlights the role of macroeconomic instability in Turkey’s recent productivity performance and argues that these factors have been influential in determining the nature of productivity and growth as well as the process of structural transformation for the Turkish economy.

Duygan and Güner, Chapter 3, provide evidence about Turkey’s future growth prospects from a different perspective. Specifically, they examine income and consumption inequality in Turkey and the role of education in determining changes in the distribution of income. Using primarily the 1994 and 2002 Household Income and Consumption Expenditures Surveys, they begin by documenting the extent of income and consumption inequality and then present the results within a broader international context. Moving behind these aggregate statistics, they also provide a detailed characterization of the country’s poor and the rich. Education is found to be an important determinant of inequality both because it is distributed very unequally and because it has a large effect on earnings. They argue that unequal distribution of education is often viewed as a major obstacle to the inequalities in labor markets as well as a key factor in the intergenerational transmission of inequality. Duygan and Güner move beyond the current, short-term discussions on inequality by highlighting some key determinants of its inter-generational transmission — household formation, private and public spending on education, and women’s education. The goal is to understand what today’s distribution of resources and institutions might imply for tomorrow’s inequality.

Tunali and Baslevent, Chapter 4, provide an analysis of labor market trends and female labor supply and participation in Turkey over the period 1988–2003. They relate the trends in employment growth to the structural and demographic changes that have been taking place in the Turkish economy during the same period. Among the structural changes they discuss are the shift to a more open trade regime, the declining share of public enterprises, and the modifications of the social security system. They then provide a micro-econometric analysis of married women’s labor supply and participation choices for a given year. They employ a multi-category model of labor force participation. Their results imply that the distinction between self-employment and labor income is an important one. They also find that small changes in real wages elicit a large supply response from women. Their analysis brings to bear different pieces of evidence on a complex issue that is likely to have important effects on Turkey’s productivity and growth experience in the coming decades.

Çaglayan and Filiztekin, Chapter 5, investigate the duration and the size of relative price changes in Istanbul over the period 1994–2000. The underlying motivation for their study lies in the recent theoretical literature and the empirical results that inflation induces higher relative price variability. Considering that the average inflation rate was about 60 percent per annum during the sample period in Turkey, their results contribute to an understanding of the effects of inflation on the pricing behavior in Turkey. Their analysis is carried out using a unique set of data collected from 15 neighborhoods in Istanbul. These data allow for a study of the micro-level data price adjustments by providing monthly price observations, which is mainly for foodstuffs, from three distinct store types: bakkals (convenience stores), pazars (open-air markets), and Western-style supermarkets over the period 1994–2000. These store types are expected to differ in obvious ways in terms of market power, transaction costs, and other characteristics such as fixed costs. Thus, their analysis helps to contribute to an understanding of the micro-foundations of the transaction costs of inflation, as well as effects of market structure on price dynamics. Their data also provides prices of several other products from all 15 neighborhoods. These data help to provide a broader perspective of the underlying price dynamics. The findings reveal that on average price duration is 3.1 months, leading to an average reduction of 14.5 percent in real prices in between price changes should prices remain fixed for so long. They also find that price changes are not synchronized, which implies that vendors do not act simultaneously in response to changes in the economy. This behavior implies that the price of a good in relative terms could be substantially different across vendors. Indeed, the chapter finds that the average price dispersion across vendors for food items is around 10 percent and that for clothing is around 25 percent. The average price dispersion is 15 percent when all goods are considered. The findings also raise some questions about the effectiveness of monetary policies pursued by the government. Particularly, nominal price stickiness suggests that it will take a longer time for the monetary policies to have the desired effect on the economy.

The chapters on corporate governance analyze the interaction of real and financial decisions for the Turkish economy. Güney, Özkan, and Yalçiner, Chapter 6, examine the capital structure of firms in Turkey, which has a significantly different legal and regulatory framework and a relatively young stock market. The approach taken in the chapter attempts to provide insights into the following questions. First, do the factors that influence the financing decisions of firms in industrialized countries exert similar impact on the capital structure decisions of firms operating in a different environment? Second, if similar factors exert a different impact, can we determine why this is so?

The analysis in the chapter focuses on the dynamics of the capital structure decision. In so doing, the analysis captures important aspects of borrowing behavior of firms arising from market imperfections such as adjustment costs and financial constraints, which may prevent firms from adapting to new circumstances and immediately offsetting the effects of random shocks. The chapter provides some interesting findings regarding capital structure. First, in contrast to previous studies, there is strong evidence that size exerts a negative impact on borrowing decisions of firms, whereas there is a positive relation between growth opportunit...

Table of contents

• Cover
• Half Title
• Routledge Studies in Middle Eastern Economies
• Full Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• List of contributors
• Preface
• 1 Introduction
• PART 1 The real economy
• PART 2 The corporate sector
• PART 3 The government sector and reform
• Index