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CIAO DATE: 4/5/2007
Economic Survey of Turkey, 2006
October 2006
Abstract
Substantial progress in macroeconomic stabilisation and institutional reform has laid a foundation for strong GDP growth. However, the recent inflation shock and turmoil in the financial markets highlight Turkey’s on-going vulnerabilities. A further comprehensive programme of structural reform would increase productivity growth, expand the formal sector of the economy and consolidate macroeconomic stability.
Managing macroeconomic risks
The main macroeconomic priority is to consolidate the progress already made.
In the area of fiscal policy, the Government should follow through with its announced intention to complement the annual primary fiscal balance target with an expenditure cap. This move would allow the government to register a primary surplus above the target in economic upswings. The Government should also further improve budgetary transparency and the quality of institutions and processes and adhere to National Accounting Standards.
In the area of monetary policy, the Central Bank needs to restore inflation to the desired path and the Banking Regulation and Supervisory Authority should strengthen its corporate governance and human resource management.
Improving framework conditions for the formal sector
Because of the high burden of regulations, a large number of firms and individuals are pushed into the informal sector, where productivity is low and working conditions are poor. In order to overcome this impediment to growth, the Government needs to:
Improve conditions for job creation in the formal sector by cutting social security contribution rates, adopting more flexible employment protection regulations, replacing severance payments with unemployment insurance, and permitting the minimum wage to vary across regions and gradually decline as a share of the average wage.
Implement further changes to the pension system to raise formal sector employment. Cuts in pension contribution rates would make it cheaper to employ labour in the formal sector, and the cut can be partly funded by a package of other reforms including a reduction in early retirement incentives.
Further simplify the legal and regulatory environment governing the business sector, eliminate remaining obstacles to foreign direct investment, and focus on promoting competition and competitiveness in all sectors of the economy, avoiding sector-specific measures.
Re-focusM educational priorities, within the limits of budget discipline, towards making good quality education available to the entire youth population, rather than just to the most able. Better prepare young people directly for the labour market.
Continue to replace agricultural subsidies with income support to farmers, and raise productivity in agriculture by strengthening the legal framework for land consolidation, enhancing technology transfers and encouraging private investment in irrigation.
