Title page
Contents
Executive Summary 10
1. Key policy insights 16
The COVID-19 shock is having a large economic and social impact 17
Targeted lockdowns and health policy initiatives were initially effective but there is a second wave 17
Strong policy stimulus triggered a vigorous rebound which faced headwinds 20
Balance-of-payment strains have been significant 26
The recovery will be uneven and there are important risks 27
Policy priorities for containing the pandemic and supporting the recovery 29
Strengthening macroeconomic fundamentals after the shock 30
Re-balancing demand and securing external sustainability 30
Moving to a more transparent and predictable fiscal framework 34
Boosting long-term fiscal credibility 40
Stabilising inflation and increasing monetary policy credibility 43
Strengthening employment, job quality and social cohesion after the COVID-19 shock 49
Resuming progress in well-being and social cohesion 55
Regional convergence of living standards 57
Social trust 58
The region's special challenges 59
De-carbonising the economy and improving air quality 60
Upgrading public governance 63
Policy choices will be key to how Turkey emerges from the COVID-19 crisis and in the years ahead 69
Annex A. Turkey's follow-ups to main past OECD recommendations 72
Annex B. Fiscal implications of the reform recommendations of this Survey 74
Bibliography 75
2. Unleashing the full potential of the business sector 82
Growth of potential output has lost steam 82
Despite high entrepreneurial spirit, business dynamism has slowed down 85
Strengthening the business sector through more market-friendly reforms is key to more durable economic growth 91
The need for more formalisation 91
A complex system of regulations entrenches the fragmentation of the business sector 94
Streamlining business incentives would sharpen their effectiveness 96
Avoiding size traps in the business tax system 98
Addressing the debt overhang 101
Reforms of the insolvency system could speed up the economic recovery after the Covid-19 pandemic and improve the allocation of resources 102
Improving the supply of equity capital 105
Helping SMEs to raise more equity capital 108
Tapping the benefits of increased adoption of digital technologies 110
Improving digital skills 111
Bibliography 115
Table 1. The upturn will be gradual 11
Table 1.1. Macroeconomic indicators and projections 28
Table 1.2. Events that could trigger major changes in the economic outlook 29
Table 1.3. Public-private partnerships 41
Table 1.4. GDP impacts of reforms 69
Table 2.1. Construction sectors account for a significant share in the economy 87
Table 2.2. Tax Status of Capital Companies and Sole Proprietorships 99
Table 2.3. SME stock market segments in selected emerging markets 108
Table 2.4. Thresholds for statutory audits in Turkey 109
Figure 1. The short-term recovery was sharp 11
Figure 2. Recovery prospects are complicated by high debt burdens 11
Figure 3. Labour force participation is low 12
Figure 4. The productivity gap between small and large firms has increased over time 13
Figure 5. Educational outcomes need to be upgraded 13
Figure 1.1. An intense second wave after the initial success against the pandemic 19
Figure 1.2. A sharp macroeconomic shock 25
Figure 1.3. The current and capital accounts have deteriorated 26
Figure 1.4. Re-balancing has made progress, but with slower growth and job creation 31
Figure 1.5. External debt is expanding strongly 32
Figure 1.6. Risk premia are excessive and should be reduced 33
Figure 1.7. Credit growth was exceptional after the COVID-19 shock 35
Figure 1.8. Banks have weathered the 2018 strains but will come under pressure after the pandemic 36
Figure 1.9. The fiscal stance loosened considerably already before the COVID-19 shock 38
Figure 1.10. High interest costs and ageing create pressures on public debt 42
Figure 1.11. Monetary policy has failed to achieve the inflation target 46
Figure 1.12. Nominal and real exchange rates have deteriorated before the recent uptick 47
Figure 1.13. The COVID-19 shock worsened the already weakened labour market situation 52
Figure 1.14. Unregistered employment varies across regions, sectors, firm sizes and education levels 53
Figure 1.15. Labour force participation is low, particularly for women 54
Figure 1.16. Labour market reforms would stimulate job creation in the formal sector 55
Figure 1.17. Well-being can be improved in several dimensions 56
Figure 1.18. Working-age people who are unemployed or in inactivity are more likely to be poor 57
Figure 1.19. Income and wealth inequalities remain high 57
Figure 1.20. The convergence of living standards tended to stall 58
Figure 1.21. The carbon intensity of the economy should be reduc 60
Figure 1.22. There is little or no carbon pricing in most sectors, except for road fuel 61
Figure 1.23. Air quality and other local environmental conditions should improve 63
Figure 1.24. Room for progress in governance institutions exists 64
Figure 1.25. Rule-of-law should be improved 65
Figure 1.26. Risks of corruption, tax opacity and money laundering 68
Figure 2.1. Productivity growth has slowed 83
Figure 2.2. Educational enrolments have increased but quality has fallen behind 84
Figure 2.3. Qualification mismatch in OECD countries 85
Figure 2.4. The population displays high entrepreneurial spirit 86
Figure 2.5. Value added per technological intensity 88
Figure 2.6. Business dynamism is high but appears to slow down 89
Figure 2.7. The speed at which resources flow to more productive firms varies across technological intensity and firm size 90
Figure 2.8. Informal employment is more frequent in smaller firms 92
Figure 2.9. Larger more formal firms are, more productive 93
Figure 2.10. Employment per firm size 93
Figure 2.11. Product market regulations are restrictive 96
Figure 2.12. Statutory corporate tax rates are moderate 98
Figure 2.13. Effective average and marginal tax rates for a hypothetical investment project 100
Figure 2.14. Leverage of manufacturing firms has increased over time 102
Figure 2.15. The recovery rate of the insolvency regime is low 104
Figure 2.16. Equity markets could play a larger role in financing investment 106
Figure 2.17. Cost of capital of listed firms is high 107
Figure 2.18. Turkish firms lag behind in the adoption of advanced ICT tools and activities 111
Figure 2.19. Digital skills and low numbers of high speed broadband subscriptions impede the adoption of advanced digital technologies 113
Boxes
Box 1.1. Main COVID-19 support measures 21
Box 1.2. Curbing the high risk premia 33
Box 1.3. The Sovereign Wealth Fund (TVF) 39
Box 1.4. Upgrading fiscal institutions 41
Box 1.5. Capital flows and exchange rate measures 47
Box 2.1. Industry composition and breakdown by technological intensity of the business sector 87
Box 2.2. Firm-level data from the Entrepreneur Information System Database 91
Box 2.3. Overcoming fragmentation in the business sector 93
Box 2.4. Can public equity injections help the corporate sector to weather the COVID-19 shock? 103