Turkey needs more global value chains
Turkey’s industrial transformation started in the early 1980s. Unlike many of its Middle Eastern neighbors, Turkey has no natural resources, so it had to organize its society around producing things others would want to buy. And we did. Our gross domestic product (GDP) per capita rose from $1,500 in 1980 to more than $10,000 in 35 years. An agricultural backwater became an urban, industrial and fairly market-driven place. So far so good. Yet if the idea is to converge with the rich world, Turkey is in trouble. It needs to renew its industrial base. To do that, it needs global value chains (GVCs). It now seems however, that GVCs no longer want to come to Turkey. Why not?
There are many things that come to mind, but I think Turkey’s stalled Europeanization process is at the root of it. High growth in 2017 does not mean Turkey does not need the EU. Have a look at the list of top 15 industrial countries with the largest manufacturing base. Turkey is no longer among the top 15 when it comes to the size of the manufacturing industry. People might think political crises occur on another plane that is unaffected by the realm of economics, but it is. Turkey’s stalled relations with the EU are taking their toll, slowly but surely. Turkey is losing its prominence as an industrial powerhouse. For the big players, Turkey is simply too low-tech, too old and cumbersome to deal with.
Turkey was not among the top 15 in 1980. Then, economic transformation started with Turgut Özal’s reforms. By 1990, Turkey had become 13th among the 15. But in 2000, Turkey declined to number 15. By 2010, Turkey was no longer on the list. We still have a prominent place among the top 20, but that’s it. Turkey grew, but others grew faster, better.
When I look at the countries that have surpassed Turkey in the last 15 years, I see a pattern. While Turkey went down on the list, a group of Asian countries started to dominate it. China became number one. South Korea was 11th in 1990 and climbed up to fifth. India, Indonesia and even Malaysia are doing better than Turkey. Mexico and Brazil are holding on. Here’s what’s important: All of these countries have improved the share of hi-tech exports among their total manufactured exports. This is a classic sign of increased GVC activity.
China has increased its share of hi-tech exports from 9 percent in 1990 to 33 percent in 2015. Mexico increased it from 5 percent to 23 percent, India from 5 percent to 10 percent. Malaysia reached it from 26 percent in 1990 to 36 percent in 2015. Most of these increases occurred because these countries are able to attract multinational corporations that base part of their production on there—think smartphone production or car plants.
How about Turkey? Our share of hi-tech exports out of total exports was 3 percent in 1990. It increased to 5 percent in 2015. Clearly there is something our competitors are doing that we aren’t. If GVCs were basing their technology-heavy production in Turkey, this number would look very different today. So what does a country have to do to be part of GVCs?
There are two dimensions of this: The first is the land value of a country, the second is the intrinsic value of a country, which consists of its government, citizens and institutions, including companies. In other words, it’s about global competitiveness. That’s where we have problems. Today’s factories need more service sector outputs to manufacture things.
The Customs Union with the EU has turned Turkey into an industrial country. Yet the absence of service sector liberalization is stalling the Turkish industrial base, preventing it from rejuvenating itself. That is where Turkey needs structural reforms. That is why the modernization of the Customs Union agreement towards the service sector and agriculture is important for the country’s industrial renewal.
Restraints on competition, weaker institutions, a poorer human capital base and problematic rule of law are all factors preventing GVCs from approaching. Fewer GVCs means less FDI and finally, a thinner industrial base. Note that Turkey has had a problem with GVCs long before the “alaturca” state of emergency declared after the failed coup attempt in July 2016. Now, things are even worse and foreign CEOs even refrain from visiting their operations in the country.
Yet the other week, Turkish Parliament accepted 30 of the 31 state of emergency decrees into law. Now, the Constitutional Court has the authority to scrutinize the administrative decisions of the last 18 months. Finally, a move towards serious engagement with the EU. This comes at a time when Ankara has been trying hard at rapprochement with Brussels. Turkish President Recep Tayyip Erdoğan has duly been invited to join the family photo with EU leaders during their meeting in Varna, Bulgaria on March 26. I won’t get my hopes up too high, but it is something.