Turkey held back by monopolies, black economy, study claims

ISTANBUL – Turkey, working to bolster its frail economy, can double its per capita income by 2015 if it eliminates two major shortcomings – the black economy and monopolies, consultants McKinsey said yesterday. Turkey has been working to implement an economic program backed by the IMF to recover from two financial crises two years ago that slashed economic growth, resulted in the loss of hundreds of thousands of jobs and forced hundreds of firms out of business. It has has also pledged structural reforms in banking, agriculture and social security to strengthen its economy and raise living standards for its 70 million people. «What we first need is an understanding and conviction at the policymaking level that productivity is what drives economic growth, and economic growth drives job creation,» said David Meen, director at McKinsey & Company in Turkey. McKinsey, which has operated in Turkey since 1994, has so far completed a consultancy study for the banking supervisory board and privatization agency. It is currently acting as consultants for the privatization of gas distribution grids in three Turkish cities. Economists say Turkey’s black economy, or unregistered economy outside the tax umbrella, equals almost half its gross national product, which is expected to total 355,000 trillion lira ($218 billion) in 2003, according to draft budget data. Meen referred to a yearlong study showing that Turkey’s economic problems boiled down to poor productivity levels driven by three factors: «dramatic levels of informality» – or black economy – a lack of liberalization in key sectors like energy and telecommunications, and macroeconomic instability. Optimism Asked by Reuters in an interview whether Turkey can overcome its problems, Meen said, «We are optimistic about this.» «If Turkey can do this, the payoff is a sustained gross domestic product (GDP) growth of 8.5 percent per annum in 2005-2015 and the creation of 6 million new jobs,» Meen said. Turkey’s 2003 draft budget envisages 5.1 percent GDP growth, down from an estimated 6.7 percent growth in 2002. Meen said small and medium-sized enterprises, which account for a substantial share of employment and added value in Turkey, formed a major part of the black economy. McKinsey said such problems could be overcome by educating these industrial groups with funds that could be provided by the European Union and other sources. The study showed overall labor productivity in 11 key non-agricultural sectors at an average of 40 percent of the «best practice» country in each sector. The electricity sector had the lowest productivity rating at 21 percent of best practice and the highest, the apparel sector, with 70 percent. «These businesses operate informally, that is, they evade tax, social security payments and other obligations… However, being allowed to evade obligations is often what eliminates any incentive for them to modernize,» it said. Meen said Turkey must break this pattern otherwise «the economy will be in a disastrous situation.»

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