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    Turkey needs more GVCs

    Güven Sak, PhD24 February 2018 - Okunma Sayısı: 2499

    Turkey’s industrial transformation started in the early 1980s. Unlike many of its Middle Eastern neighbors, Turkey has no natural resources, so it had to organize its society around producing things others might want to buy. And we did. Our per capita GDP went from $1,500 in 1980 to more than $10,000 in 35 years. An agricultural backwater became an urban, industrial, and fairly market-driven place. So far so good. Yet if the idea is to converge with the rich world, Turkey is in trouble. It needs to renew its industrial base. To do that, it needs global value chains (GVCs). It now seems however, that GVCs no longer want to come to Turkey. Why not?

    There are many things that come to mind, but at the root of it, I think it’s Turkey’s stalled Europeanization process. High growth in 2017 does not mean that Turkey does not need the EU. Have a look at the list of top 15 industrial countries with the largest manufacturing base. Turkey is no longer among the top 15 when it comes to the size of manufacturing industry. People may think that political crises happen off on another plane, which they don’t affect the realm of economics, but they do. Turkey’s stalled relations with the EU are taking their toll – slow, but they are. Turkey is losing its prominence as an industrial powerhouse. For the big players, Turkey is simply too low-tech, too old and cumbersome to deal with.

    Turkey was not among the top 15 in 1980. Then the economic transformation started with Turgut Özal’s reforms. By 1990, Turkey had become 13th among the 15. But in 2000, Turkey declined to number 15. By 2010, Turkey was no longer on the list. We still have a prominent place among the top 20, but that’s it. Turkey grew, but others grew faster, better.

    When I looked at the countries that surpassed Turkey in the last 15 years, I see a pattern. While Turkey was going down the list, a group of Asian countries were starting to dominate it. China became number one. South Korea was 11th in 1990 and climbed up to be 5th. India, Indonesia, even Malaysia is doing better than Turkey. Mexico and Brazil are holding on. Here’s what’s important: all of these countries have improved the share of hitech exports among their total manufactured exports. This is a classic sign of increased GVC activity.

    China has increased the share of hightech in its exports from 9 percent in 1990 to 33 percent in 2015. Mexico increased it from 5 percent to 23 percent, India from 5 percent to 10 percent. Malaysia reached it from 26 percent in 1990 36 percent in 2015. Most of these increases happen because these countries are able to attract multinational corporations that base part of their production on there – think smartphone production or car plants.

    How about Turkey? Our hitech exports as a share of total exports was 3 percent in 1990 and increased to 5 percent in 2015. Clearly there is something our competitors are doing that we aren’t. If GVCs were basing their technology-heavy production in Turkey, this number would look very different today. So what does a country have to do to be part of GVCs?

    There are two dimensions of this: the first is the land value of a country, the second is the intrinsic value of a country, so the value that its government, citizens and institutions, including its companies. In other words, it’s about global competitiveness. That’s where we have problems. Today’s factories needs more service sector outputs to manufacture things. The Customs Union with the EU turned Turkey into an industrial country. Yet the absence of service sector liberalization is stalling the Turkish industrial base, preventing it from rejuvenating itself. That’s where Turkey needs structural reforms. That’s why the modernization of the customs union arrangement towards the service sector and agriculture is important for the country’s industrial renewal.

    Restraints on competition, weaker institutions, a poorer human capital base and problematic rule of law are all factors preventing GVCs from approaching. Fewer GVCs means less FDI and finally, a thinner industrial base. Note that Turkey has had a problem with GVCs long before the State of Emergency-a-la-Turca that was declared after the failed coup attempt in July 2016. Now things are even worse, and foreign CEOs refrain from even visiting their operations in the country.

    Yet the other week, Parliament has accepted 30 of the 31 SoE decrees into law. Now the Constitutional Court has the authority to scrutinize the administrative decisions of the last 18 months. Finally a move towards serious engagement with the EU. This comes at a time Ankara has been trying hard at rapprochement with Brussels. President Erdoğan has duly been invited to join the family photo with EU leaders during their meeting in Varna, Bulgaria. I’m not getting my hopes up too much, but it’s something.

    This commentary was published in Hürriyet Daily News on 24.02.2018