Turkey’s economy: will GDP growth hit a wall?

Earlier this month the German magazine Der Spiegel published a brace of articles about Turkey and accompanied them with a graphic comparing Turkey’s economy and those of a number of EU member states. A cursory glance at this graphic, which I’ve reproduced below, suggests clearly that this is Turkey’s hour. Far from being the economic basket-case of old, it would appear that a youthful Turkey is surging ahead of an ageing, debt-ridden and generally sclerotic EU.

Would that it were so simple. But it isn’t. The numbers in Der Spiegel’s graphic present the most superficial of comparisons between Turkey’s economy and those of its neighbours to the west. Take the comparison of GDP growth figures. While GDP growth is a crucial number, in isolation it is a poor barometer of a country’s overall economic standing.

For one thing, on its own it tells us nothing about the size or composition of the economy doing the growing. Less developed economies frequently enjoy periods of rapid GDP growth, because they have so much scope for improvement and so much best practice to borrow from others. Similarly, for more highly developed economies each extra unit of additional GDP is that much harder to eke out because the low-hanging fruit have long since been picked.

So when we look at the Der Spiegel graphic and see that Germany’s economy grew at significantly less than half the pace of Turkey’s in 2010, we shouldn’t jump to any simplistic conclusions. Turkey’s economy isn’t twice as strong as Germany’s, or twice as resilient, or twice as productive. Despite its much lower growth rate in 2010, it remains an obvious fact that Germany has a much larger and more advanced economy than Turkey, that it can produce goods and services of much higher value than Turkey, and that it can thereby deliver its citizens a correspondingly higher level of material well-being than Turkish citizens enjoy.

The counter-argument one often encounters at this point suggests that it’s only a matter of time before Turkey catches up. The European Union is tired and on the wane while Turkey, with its young population, is only getting into its stride. But this, for the moment, is hubris. Yes, Turkey’s population is large and young. But it is also very poorly educated. It will struggle to make the transition into the kinds of higher-value economic activity that will ultimately be needed if Turkey is to sustain strong rates of economic expansion.

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Economists refer to the existence of a ‘middle-income trap’ which sees countries’ economic growth slow once they move from being a developing economy to one that needs to innovate for itself. We can tentatively identify where this middle-income trap lies. According to research published earlier this year by Barry Eichengreen and others for the National Bureau of Economic Research in the US, periods of rapid catch-up by poorer economies tend to bump up against this wall when per capita GDP—that is, GDP divided by the size of the population—reaches $16,470. At this point, the research claims, average growth drops from 5.6 per cent to 2.1 per cent.

Where does Turkey stand relative to this figure? The chart below plots the levels of per capita GDP in Turkey and five EU member states from 1970 to 2009.

(Source: Penn World Table Version 7.0)

The comparison between Turkey and Germany suggested in the Der Spiegel graphic appears remote when we look at this second chart. In 2009, Turkey’s per capita GDP in 2009 stood at $9,910. Germany’s by contrast was more than three times higher at $32,487. But not only does Turkey have a vast distance to travel before it would reach current German levels of economic development, it even has a significant way to go before it gets to Mr Eichengreen’s $16,470 middle-income trap, when we can expect growth to become more difficult to sustain.

None of this is to say that Turkey’s current economic performance isn’t impressive. It is. But we shouldn’t get carried away. I have noted in a previous post that there are immediate vulnerabilities in the form of a yawning current account deficit. But the chart above coupled with this idea of the middle-income trap points to a longer term cause for circumspection. There is no inevitability about Turkey remaining on a steeply upwards economic trajectory that will see its economy converge any time soon with those of its EU counterparts.