The concept of the middle income trap is among the favorite topics of economic discussions in recent times in both Turkey and the world… The middle income trap is the situation when economies which have emerged from the low income category due to rapid growth have slowed down upon reaching the middle income stage, and can be described as an impasse linked to the lack of productivity.
There are plenty of Southeast Asian, Latin American and African countries which during the past few decades have not been able to attain high income positions and continue to struggle in this loop. Countries like South Korea and some eastern European countries did not fall into this trap and have continued their rise.
WE HAVE BEEN IN THE ‘UPPER’ MIDDLE INCOME GROUP FOR 9 YEARS NOW
Upon examining the international literature available on this topic we can see that there is actually no fixed definition for this trap regardless of whether it is about relevant income levels or the periods of stagnation in this trap… It is even possible to come across the trap being classified in two stages i.e. “lower middle” and “upper middle” in these studies.
If we take the World Bank classification of per capita income as the basis, then the middle income level is in the US$ 1,046-12,475 range, based on current estimates. It is a wide range! If this is classified as lower and upper categories, then the first category would be US$ 1,046-4,125, and the second category would be US$ 4,126-12,475. In this context, we could also phrase the question regarding our situation as “will we fall into the upper middle income trap?” This is because we were granted this status nine years ago.
HOW MUCH TIME DO WE HAVE?
How long can we afford to remain in this range? What is the criterion vis-a-vis the time period for not falling into this trap? As I said, there is no fixed definition but on the basis of a reputed academic article, there is evidence of economies falling into the trap if they remain stagnant in the upper middle income category for 14 years -- after taking into account the difference in the gap in per capita income values -- and are still unable to pass into the high income group.
Our per capita income that used to be in the US$ 3,000 range rose three-fold within 10 years since 2002. This is a significant level of success that left the world in awe… Of course, it should be stated that particularly in the early parts of this period, apart from our accelerated growth on the back of reforms and stability, we were also supported by the increase in the value of the Turkish Lira. In recent years we are faced with a situation that represents the opposite. Apart from the loss of acceleration, the exchange rate also has a negative impact on per capita income not increasing at the necessary rate.
TIME AVAILABLE IS NOT UNLIMITED
If we cast a general glance and take the World Bank categories as a basis, then we need to increase our per capita income to the level of US$ 12,500 from its current level of approximately US$ 10,800. It could be said that while we have a certain amount of time available to us to reach the high income level, we do not have unlimited time at our disposal.
As pointed out by international studies as well, Turkey is close to joining the high income group and has progressed faster than other countries in a similar situation. Based on World Bank classifications, we have covered 86 percent of the road toward entry to the high income class. This is good news but in order not to get stuck on the threshold, we will need reasonable and sustainable growth in the coming years. If this is not managed, then we face the risk of falling into the trap.
What is our current situation? As you know, data on growth during the 3rd quarter was released on Wednesday and was disappointing to an extent. We managed 1.7 percent growth during this period. Forecasts suggested that we should expect modest growth but this was too modest. I would like to shed light on our situation by summarizing the dynamics involved behind the scenes.
WE MIGHT HAVE STALLED WITHOUT EXPORTS
Let me start by expressing my gratitude to our exporters. Exports were the engine of our economy in the 3rd quarter despite the negative atmosphere in our markets and had a 2 percentage point impact on our growth rate. Imports, just like I have previously stated on the matter, are falling and continued to contribute by applying the brakes. I give it 0.5 percentage points.
What about domestic demand? I had previously stated that the support provided by public expenditure during this period will be important. This was the case when it came to consumption. Consumption expenditure by the state benefitted our rate of growth by 0.6 percentage points. Private consumption, on the other hand, continued to be sluggish as intended and could only contribute with 0.1 percentage points.
Investments are also critically important for domestic demand. Private sector investments that left us without joy by contracting in the first half of the year stood at 0 percent in the 3rd quarter. What does this mean? Private investments have stopped falling but our economy managed to grow yet again without investments. Public investments fell too and dragged our growth rate down by 0.1 percentage points.
You might ask why we didn’t grow at a rate of 3 percent when we add up these numbers but only 1.7 percent. The reason for this is the final factor, which is the change in the level of stocks and its 1.5 percentage point negative impact. When looked at through calculations made on the basis of production methods, the 4.9 percent drop in the agricultural sector caught my eye. This means that agriculture impeded our growth rate by 0.7 percentage points and can also be linked to the topic of stocks. Therefore, the drop in agricultural production and the reduction in stock levels are the primary reasons for the slowdown in this quarter.
WE HAVE TO ACCELERATE
Leaving aside the topic of agriculture and stock levels, I think the main lesson that needs to be learned from the existing picture is investment. It is clear that we need to quickly reinvigorate private investment in order to achieve sustainable and quality growth. Based on this data, we grew at a rate of 2.8 percent in the first three quarters, and if we manage to accelerate in the 4th quarter, we will only manage to end the year with 3 percent growth under the best scenarios.
This would mean that we have dropped our growth rate to the 3-4 percent range in the last few years… As time begins to run out, we need to attain sustainable rates of 4-5 percent at least to pass the threshold in time. That is why we need a new model that will bring dynamism and is productivity-based.
Whether we fall into the trap or not will depend on how successfully the model is designed and how effectively we can implement it. If we negotiate this tough process, then the world will watch with the same awe as we cross the new threshold just like it watched in awe as we entered the upper middle income level.
