WBTurkey090306

TURKEY Country Economic MemorandumPromoting Sustained Growth and Convergence with the European Union : 

The World Bank CEPS, Brussels March 9, 2006 TURKEY Country Economic Memorandum Promoting Sustained Growth and Convergence with the European Union

The CEM reviews policy reform options and sequencing to address Turkey’s simultaneous challenge on the way to the European Union: 

The CEM reviews policy reform options and sequencing to address Turkey’s simultaneous challenge on the way to the European Union Managing the process of EU accession and preparing for membership, by fulfilling the Copenhagen criteria and implementing the acquis of the Union Managing the broader development agenda beyond the acquis, to prioritize reforms with the greatest benefit for sustained and inclusive growth

Plan of the presentation: 

Plan of the presentation The achievements: Strong economic performance powered by broad-ranging reforms The challenge: Unlocking potential for fast and sustained growth by fostering productivity and job creation Public finance management on the way to the EU Structural policies to improve the functioning of key markets and the efficiency of production factors Policies for inclusive growth: rural development; social assistance; health care

I. The achievements: Strong economic performance powered by broad-ranging reforms: 

I. The achievements: Strong economic performance powered by broad-ranging reforms Growth has been particularly robust during four consecutive years… …supported by a stable macroeconomic environment and declining inflation

Ambitious fiscal consolidation has been the cornerstone of the policy framework for macroeconomic stability and has also supported strong monetary discipline…: 

Ambitious fiscal consolidation has been the cornerstone of the policy framework for macroeconomic stability and has also supported strong monetary discipline… …while public debt ratios have declined and the structure of debt has improved

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The recent upswing holds the promise of sustained faster growth over the medium-term as it is driven by: Rising private sector productivity Increasing exports Recently booming FDI …but two weak spots require increased attention: A widening current account deficit (above 6% of GDP in 2005) Continuous high unemployment (at 10%) and low employment ratios despite strong growth

II. The challenge: Unlocking Turkey’s potential for fast and sustained growth to achieve significant convergence with the EU: 

II. The challenge: Unlocking Turkey’s potential for fast and sustained growth to achieve significant convergence with the EU Key preconditions: Structural reforms to promote: Stronger Total Factor Productivity growth Stronger employment generation Improved efficiency and productivity growth in services Better educational attainment and worker skills A robust macroeconomic framework and structural initiatives conducive to external current account sustainability

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Long-run growth has also been held back by slow employment generation Labor productivity growth has lost momentum in the 1990s, reflecting weak TFP growth Sources of labor productivity Growth in Turkey, 1973-2003

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Contributions to labor productivity growth in Industry and Services, (1973-2003 in %) Productivity growth in services (now accounting for 57% of GDP) has to increase if growth is to accelerate main enabling factors: reducing informality; liberalization of key services; deeper integration into the EU markets for services

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Improving education and worker skills will be key enabling factor for faster growth and employment generation Distribution of students by PISA proficiency, 2003 Mathematics-quantitative proficiency of students remains weak by international standards Average schooling in working-age population remains low

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The speed of convergence with the EU will depend on the scope and pace of structural reform Convergence scenarios: Turkey’s per capita income in % of the EU25 average The estimated convergence speeds for Turkey under the two high-case scenarios are in line with the experience of EU countries

Maintaining current account sustainability is an important challenge : 

Maintaining current account sustainability is an important challenge External current account pressures are likely to persist in a fast-growth scenario Real exchange rate appreciation, reflecting larger capital inflows on the way to the EU, and High energy prices… …are likely to add to current account pressures

Requirements for sustained growth with current account sustainability: 

Requirements for sustained growth with current account sustainability On the macroeconomic front: maintaining continuous fiscal discipline through a high primary budget surplus On the structural front: Promoting private savings (financial sector reform agenda) Strong investment climate to promote FDI Market liberalization (especially in services), and Competition policy — to enable competitive cost reductions Structural initiatives would promote fast potential GDP growth with low inflation — thus supporting a monetary policy framework with less tensions on interest rates and the exchange rate

III. Public finance management on the way to the EU: 

III. Public finance management on the way to the EU

Further to the strong adjustment achieved in the past, structural fiscal reforms would be needed to make room for growth-promoting expenditures and lower taxes: 

