SEYFETTIN – Exit from the middle-income trap may take years

Exit from the middle-income trap may take yearsAlmost one year ago I wrote an article about the difficulties that were facing the Turkish economy with regard to increasing per capita income for two years.In my article titled “Turkey on the brink of middle-income trap,” I argued that the high per capita income growth that was led by robust labor productivity growth during the first years of Justice and Development Party (AKP) rule, slowed down first and then totally stopped in 2012, based on a research published by BaheIehir University’s Center for Economic and Social Research (BETAM) in August 2013.

BETAM published an updated version of this research last Wednesday titled “Turkey’s exit from the middle-income trap may take years” aiming to scrutinize changes in the per capita growth, employment rate and labor productivity that has occurred over one yearIndeed, from 2002 to 2011, per capita income rose roughly from $3,000 to 10,500. Since then, it has stagnated.

This astonishing performance is due to two basic factors: the appreciation of the Turkish lira in real terms against the United States dollar and an average gross domestic product (GDP) growth rate close to 6 percent, which provided a per capita income increase over 4 percent per year, given the population growth rate. This means an overall per capita income increase of over 40 percent in real terms in nine years.

Furthermore, we know this improvement has profited all segments of society almost equally, with the low-income segments being slightly more favored. For more information, see my recent piece “The growth of the middle class.

“The strong per capita income increase has allowed a modest decrease in income inequality and a rather remarkable decrease in poverty, which, however, continues to be quite high.The BETAM research focuses on the evolution of the main factors that contributed to this striking per capita income increase at the beginning and its abrupt stop at the end of the research period.

As one of the authors of the report, let me briefly explain the methodology used. It is possible to break down the per capita income increase into three contributors: the ratio of the working age population to the total population the employment ratio (employment by working-age population) and labor productivity, defined as GDP per employed individual.

The contribution of the working-age population ratio is marginal. Though the working-age population is still growing more rapidly than the total population, this factor shall be extending in the 2020s because of an aging population.

As for the two other factors — namely employment ratios and labor productivity — three different sub periods have been observed. Until the second quarter of 2008, the entry date of the economy into recession, high per capita income growth was driven largely by increases in labor productivity.

During this period, total employment almost stagnated non-farming employment rose significantly, while agricultural employment declined.In the aftermath of the global crisis, the nature of per capita income growth changed dramatically.

From the last quarter of 2009 to the last quarter of 2011, the economy had very high per capita income growth rates — over 7 percent. Both increases in the employment ratio and in labor productivity contributed more or less equally to this performance.

However, starting at the beginning of 2012, GDP growth decelerated dramatically along with the increase of per capita income. BETAM’s analysis shows that until the second quarter of 2013, the per capita income increases declined under 1 percent however, the most striking future of this decline was that the decrease in labor productivity turned out to be negative.

In other words, the weak growth — GDP growth was limited to 2 percent in 2012 — was supported only by the increase of employment ratio. During the following three quarters one observes slight improvement in the growth performance labor productivity resumed to contribute to the per capita income increase that rose to some extent and reached 2 percent.

Nevertheless, in the first quarter of this year, the contribution of labor productivity had become negative again.At the end of the day, we can assert that more than two years of labor productivity has not contributed to the per capita income growth, which continues to be quite low.

Strong employment increases certainly have prevented the increase of unemployment, but this low level of per capita income growth will not allow Turkey to escape from the middle-income trap quickly.

SOURCE: Today’s Zaman