ANGEL GURRIA OECD (Organisation for Economic co-operation and Development) Secretary General
TURKEY URGENTLY NEEDS TO CONTINUE WITH REFORMS
	Turkey has enjoyed very strong economic growth in the past few years, putting it among the fastest growing OECD countries. The Turkish economy has grown by one third since the 2001 political and economic crisis, or nearly three times the average growth rate of OECD countries as a group. This impressive performance is helping to raise living standards, enabling Turkey to reduce the gap with other OECD countries. A strong entrepreneurial spirit among Turkish business leaders seems likely to continue to fuel innovation and growth in coming years.
In general, what do you think about the course of the Turkish economy? The outlook for Turkey’s economy has improved significantly over the past few years. Inflation is down, and the exchange rate of the lira has become more stable. The government has made fiscal consolidation a priority, and the banking sector has been cleaned up and re-capitalised. Major privatizations and reforms in Turkey’s regulatory framework and company law have improved the investment environment and opened the way to foreign direct investment inflows. But Turkey still faces a number of challenges. Its current account deficit reached the equivalent of 7.5% of gross domestic product in the second quarter of 2006, which is very high. Its labour productivity and employment rates are well below most other OECD countries. Rigid labour laws and high taxes on labour have led to an extensive informal economy. That in turn limits the government’s ability to raise money through taxes and puts a brake on the ability of individual businesses to grow. Though firms operating in the informal economy can cut costs and gain flexibility, they find it harder to borrow money or raise capital through public share issues on the stock market. That limits their ability to invest in new plant and to develop international partnerships. Can you compare the growth performance of Turkey with the other OECD countries? Turkey has enjoyed very strong economic growth in the past few years, putting it among the fastest growing OECD countries. The Turkish economy has grown by one third since the 2001 political and economic crisis, or nearly three times the average growth rate of OECD countries as a group. This impressive performance is helping to raise living standards, enabling Turkey to reduce the gap with other OECD countries. A strong entrepreneurial spirit among Turkish business leaders seems likely to continue to fuel innovation and growth in coming years. But when countries grow very fast there is a danger of thinking that things can go on improving indefinitely, and this clearly is not the case. Continued reforms are needed, in order to pave the way for further growth. Periods of strong growth provide a favourable moment for governments to take action on such lines, and we would strongly encourage such action in Turkey. One of the Turkish government’s most urgent tasks, as we see it from the economic perspective, is to improve the legal and administrative environment in which companies have to operate, so as to encourage more firms to move out of the informal economy into legality and respect for their fiscal obligations. The OECD recommends a package of measures to enable this to happen. Among other things, these should include significant cuts in taxes on labour; an easing of labour market regulations to encourage hiring; and a reform of pension rules so that middle-aged workers are not pushed into the informal sector. Pension reform, incidentally, would also help the government to raise the funds needed to finance the suggested cuts in labour taxes. What do you think about the recent inflation and turbulence in financial markets? The weakening of the Turkish lira and the rise in inflation following the turmoil in international markets earlier this year provided a warning regarding Turkey’s ongoing vulnerabilities in terms of the management of its economy. Although Turkey’s new monetary, fiscal and banking supervision arrangements have proved relatively successful over the past four years, they may not be enough on their own to enable Turkey to withstand the impact of major cyclical changes at the level of the global economy or unexpected political pressures, whether on the international or the domestic stage. Thanks to the lead taken by the government so far, Turkey’s new policy environment leaves no room any more to resort to high inflation or currency depreciation in order to maintain competitiveness. But if the country’s new-found stability and growth are to be consolidated, Turkey urgently needs to continue with reforms. Can you share your opinion about the EU membership of Turkey? The process of EU accession negotiations is taking place in another forum, but the OECD can be a partner on the reform agenda. Turkey is a founding member of the OECD and an active participant in our work. As OECD Secretary-General, I have made clear to the government in Ankara that we stand ready to assist Turkey in its modernisation process with analysis and advice. Indeed, your country is already making considerable use of the resources that the OECD can offer. Only recently, for example, Turkey worked with the OECD to make a pilot study of its legislation and practices in the field of corporate governance. In this study, we were able to make a number of recommendations which, if followed, will help to strengthen Turkey’s already well-structured framework for corporate governance. That said, there are a number of other areas where Turkey clearly needs to make great efforts in order to reach European standards. In education, for example, more effort needs to be made to spread opportunities across the whole of society, instead of concentrating them, as at present, on a talented elite. Reforms are also needed in agriculture, to make producers less dependent on government assistance. And I have already mentioned the reforms needed in the commercial sector, to enhance competition in product markets and facilitate companies’ access to bank and equity financing, and in the labour market. As more companies are brought into the formal economy, thanks to reforms in regulations and taxes on employment, the result will be a more level playing field for companies and for employees. The EU accession negotiations, if they encourage and facilitate such reforms, can only have a positive impact for Turkey’s economy. Whatever the final outcome of the negotiations – and they are expected to be lengthy -- Turkey stands to benefit from the actions taken along the way. If all goes well, Turkey could find itself entering a virtuous circle in which stronger growth and a broader tax base help to finance more tax cuts, in turn contributing further to a levelling of the playing field for business. If that happens, Turkey will become even more attractive to foreign direct investment, in turn paving the way for sustainable long-term growth and improved economic stability and resilience.