Turkey’s middle income trap makes the country vulnerable to external shocks

Originally appeared on Bosphorus Consulting in October 2014

Last week Haluk Dinçer, the chairman of the Turkish Association of Industrialists and Businessmen’s Association (TÜSİAD), claimed that Turkey’s large current account deficit and its middle income trap make it very vulnerable to external shocks (the existence of Turkey’s middle income trap is argued convincingly in a recent report by Istanbul-based Bahçeşehir University’s Centre for Economic and Social Research). One of the areas that Dinçer touched on was the importance of education in stimulating and developing innovation. Indeed, according to many metrics, Turkey lags behind more developed nations with respect to education. While its enrolment rates have made impressive progress, still only 64% of 15-19 years old were enrolled in education, according to the OECD’s 2013 country report on Turkey. Without higher education, innovation is harder to promote, and thus true value-added products and services harder to produce. In such a situation, Turkey will remain on the receiving end of others’ good ideas – a reactive rather than proactive position.

Recent events have shaken Turkey’s economy and highlighted its vulnerability to exogenous shocks. Despite some progress, Turkey still ranks 52nd for innovation according to a report by the Economist Intelligence Unit, despite being among the world’s 20 largest economies. In a previous research note, we consisdered that Turkey’s relatively low standard of living may deter start-ups establishing themselves in the country; this situation is unlikely to drastically improve anytime soon. In the meantime, Turkish businesses will need to continue proactively promoting themselves as having brighter futures than the Turkish economy.

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