Why the growth slowdown in Turkey now?

Why the growth slowdown in Turkey now?

Have you seen the Putinphone? Caviar, a Russian jewelry company, has designed a limited edition of them on the occasion of the 63rd birthday of the Russian president.  It looks like the iPhone 6, except Putin’s face is encrusted in gold on the back, as is the seal of the Russian presidency and a few lines of the country’s national anthem. This is all on top of a titanium base that is supposed to reflect the national will of the Russian people, as embodied by their omnipresent president. 

Here’s the rub though: When you turn the phone on, it’s just a regular iPhone, “designed by Apple in California” and manufactured by Foxconn in China. 

That’s because there are two types of countries in the world: Countries that make iPhones and countries that make iPhone covers. It’s a pity that Russia and Turkey are in the second category.

What are the most salient differences between these two categories? iPhone makers design the thing and operate the global value chain for its production, advertisement and distribution. They have companies like Apple, which is the most valuable publicly traded company in the world. iPhone cover makers don’t have the capacity to add high value to their exports, they settle for whatever scraps are left on the table. 

Take the case of Turkey. We are not integral to any global value chains. We are not known for high technology or other high value-added exports. For every 100 units of exports, the Turkish economy needs 140 units of intermediate goods imports. 

In 2002-2007, Turkey’s average annual growth was around 6.8 percent. In 2012-2016, that number fell to 3.3 percent. Why is that? You might be tempted to say this is because the world’s economy is slowing down. Global average growth has been around 3.2 percent in 2016, and Turkey is slightly above that figure. So yes, there is a cyclical element that needs to be taken into account. But that does not nearly cover it. 

I see two additional reasons for why Turkey has not been able to take off. One is structural, and it is very much related to the low value-added in Turkish industry. Turkish growth in the last four or five decades has basically been fueled by internal migration. When I was born, only 30 percent of Turks were living in urban centers. Now that number has reached almost 75 percent. Turkey’s per capita GDP has risen from 1,500 in 1980 to almost 10,000 today. That is because when agricultural workers move to urban centers, the factories and service jobs they work at yield much higher value, giving the entire economy a boost. But we can’t move everybody back to the countryside and have them migrate to the cities again. So now is the time to shift Turkey from an iPhone cover maker to an iPhone maker. It’s time for intra-sector productivity growth, which means quality education, technological renovation and high levels of foreign direct investment. You can only do that by reducing policy uncertainty, installing structural reforms, smarter government and increasing state capacity overall. That also happens to be the only way for growth and job creation in the Turkish economy. There is no other way of enhancing welfare.

Secondly, I see a more conjunctural reason for the slowdown in Turkey’s growth: The way the ongoing state of emergency “a la Turca” is being conducted is hampering growth. I am not only talking about the shutting down of companies – such examples aren’t big enough to really affect things by themselves. The problem is deeper than that. The state of emergency a la Turca is not like its French counterpart. There is no judicial overview of administrative decisions, which means a suspension of the separation of powers. In some ways, the state of emergency is only underlining a problem that we have long had.

At the end of the day, we are killing hopes for good governance and the rule of law. Without those things, there will be no incentive to enact the reforms that would transform Turkey from being an iPhone cover maker to an iPhone maker. We would not have the organizations in place. Russia has some of the best hackers, smartest diplomats and most creative media spin doctors in the world, but welfare there is terrible. Most people are poor, and those who are not poor are the types who buy titanium iPhone covers with gold-encrusted faces on them. That is because Russia does not have the rule of law, which would allow ordinary people to build better lives for themselves. 

Turkey was not always as lost in political tactics and as oblivious to economic policy as it is today. It is not doomed to be in the second category. But time is short. No wonder the Turkish Lira is adjusting so rapidly.