Micro shifts for macro gains: Firm productivity and economic growth in Turkey

The pace of Turkey’s economic catch-up with high-income countries between 2002 and 2017 was, at the time, one of the most remarkable among comparable economies. In a period of less than 20 years, the country came close to transitioning from upper middle-income to high-income status, a feat only achieved by a handful of countries in the past decades. But a series of shocks, amplified since 2016, have disrupted progress. 
 

Figure 1: Strong convergence between 2002 and 2017

Resuming and sustaining Turkey’s economic catch-up will, among other things, require higher productivity growth. Productivity growth in Turkey, like in many other Emerging Market and Developing Economies (EMDEs), has been declining, for reasons including macroeconomic challenges, a slowdown in structural reforms, and the quality of investments. Addressing macroeconomic challenges in the near term will require a combination of monetary and fiscal adjustments along with orderly deleveraging.  

To address structural reforms, a recent World Bank study on macro-micro productivity linkages in Turkey offers some ideas.  The study, Firm Productivity and Economic Growth in Turkey, shows that productivity has been on a declining trend and that low-productivity sectors have been capturing an increasing share of domestic resources. In addition to low productivity, the development characteristics of these sectors and industries, such as value addition and tradability, tend to be relatively weak.  

Other than in a few breakout industries—including motor vehicles, basic metals, and textiles—productivity growth has declined in recent years. Construction and services, on the other hand, have expanded rapidly in terms of production, despite exhibiting low, falling productivity. Services are dominated by relatively low-productivity, less knowledge-intensive industries, such as wholesale and retail trade, as opposed to more productive sectors such as ICT. 

Figure 2: Manufacturing growth constrained by large, low productivity sectors

What are the implications? At its current level of per capita income, Turkey cannot compete with low-skill, labor-intensive manufacturing economies. Neither can it keep raising prices to sustain wage increases, unless the quality of output improves.  

At the same time, labor-saving technologies have raised concerns for emerging markets with abundant workforce like Turkey because these technologies could displace manufacturing industries, which have traditionally been a strong ladder of development. Turkey needs a new ladder of development—one that takes advantage of new technologies and changing patterns of globalization to deepen the country’s manufacturing and services capacities. 

A few pro-development manufacturing industries stand out as having potential for building such a strong ladder of development for Turkey. Basic pharmaceuticals, chemicals, motor vehicles, and transport equipment tend to have the greatest scope for productivity growth, innovation, and tradability.  

There are other manufacturing industries with good potential, including machinery and equipment, electrical equipment and computers, electronics, and optical equipment. But these industries require strong competitiveness, capabilities, and connectedness because they are more knowledge-intensive, and therefore more vulnerable to disruptive technology. Turkey performs relatively well on connectedness, though it is only just above average on capabilities and is a middling performer on competitiveness. Unless these challenges are addressed, these types of industries are at high risk of being disrupted.  

The growing interdependence of manufacturing and service sectors also underscores the importance of investing in high-productivity services. In Turkey, traditional services dominate, but high-end services such as IT and scientific sectors are more likely to help mitigate risks to disruption in more advanced manufacturing sectors.  

Figure 3: Turkey scores well on connectedness and capabilities but lags on competitiveness

This situation highlights the importance of structural reforms that enable the most productive firms and industries to absorb a growing share of resources. As discussed in the report, allocative efficiency can be supported through policies that address market failures—such as anti-competitive practices, price distortions, information asymmetries, and inefficient subsidies. Productive efficiency can be influenced by factors including digital technology adoption, knowledge transfer, innovation, and human capacity. These efforts could help Turkey sustainably recover from the current pandemic-related shock while restoring its earlier progress toward high-income status.