Can Turkey's economy switch gears after the election?

Turkish politics is not for the faint at heart, they say. This seems to be especially true during election time. As Turkey is once again headed towards an election, presidential candidates are already making passionate statements and ambitious campaign pledges. 

Campaign manifestos reveal different trajectories for the country. But, there is one theme that all spectators seem to agree on; new elections may mark the beginning of a new economic paradigm for Turkey.

Over the last two decades, Turkey has experienced an impressive growth record. While Turkey's GDP per capita multiplied fivefold (a growth miracle by any standard), large segments of Turkish society have moved out of poverty.

However, Turkey’s biggest challenge to become an industrialised nation still lies ahead. In order to accomplish high levels of per-capita income, Turkey needs to develop its productive capacity in industrial technologies and transform its economy from labour-intensive sectors to high-value-added manufacturing.

The upcoming elections could be an economic turning point.

Economists have identified a number of trends in the development of emerging economies. With some exceptions, most emerging countries transform their economies from agriculture to labour-intensive manufacturing in the early phases of economic development. As people migrate from rural to urban areas, labour gets cheaper and labour-intensive sectors become attractive for investors.

Countries that can successfully promote these industries, attract capital inflow, and find markets for their exports experience high growth in their take-off period of economic growth.

Turkey has been very successful in hitting these milestones in recent decades. One of the main tenants of the Justice and Development (AK) Party government, which first came to power in 2002, has been integration into world trade and financial markets. Consequently, while foreign direct investments reached unprecedented levels, exports soared.

Furthermore, government commitment to fiscal and monetary discipline, Turkey’s consistently high inflation rate had been reduced to unprecedented single digits (it has only recently increased to around 12 percent), and public debt has been substantially reduced. This has meant two decades of macro-economic stability and higher prosperity for every layer of Turkish society.

As early opportunities for economic growth via structural transformation and integration into the global economy have depleted, Turkey now needs to make its leap towards capital intensive production. Otherwise, it may become another victim of what is known as the middle-income trap.

Economists now know that most developing countries, including Brazil, South Africa and Indonesia, struggle to pass beyond per capita income levels of 10-12 thousand dollars and join the group of high-income countries. The lesson here is that any successful long-term growth strategy has to define a way to make its transition to high-value-added industrial production.

The Turkish economy is still a mass importer of intermediate goods and high-tech products. Even the automotive industry, one of the lucrative sectors of Turkish manufacturing, imports more than it exports.

Turkey’s trade imbalance is compounded by Turkey's energy import dependency. Unlike some of its neighbours, Turkey has had bad luck with natural resources. The country imports almost 75 percent of its total energy use, which makes up around half of Turkey’s total trade deficit. And, note that Turkey’s energy usage has almost doubled within last two decades in line with its high economic growth.

Consequently, even though Turkey has accomplished important successes in multiplying its export volume and total output levels, it still has a current account deficit problem, which makes the economy vulnerable to short-term capital movements. This vulnerability manifested in the recent fluctuations of the exchange rate. This is another indication that Turkey needs to transform its economy, and do it quick.

I would argue that Turkey is ready to make its transition to become a developed country with an economy driven by high-tech engineering. The levels of capital accumulation realised over the last two decades, experience acquired by the private sector thanks to better integration with global markets, and improvements made in the sophistication of financial institutions give Turkey amply ground to move to more sophisticated production.

However, this requires greater effort, courage and political will from policy makers – which is why the elections may mark an important turning point.

The constitutional changes, which the Turkish people voted for two years ago, provides a clear-cut division of labour between the parliament and the president, and decorates the president with executive power for a 5 year term in office.

This means that although the new president, unlike his predecessors, will not have the power to legislate, he will be able to single-handedly design and implement economic policy (after a budget is passed by parliament) over a considerable period of time.

Last year, it was announced that government, in an attempt to increase market share of domestic high-tech products, will be supporting production of Turkey’s first domestically designed and manufactured automobile.

Furthermore, Turkey’s R&D investments in defence industry have already started to pay-off. Today, domestic production accounts for 60 percent of the Turkish military's requirements and aims for 100 percent by 2020, compared to only 25 percent two decades ago. Turkey just recently signed a deal for the sale of Turkish-designed and produced attack helicopters to Pakistan.

Turkey have also started to make some aggressive investments in renewable energy resources. While solar energy production tripled within 2017, Turkey’s already produces 8 percent of its energy from wind power.

Turkey should genuinely endeavour to invest in high-tech sectors, improve its human capital through education, and become a hub for engineering in all sectors. Election manifestos show that there is more awareness and willingness from politicians than ever before. Long-term political stability, expected after the elections, is a great opportunity to take advantage and transform the economy. It is time for Turkey to move into the big league.