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2018 OECD Economic Surveys: Turkey 2018

image of OECD Economic Surveys: Turkey 2018

The Turkish economy bounced back strongly after the failed coup in July 2016 but going forward growth is set to be closer to potential. The exchange rate has depreciated considerably, inflation is high and so is the current account deficit. Growth has been overly dependent on consumption and external savings and should be rebalanced by improving export performance. There is ample room to improve the quality of governance, including with respect to fiscal, monetary and macroprudential policy. Progress in these areas would help bring about disinflation and reduce risk premia, thus lowering financing costs. Coupled with increased foreign direct investment, this would contribute to improve the quality of business capital formation, and to generate high-quality sustainable jobs for the rapidly expanding labour force.

SPECIAL FEATURE: UPGRADING BUSINESS INVESTMENT

 

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Upgrading business investment

Starting from a low level in early 2000s, Turkey’s total capital stock has since expanded rapidly, but the composition and quality of investment raises questions. This chapter focuses on business investment, as the main driver of physical and knowledge-based capital formation and, hence, of potential output and the material foundations of well-being. Micro data allow to distinguish four types of firms: small businesses with a high rate of informality, medium-sized family firms, large formal corporations, and skilled start-ups. The relative importance of the challenges facing these different types of firms varies, notably with respect to skill shortcomings, regulatory burdens, labour costs, access to bank lending, over-leveraging and scarce equity capital. Improving the current business environment and overcoming the fragmentation of the business sector will be crucial to upgrade the quality of business investment and to enhance the allocative efficiency of capital formation. This calls for promoting formality, best management practices, the build-up of equity capital, access to long-term bank financing and other market-based financing that can complement traditional bank lending; and a faster and more inclusive transition to the digital economy.

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