High-quality versus low-quality growth in Turkey: causes and consequences

Abstract

Turkey's economy has made important strides in the 17 years since the financial crisis of 2001, averaging an annual growth rate of about 5.7%. But the quality of this growth has been poor, especially since 2007, with little-to-no productivity growth, limited technological upgrading, substantial (mis)allocation of resources to the construction sector and a huge surge in credit. This growth has also been generally unequal. This low-quality, unequal growth has been in the context of worsening economic institutions, underpinned by deteriorating political institutions.

This paper attempts to understand the causes and consequences of low-quality growth in Turkey, briefly interrupted by a period of higher-quality growth between 2002 and 2006. The main thesis of our paper is that the lack of high-quality, shared growth in Turkey is rooted in the nature and evolution of its economic institutions, which are themselves closely linked to the country's political institutions. The short episode of high-quality and more equally shared growth came as a result of institutional improvements, but duly disappeared as these institutional gains were reversed.