How Turkey will not escape the middle-income trap
In the concluding statement of its 2014 Article IV Mission to Turkey, which was released on Oct. 3, the IMF noted that without structural reforms, Turkey was likely to be left in a middle-income trap as a result of slowing growth.
You can see Finance Minister Mehmet “Nominal” Şimşek’s op-ed in the Wall Street Journal titled “How Turkey will escape the middle-income trap” as a reply to the IMF. He may also have wanted to join the bandwagon of emerging market officials who have been trying to soothe investors over their country’s structural reform drive.
Whatever his motives are, I am glad the minister gets it: Turkey’s most important medium-term risk is not its external vulnerability, even though that was highlighted in the statement as well as in other IMF reports that were published last week.
For example, the World Economic Outlook argues that while current account imbalances are set to narrow in most of the world, Brazil, New Zealand and Turkey could see their deficits widen in the next five years, putting them at the risk of a sudden stop in capital flows.
Another paper looks for lessons from last summer’s tantrum following Ben Bernanke’s remarks that the Fed would start tapering its bond purchases soon and argues that countries with “elevated current account deficits, high inflation, weak growth prospects, and low reserves” would be the most vulnerable to another bout of volatility. Turkey fits the bill.
I agree with these analyses, but I would argue that a one-off currency crisis would be less damaging to the Turkish economy than low growth forever. After all, as Şimşek explained to the Financial Times last week, “3, 4 percent growth will not do the trick” of absorbing new entrants to the labor force and keeping unemployment at bay.
The minister correctly emphasizes the importance of increasing the quality of the country’s workforce and women’s labor force participation as vital structural reforms. I wish he could explain how covering 10-year old girls’ heads will educate and prepare them for the labor market.
I would also agree with him on the importance of innovation. But given recent research on the link between individualism and innovation, wouldn’t the government’s authoritarian tendencies be stifling innovation? Would you innovate in a country where lawlessness rules supreme over the rule of law?
Besides, could a government implement reforms in such a polarized society? South Africa, which I visited again in September, is every bit as externally vulnerable as Turkey and has even more serious economic challenges.
But you sense that this is a country where everyone is trying to coexist when you learn that their Constitutional Court granted same-sex couples the right to marry in 2005 - rather than declare homosexuality a disease like a former Turkish minister. Or when you visit the Hector Pieterson Museum, named after the first boy who was killed during the 1976 Soweto uprising, and compare him to #RememberBerkin, who was declared a terrorist by Turkish President Recep Tayyip Erdoğan.
I would put my money on South Africa escaping the middle-income trap before Turkey. When push comes to shove, they will probably be able to reach consensus for reforms more easily.