Fiscal consolidation has been mainly driven by revenue-increasing measures Fiscal revenues stand at a high level of 40% of GDP Primary expenditures, at 33% of GDP, remain higher than in other fast-growing emerging economies Further to the strong adjustment achieved in the past, structural fiscal reforms would be needed to make room for growth-promoting expenditures and lower taxes

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…while the wage bill has been unaffected by fiscal adjustment Cuts in investment expenditures and capital transfers have merely offset a growing social security deficit…

Key public finance priorities over the medium term:: 

Key public finance priorities over the medium term: Reforms to improve efficiency of expenditure in sectors where pressures are being felt (health care, social protection, education) Horizontal reforms, focused on the modernization of civil service pay and employment system and the formulation/reprioritization of the investment program Containing overall expenditure growth in order to: Maintain a high primary surplus (to address CA pressures; accelerate debt reduction; support inflation targeting framework); Make room for lower taxes; Create fiscal space for growth-promoting expenditures and spending related to alignment with the EU acquis

IV. Structural policies to improve the functioning of key markets and the efficiency of production factors: 

IV. Structural policies to improve the functioning of key markets and the efficiency of production factors

Improving labor market performance would greatly support Turkey’s goal of EU accession: 

Improving labor market performance would greatly support Turkey’s goal of EU accession Employment ratios will have to considerably increase to reach the EU’s Lisbon Strategy targets

Although the reform agenda to accelerate job creation is multifaceted, reforming labor market institutions and regulations is key: 

More flexible job security rules — especially for severance pay and fixed-term contracting More flexible job security rules would require a stronger safety net for workers The “tax wedge” on labor income is high, hampering job creation in the formal sector — reducing it would require ambitious social security reforms, or a partial switch from payroll taxes to general (consumption) taxes Although the reform agenda to accelerate job creation is multifaceted, reforming labor market institutions and regulations is key

Further improving product market regulations would strengthen Turkey’s investment climate and the efficiency of the business sector: 

Further improving product market regulations would strengthen Turkey’s investment climate and the efficiency of the business sector Reducing cost of business entry and simplifying licensing procedures Continuing reforms of the commercial and civil judicial systems to trim the time and cost required to resolve disputes State aid should be better monitored and disclosed

The financial sector has been considerably strengthened but its contribution to efficiency and growth needs to be improved: 

Addressing challenges in supervision: related or group transactions; consolidated financial reporting for non-financial firms Privatization of State-owned banks Promoting sound accounting and auditing Modernizing the supervisory framework of the insurance sector in line with the EU acquis The financial sector has been considerably strengthened but its contribution to efficiency and growth needs to be improved

Liberalization of infrastructure services and effective integration with international markets: 

Liberalization of infrastructure services and effective integration with international markets Continuing efforts to liberalize the ICT market, combined with early implementation of the acquis for electronic communications Improving the efficiency of the transport sector – a challenge that goes well beyond alignment with the acquis Continuing restructuring and improving competition in the electricity and gas sectors

Challenges for Agriculture on the way to the EU: 

Challenges for Agriculture on the way to the EU EU accession will bring duty-free access of Turkish exports to EU markets, but also a decrease in domestic tariff protection — with considerable benefits for consumers On current CAP structure and EU trade policies, free market access to the EU would support long-term agricultural growth despite lower trade protection Tariffs should be reduced gradually, so as to converge to EU levels prior to accession and avoid any sharp falls in prices and contractions in agricultural income

V. Policies for social cohesion: 

V. Policies for social cohesion

Promoting social inclusion is a major element of meeting the Copenhagen criteria and keeping the entire accession negotiation process on track: 

Promoting better integration of women in the economy and society and youth empowerment Taking maximum advantage of pre-accession funds for rural development by elaborating a rural development strategy and an IPARD plan; establishing a Rural Development Agency Reducing costs and improving efficiency of health care, to ensure financial sustainability and affordability of the Universal Health Insurance Promoting social inclusion is a major element of meeting the Copenhagen criteria and keeping the entire accession negotiation process on track

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Thank you