Ussal Sahbaz - [Archive]

De-industrialization: A dangerous trend in Turkish economy? 27/07/2011 - Viewed 4549 times

Structural change is the major driver of productivity increases in developing economies. If only, it is in the correct direction, says Dani Rodrik in his latest column: In many Asian economies, the movement of workers from agriculture to higher productivity manufacturing and modern services has been the major force that drove overall productivity growth. In Latin America, on the contrast, structural change has been in the wrong direction -- informal service activities of low-productivity gained a large share in expense of manufacturing.

According to Rodrik's findings that he presented at annual Merih Celasun Lecture at TEPAV, Turkey has so far had the structural transformation to the correct direction. Around 40% of the overall productivity increases in the last two decades has been a direct outcome of the structural transformation. Industrialization process has been the driver of this transformation through which high-productivity manufacturing replaced low-productivity agricultural activities.

Yet industrialization also has a level of saturation. After some level, it may not be that easy to sustain growth that is based on structural transformation. Hence emerges the billion-dollar question: Is the industrialization trend sustainable?

It may not be so, the above data suggests. TEPAV research team analyzed the merger and acquisition applications filed to the Turkish Competition Authority in the last decade. M&A transactions that are larger than a certain size are reported to the competition authority (larger than 25 million TLs in turnover or 25% in market share). The above graphs show transactions of 21 industrial conglomerates listed in ISO1000 -- the traditional large manufacturing conglomerates of Turkey. We put transactions into two categories: manufacturing industry M&As on one hand, services & energy M&As on the other. Green bars show entries (acquisitions); red bars show exits (divestitures).

Data show a clear change in transaction patterns in the last five years. The number of entries and exits to manufacturing and services are almost equal between 2000-2006, but between 2007-2010, net entries into services clearly outnumber those to manufacturing. The traditional industrialists of Turkey rather get into services and energy, while they exit from manufacturing. The production data (not shown here) also show a similar trend. This is no news to a careful follower of corporate news in Turkey: Energy, not automotive is the new favorite of Sabanci; real estate development, not manufacturing TV sets appeals more to Zorlu; and Kanyon shopping mall is associated more with Eczacibasi family, not the pharma business the family was once named after.

What do these numbers mean? The manufacturing plants that these traditional industrialists sell of course do not disappear; they continue to operate under different ownership. The critical point is that these large conglomerates, which have the most sophisticated strategic planning capabilities in Turkish corporate sector, no longer find manufacturing as a profitable investment area. Others may follow, and we can see a decline in investments to manufacturing in the near future. These observations are of course not conclusive, but there might be dangerous trend to follow here.

Why dangerous? One may argue, if globally connected service sectors such as financial services, high-end retailing or energy are more productive, there is no reason to worry about these sectors replacing manufacturing. I disagree. Turkey is not Dubai or Singapore, or even Greece for that matter; high-productivity service sectors cannot absorb the large workforce that Turkey has. If services will continue to get a higher employment share at the expense of manufacturing, it will be at the low-productivity end of the services, once these high-productivity segments get to a saturation point. Turkey has to produce things to continue its sustainable growth. This will require a serious industrial policy strategy in the upcoming years to overcome the deindustrialization trend. Or Turkey this time may get trapped at the wrong direction of the structural transformation.

* Ussal Şahbaz, Advisor at TEPAV, http://www.tepav.org.tr/en/ekibimiz/s/1190/Ussal+Sahbaz