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Trading Up to High Income: New Firms, New Products, New Markets

Martin Raiser's picture
Also available in: Türkçe

A competitive export sector is one of the key engines of a successful transition to high income. Turkish policy makers knew this well, and so they put an increase in export competitiveness at the forefront of their ambitious targets to get the country into the top 10 economies worldwide by 2023. What are the chances of success?
 
To try and answer this question, the World Bank working closely with Turkey’s Ministry of Economy carried out a Trade Competitiveness Diagnostic (“Turkey Country Economic  Memorandum: Trading Up to High Income”), which was just launched in Ankara. The team looked at how Turkey did during the past decade, a period of rapid growth in global trade. It turns out that Turkey did pretty well – its exports during the 2000s grew 15.3 percent annually, twice the average growth in the OECD, 6 percentage points above world trade growth and only 4 percentage points slower than in China. Turkey’s global market share grew by 60 percent (from 0.53 to 0.82 percent) between 2002 and 2009 and is getting close to Turkey’s share of the world population (1.06 percent). At the same time, Turkey increased its export sophistication and improved product quality.

One main reason for this success was trade integration with Europe. The elimination of most tariff and non-tariff barriers in goods trade between Europe and Turkey after 1995 galvanized the modernization of Turkish industry, attracted FDI and boosted Turkey’s export competitiveness not just in the EU but in third markets as well. Turkey has done quite well in diversifying into new markets, particularly in MENA and in Africa – thanks to its reputation for “selling European quality at Turkish prices,” as one African Ambassador in Ankara recently told me. By being close to the world’s largest and most sophisticated market, Turkey is now well placed to “trade up to high income.”
 
A more detailed analysis, however, also reveals concerns. Turkey could have had even faster export growth if it had specialized in a different product basket. While Turkish exporters have moved from low into medium-tech and have upped quality, they have not been prominent in the highest growth segments of the world economy: the largest gains in global market share were in sectors that experienced below average growth in global demand. Using firm-level data, the team further found that around two thirds of all export growth can be explained by increases in foreign sales of existing producers in existing markets, and only 9 percent by exports of products that newly entered the export basket. Export growth in new markets and the entry of new exporting firms accounted for respectively 15 and 11 percent of export growth between 2002 and 2011 (Figure 1; see also Cebeci and Fernandes, 2013: http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-6452).

 

The implications for Turkey’s future export prospects are clear: the country needs to get into higher value and faster growing market segments and it needs to have more companies engaged in exports.  
 
The implications for policy are less clear, however. If the problem is the need to shift to a new export basket, should the solution lie in product or at least industry specific policies? Our report comes out differently, for two reasons. First, it argues that industry specific policies may remain ineffective if structural constraints have not been addressed. For instance sector specific incentives may mobilize little investment if there are overarching concerns regarding the enforcement of contracts, the predictability and business-friendliness of regulations or the availability of sufficiently skilled labor.
 
Second, building on the idea that trade is increasingly based on global supply chains (see Baldwin and Gonzales, 2013: http://www.nber.org/papers/w18957) the team argues that Turkey has ample opportunities to move up the value chain, without the need for sector or product specific policies. Figure 2 presents an index of the length of global value chains by sectors produced by the OECD. It turns out that the longest chains can be found in sectors which already account for a large share of Turkey’s exports, such as motor vehicles, other transport equipment, or textiles. The longer the chain, the better are the chances to move up, for instances by attracting more of the pre-production research and development and design and post production marketing and specialized logistics activities. 

 

Export competitiveness is not just about doing different things, but also about doing things differently. This applies to all activities and hence horizontal policies may be as important, if not more, than industry specific interventions or incentives.  Indeed, the report has 17 recommendations on “Fundamentals” – horizontal policies such as improvements in the business environment to attract more FDI or investments in skills – and only 4 specific recommendations on trade – such as better documenting existing export promotion schemes and their effectiveness.
 
In short – industrial policies are no short-cut to high income. When all the other ingredients are there, a light-handed industrial policy may help. But if the critical fundamentals are found wanting, industrial policies may achieve little. That’s my take away on the team’s detailed analysis of Turkey’s trade competitiveness. But I am sure, this is not the last word on it. Check out the evidence and let us know where you come out.
 

Comments

Submitted by Sharjil Haque on

This is a great analysis applicable to other economies poised for transition. Export market diversification and upgrading to high end products is also a core necessity for sustainable double-digit growth in my country - bangladesh. Our export markets are mostly in the EU, and our major export item, RMG exports focus on low-end products. In my opinion once economies like Turkey, Bangladesh and many others in transitional states (ours ofcourse is to be a middle-income country) ensure sustainable growth in exports, we may see a shift in economic dominance and international trade patterns.

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