Ahead of important local elections this month, Turkiye stands at a critical juncture, requiring not only short-term inflationary measures but also a comprehensive reassessment of the economic structure, technological landscape and social equity.
Prime Minister Turkiye said the country is at a critical juncture as the economy remains in the spotlight as key local elections are scheduled for March 31, 2024. This article assesses the main challenges of the Turkish economy.
Robust growth, minimum wage challenges and persistent poverty
The Turkish economy grew significantly in 2023, exceeding expectations with an estimated year-on-year GDP growth rate of 4.5% (see Figure 1). This growth was fueled by stimulus measures implemented ahead of the May 2023 elections, including wage and pension increases. However, despite being relatively high, minimum wages have failed to alleviate widespread poverty, especially in urban centers like Ankara and Istanbul, exposing flaws in the country’s economic system.
A closer look at the industrial scene reveals a situation characterized by low productivity and efficiency. Problems include weak institutions, low investment in technology, and a lack of skilled labor, all of which contribute to an economic system that struggles to make real progress. I am. This highlights the urgent need for comprehensive reforms and strategic investments to revitalize the entire industrial sector.
Figure 1: Prime Minister Turkiye must balance promoting economic growth with maintaining tight monetary policy to keep inflation in check. Source: Refinitiv, IMF, author’s calculations
Execution of legitimate economic policy amid continuing turmoil
After the May 2023 elections, a new economic management team was installed in Turkiye, marking a major shift towards tight monetary and fiscal policies. Central banks responded by sharply raising interest rates, increasing borrowing costs by more than four times, and reducing interventions to protect the currency (see Figure 1). Despite these efforts, challenges remain as interest rate adjustments have not yet reached positive real interest rates (i.e., interest rates remain negative even when adjusted for high inflation).
The recent increase in the policy rate to 45% reflects our continued efforts to combat inflation and stabilize the currency. But focusing solely on inflation will not address Turkiye’s more fundamental problems, which are deep and systemic and hinder the country’s development opportunities.
Economic outlook, growth dilemma and risk mitigation
Estimates suggest growth will be 4.5% in 2023, with the government forecasting growth of 4.4% for the year ahead. However, according to the International Monetary Fund (IMF), the growth rate is expected to slow to 3.25% in 2024, and balancing this with macroeconomic stability is an issue.
Turkish authorities are grappling with the difficult responsibility of fostering economic growth in the face of numerous obstacles. High inflation and interest rates are hampering private consumption, and calls for fiscal discipline pose challenges to public spending and investment.
For example, in line with the goal of controlling inflation, the fiscal deficit in 2024 must be lower than the projections outlined in the government’s medium-term plan for 2024-26. Additionally, private investment faces barriers such as high borrowing costs (high interest rates) and a variety of other structural issues, such as policy uncertainty and rule of law concerns. The combination of high borrowing costs and an unstable economic environment makes Turkiye a poor investment location. This can hinder future growth.
Risk mitigation and evolving economic policy
Meanwhile, the risk of a sudden reversal of the current shift toward orthodox economic policy is decreasing. Positive messages from the president expressing support for the new economic team and Turkiye’s medium-term plan demonstrate a commitment to stability and reform.
But actions speak louder than words. While the Turkish authorities’ view is positive, reforms are needed to foster a stable economic environment, which is essential for the country to make meaningful progress.
Relationship between Russia, sanctions, and world affairs
An important aspect influencing Turkiye’s economic situation is its complex relationship with Russia. In 2022, Russia emerged as the largest trading partner, with bilateral trade doubling to her $68.2 billion (see Figure 2).
This trend is expected to continue through 2023, leading to sanctions against Turkish companies involved in the supply of technology, goods and services to Russia. As global political shocks continue to shape economic outcomes, Turkiye maintains important commercial partnerships while adapting to evolving geopolitical challenges. In any event, however, the country’s trade prospects are in part tied to the sanctions imposed on Russia. This situation is inherently uncertain.
Figure 2. Trade with Russia surged after 2022, then declined Source: Refinitiv, IMF, authors’ calculations
brain drain
Considering the current situation in Turkey, the escalating brain drain is also a serious concern for the country’s future. Tightening restrictions on freedoms and a gloomy outlook for the country are causing great concern as Prime Minister Turkiye’s brightest minds are increasingly defecting. Without a skilled workforce in the country, it is difficult to achieve meaningful domestic economic growth.
The potential impact of this brain drain could be severe. As the outflow of intellectual capital gains momentum, it highlights the urgent need for comprehensive measures to retain and develop talent that can make a significant contribution to Turkiye’s development.
This can affect other structural issues discussed above. Unless economic growth is supported by human capital, Turkish policymakers will remain under severe pressure. Fiscal and monetary interventions can only achieve so much in terms of supporting growth. It is also important to have the right people trained to the right level and in the right location.
In summary, Turkiye stands at a critical juncture ahead of local elections, which calls for not only short-term measures to combat inflation, but also a comprehensive reassessment of the economic structure, technological landscape, and social equity. Only through systemic change can this country chart a sustainable path toward economic stability and continue to address deep-rooted challenges while capitalizing on the opportunities presented by growth.
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Daron Acemoglu Cevat Giray Aksoy Čihat Tokgoz Dani Rodrik Ozge Oner Author: Cevat Giray Aksoy Photo by Leonid Andronov on iStock
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