Regulatory reforms to unlock long-term growth

In the 2000s, Turkey has enjoyed rapid catching-up thanks to improving macroeconomic framework, increasing openness to trade and foreign investment and the great entrepreneurial spirit of Turkish businessmen. This was possible against the adverse business environment, reflecting restrictive product and labour market regulations, since the semi-formal and informal economy had a significant contribution to the expansion of the private sector. Productivity growth was strong, but labour utilisation remained very low, affecting negatively social cohesion and the growth performance. Looking forward, higher employment and productivity growth will not be possible without profound regulatory reforms. They primarily require labour market reforms to lower minimum wages, possibly via regional arrangements, to reduce severance payments and social security contributions and to introduce more flexible forms of job contracts. These reforms have been discussed for a long time, but political obstacles prevented implementing them. Resolving this deadlock calls for advancing an integrated strategy of labour reforms and formalisation via experimenting with new regulation on the voluntary basis to identify the most successful solutions that can be later rolled over to the whole economy. Moreover, Turkey has to ease further anti-competitive product market regulations by reducing barriers to entrepreneurship and foreign direct investment and by reducing government involvement in business. A successful implementation of these reforms would allow Turkey to enjoy golden decades.