Economic Survey Of Turkey Published

by Ulrika Lomas, Tax-News.com, Brussels

21 July 2008

The Organisation for Economic Cooperation and Development (OECD) published last Thursday the results of its 2008 Economic Survey of Turkey.

Explaining the results of their survey, the OECD began by giving a general overview of Turkey's economy, stating that over the past two decades Turkey has successfully implemented a growth strategy based on competitive markets. The strategy nurtured a highly dynamic and vibrant private business sector.

However, this new growth trajectory remained vulnerable to deep and recurrent macroeconomic shocks. At the same time, driven by the high level of FDI and other capital inflows, the Turkish currency tended to appreciate very strongly in real terms – except during periods of international capital market turbulence or internal political tensions.

Moving on, the OECD analysed Turkey's fiscal strategy, arguing that following six years of very tight fiscal policies, Turkey is faced with a fiscal policy challenge: how to i) preserve a rigorous fiscal policy stance, while ii) both improving the quality and cost-efficiency of key public services and developing the country’s infrastructure, and iii) simultaneously reducing the most distortive aspects of the Turkish tax system.

In response to this challenge the government is trying to develop a new pro-growth fiscal strategy. Turkey is in a strong position to move towards such a new strategy.

Thanks to past fiscal restraint, public debt is on a robustly sustainable path, and a major law on Public Financial Management and Control has established a state-of-the-art institutional framework.

However, important spending drifts occurred in 2007, and were identified only with some lag, giving a warning signal on the urgency of full implementation of the new framework, and it has been suggested that strong political commitment is also needed for clarifying Turkey’s functional spending priorities, shifting to more efficient supply arrangements in key public services and closing the most blatant tax loopholes and strengthening tax enforcement.

The final part of the OECD's survey concentrated on Turkey's business sector.

The Turkish business sector’s successful post-crisis performance has come under strain. Competition from low-cost countries and strong real currency appreciation have together undermined the performance of the trade-exposed sector, in particular of the segments dependent on low-skilled labour and domestic inputs.

The chapter argues that important competitiveness reserves remain latent in the business sector, and should be mobilised. They arise from a large part of economic activity still being carried out in the informal and semi-formal sector.

If more resources can be shifted to the formal part of the economy, aggregate productivity and competitiveness would be enhanced. Formal firms draw more effectively on the technology, skilled labour, capital and FDI resources available in the rapidly globalising Turkish economy.

Concluding the survey, the OECD predicted that the two top priorities in facilitating the growth of the formal sector are further reform of labour market regulations and progress with the modernisation of capital markets.

Recommended