The COVID-19 crisis has hit Turkey’s people and economy hard, accentuating pre-existing challenges such as the low share
of workers in formal employment and obstacles to firm expansion. Well-designed support to households and firms that is
aligned with a return to macroeconomic stability, and reforms to improve competition and labour laws, institutions and
business would help to build a lasting recovery, according to a new OECD report.
The latest OECD Economic Survey of Turkey says a full recovery from the COVID-19 crisis will take time, given the blow from the drop in tourism and uncertainty
over the future evolution of the pandemic, as well as Turkey’s limited welfare provisions and high levels of corporate
and household debt. The crisis has put pressure on the viability of many businesses and on social cohesion, hitting
informal workers, women, refugees and youths particularly hard. While a one-size-fits-all support strategy was justified
during the first phase of confinements, policy support in the second wave of the pandemic should now be adapted to the
varying conditions of sectors, workers, households and companies.
The pandemic has also amplified monetary policy challenges, with inflation surging further to well above Turkey’s 5%
official target following interventions to shore up economic activity, bank liquidity and the Lira currency. Support to
people and firms should be provided in a transparent and stable way to build investor confidence and reduce the risk of
abrupt movements of capital. For example, targeted allowances for a stated period can be more effective than
concessional loans and one-off transfers. Turkey should also seek to replenish foreign reserves and restore the
independence of the Central Bank, the Survey says.
In parallel to the pandemic, Turkey remains exposed to geopolitical and trade risks, including the effect of the United
Kingdom’s exit from the EU. As things stand, and factoring in headwinds from the second wave of the pandemic, the Survey
projects Turkey’s GDP rebounding by 2.6% in 2021 and 3.5% in 2020.
“Turkey is looking at a gradual recovery from the COVID-19 crisis and risks persist for growth and well-being,” said Alvaro Pereira, OECD Director of Economic Country Studies. “The focus should be on restoring macroeconomic stability and seeing the post-crisis period as an opportunity to
encourage foreign and domestic investment through stronger public governance, and to use market and labour reforms to
empower businesses to grow and create quality jobs.”
Once a recovery is under way and investor confidence restored, the Survey estimates that a combination of market,
institutional and education reforms could lift GDP per capita by 1% per year over the coming years. Market
liberalisation reforms should include removing anticompetitive regulatory barriers in product markets, increasing labour
market flexibility and reducing corporate income tax, while institutional reforms should improve public governance and
the formalisation of business activities.
While the dynamism of Turkey’s business sector, and the country’s strong entrepreneurial spirit and youthful workforce,
have been an asset through the COVID-19 pandemic, the majority of Turkish firms are very small and have limited capacity
to weather a protracted slowdown. Significant parts of the business sector rely on informal or semi-formal practices in
employment, corporate governance, financial transparency and tax compliance. Easing overly stringent regulations on
product and labour markets and simplifying business and tax systems would make it easier for young firms to grow and
move to the formal sector. A modernized and more efficient business sector would also help firms to emerge stronger from
the crisis.
In terms of labour reforms, cutting non-wage labour costs, shifting part of the cost of social protection to sources
other than payroll contributions, making statutory minimum wages affordable for low-productivity firms, and modernising
regulations for temporary as well as permanent contracts would stimulate the creation of formal jobs once the recovery
takes hold.
Education reforms should seek to enhance adult skills in a country which ranks among the highest in the OECD for
qualification mismatch, with 43% of the working population either over-qualified (29%) or underqualified (14%) for their
job. Investing more in Research & Development and in digital technology and infrastructure would also raise growth prospects.
See a Survey Overview with key findings and charts (this link can be used in media articles)
Download the complete OECD Economic Surveys: Turkey 2021