Turkey: export-led growth
The past decade saw Turkey move away from the boom-bust cycles of the past. Nonetheless, when the economy almost overheated in 2011, it became painfully clear that further stabilization requires more than just sound institutions. Any meaningful effort to reduce the external imbalance and reduce Turkey’s vulnerability to investor sentiment should include a move towards an export-led growth strategy. The new export industries created in the last decade are a good step in the right direction, but more is needed. This Special Report takes account of past achievements, while also considering the road ahead.
From agriculture to services
Not long ago, agriculture was considered the backbone of the Turkish economy. However, over the past three decades, various reforms and investment programs spurred the development of new and more productive industries. Over the last decade, this transition accelerated, resulting in a vibrant services sector, combined with an ever-growing industry. This development also altered the make-up of Turkish exports. While in 1980, agricultural goods made up nearly 60% of all Turkish exports, this share had dropped to roughly 5% by 2011. In addition, the transition from an agricultural economy to a services-based economy went hand-in-hand with higher economic and export growth. As a result, the past decade not only witnessed a change in the type of goods and services exported, but also saw the volume of exports grow.
Since Turkey’s crisis of 2001, and until the global crisis impacted export growth in 2009, the volume of Turkey’s goods and services exports increased by roughly 11% annually. During that same period, the value of services exported rose by an average of 14% annually. Underlying these growth rates is the development of a large tourism sector.
The sector has grown exponentially over the last years, with tourist arrivals growing from roughly 10m in 2000 to over 40m in 2011. As a result, the sector accounted for over 10% of GDP in 2011. Most tourists come from Western Europe and Russia.
Nonetheless, despite the fact that the economic crisis depressed demand in these countries, Turkey’s tourism industry continued to grow, owing to competitive pricing.
For the coming decade, the government plans to further invest in the sector as a whole, while also developing new types of tourism. Specifically health tourism is projected to become a major growth market, catering to the needs of ageing Europe.
Box 1: New trade partners
Located between East and West, Turkey has always been well positioned to penetrate both markets. Still, for the better part of the past two decades, its focus has been on Europe, which continues to form Turkey’s main export market. However, in more recent years, as Turkey’s love affair with Europe started to cool, the Middle East and North Africa (MENA) gained importance as a destination for Turkish exports. This development is evidenced by the fact that while in 2000 Europe was the destination for almost 60% of all Turkish exports, this share had dropped to below 50% by 2010. In contrast, by 2010, the MENA received roughly 20% of all Turkey’s exports, from 10% in 2000 (figure 3). We expect this trend will continue in the next decade. Especially the crisis in the eurozone, and the resulting fall in demand, justifies further diversification of export partners. Nonetheless, increased dependence on the MENA is not without risk, given the political and social tensions in the region.
Together, these developments should help sustain growth of the sector. However, downside risks remain and include Turkey’s proximity to some of the world’s most volatile countries, as well as its own security issues at home (mostly in the form of terrorist attacks). Negative press as a result of either could deter tourists. That said, Turkey has been coping with these issues for a long time and any impact on tourism appears to be temporary at worst.
Next to tourism, also the export of services related to construction and infrastructure gained importance. After Turkey’s economic crisis in 2001, the sector was thoroughly modernized and received significant investments. The result was the emergence of a number of large-scale companies that are able to compete globally. And, as Turkey has strengthened its ties with the Middle East (see box 1), these companies have found lucrative opportunities in especially Iraq and Libya, where they provide post-war reconstruction services. As Turkey continues to shift its focus on the East, we expect this trend to continue in the next decade.
In the 1990s, the opening of Turkey’s domestic markets to global competition altered the make-up of the country’s manufacturing industry. A few factors played a role in this transformation. First of all, due to Turkey’s high minimum wages, specifically its labor-intensive sectors felt the burden of increased competition. Secondly, the crisis in 2001 marked the end of state-subsidized industry and a restructuring of the financial sector, which meant that money began to flow increasingly to sectors that would survive global competition. The repercussions of both developments were especially felt in the textile industry, which had traditionally formed the backbone of Turkey’s manufacturing industry. In 2000, textile and clothing exports made up 64% of all manufactured exports. This share dropped dramatically, to 40% in 2011.
While labor-intensive industries suffered, capital-intensive manufacturing industries emerged. The largest benefactor of this development has been the previously underdeveloped Anatolian region, which has become Turkey’s manufacturing center and largest exporter of Turkish manufactures. Especially the automobile and machinery industries are flourishing. As shown in figure 4, between 2000 and 2011, the exports of automobiles doubled, while their share in total exports increased from 4% to 18% over the same period. Most of the largest automobile manufacturers are based in Turkey, profiting from the relatively low production costs and Turkey’s proximity to both Europe and Asia. Given the distress in European markets and the consequent need for cost-cutting among European car manufacturers, we expect the Turkish automobile industry to only grow further over the coming decade. This development will be spurred by the government’s efforts to attract foreign investors in the sector. However, as most of the automobile exports are destined for Europe, a slow recovery there could slow export growth. In addition, growing competition from Asia could further hamper growth.
Developments in the machinery industry have also been impressive (see figure 4). The sector especially benefits from Turkey’s proximity to the MENA, which has become a large importer of Turkish machinery. For the next decade, the Turkish government expects the sector to grow by 18% annually. Although this could be overly optimistic, we do expect strong growth, aided by a combination of private and public investments, as well as a further strengthening of ties with trade partners in the MENA.
Back to agriculture
Turkey’s transition towards services and industrial production should not mean less weight is given to its significant agricultural potential. Although agricultural exports currently make up only about 5% of total exports, Turkey’s favorable climate and about 21m hectares of arable land make it a suitable source of export growth. In addition, the sector could benefit from the techniques and machinery produced by Turkey’s manufacturing industry, while increased interest from Arabic investors could help spur development.
Unfortunately, increasing agricultural productivity is complicated by the fact that the sector is largely made up of small farmers. In fact, 66% of all farmers hold up to one hectare of land each. These small farmers lack the funds to invest in productivity-enhancing machines, fertilizers, or other techniques. This helps explain why the positive spillover effects from the developments in the manufacturing sector have so far been limited. Reducing this fragmentation is vital in order for Turkey to create a competitive agricultural sector that can both compete globally as well as feed Turkey’s own population.
The developments of the past paved the road for an export-led growth strategy. Still, much remains to be done. Turkey needs to increase the value-added of especially its low-tech industrial production. As noted by the World Bank, roughly 84% of Turkey’s export growth in the last decade is explained by an increase in volumes, rather than an increase in price. Underlying this percentage is the fact that Turkey’s input markets are relatively underdeveloped. This means the country relies heavily on the import of inputs. Increasing domestic production of inputs, and thus raising the share of the value-chain owned by Turkish companies, is vital if Turkey is to move to an export-led growth stategy. Some programs are currently being implemented to realize this goal and we do expect to see the first results within the next five years.
The past decade saw the creation of a vibrant tourism sector, as well as new manufacturing industries. These developments go a long way in realizing an export-led growth strategy.
However, for exports to become the main driver of GDP growth, Turkey needs to further develop these sectors, while at the same increasing the productivity of the agricultural sector. In addition, Turkey needs to increase.