Conversation with

    After finishing at Ankara College Foundation High School and receiving a BA from Bilkent University, as well as an MA and PhD from Princeton, all in economics, Refet Gürkaynak is Professor of Economics and department chair at Bilkent University. He is also a Research Fellow at the Centre for Economic Policy Research (CEPR) in London, Centre for Financial Studies (CFS) in Frankfurt, CESIfo in Munich, and the Bilim Akademisi (Science Academy). Gürkaynak was previously an economist at the Monetary Affairs Division of the Federal Reserve Board and served as visiting lecturer at MIT. His research interests cover monetary policy, financial markets, and the macro-economy in general, and his contributions have been published in leading international journals. He has served as advisor to the Central Bank of the Republic of Turkey and the European Central Bank and is the recipient of awards from the Turkish Academy of Sciences, TÜBİTAK, the Central Bank of the Republic of Turkey, and the European Central Bank.


    An economist with a BA from Boğaziçi University and a PhD from Boston College, Murat Üçer is the Turkey Country Analyst for Global Source Partners, co-founder of the Turkey Data Monitor, and a part-time faculty member at Koç University. As a consultant, he provides macroeconomic expertise to financial institutions, multinational corporations, and public sector organizations, and he gives seminars on macroeconomic developments in Turkey and the world. He has previously worked as an economist at the Institute of International Finance, Credit Suisse, and the International Monetary Fund, and he has held senior advisory roles for a number of institutions, including the Turkish Treasury in 2001 and the Governor of the Central Bank of the Republic of Turkey in 1997. Author of numerous articles on the Turkish economy, Üçer has also published a book on the 2001 crisis in Turkey.


Before we start, I’d like to mention a report I received yesterday from a friend who works at a major European bank. The title was Turkey at the Crossroads, and it reminded me of a speech I gave to foreign guests a few months back. The title of that speech was – quite by chance – very similar. Even more interestingly, the very first speech I gave to a foreign audience when I had just started work in 1974 also had the same title. So, it seems to me that Turkey is always at a crossroads. We arrive at a junction where we need to make a number of major decisions, decisions that would seem to be vital for our country, and then 40 years or so pass and there we are again, talking about our crossroads.  Moreover, I’m certain many of us have given dozens of speeches entitled Turkey at the Crossroads throughout all that time.

What exactly does this mean? Clearly, we’ve gone through many stages to get to where we are today. We had a completely different economic environment in the 1970s and 1980s, as we all know. Turkey made a great effort to open up to international markets but failed to achieve the balances we wanted. Things went a little out of kilter in the 1990s. Then, in 2002, we entered a period of political stability that has continued to the present. At first, this stability was accompanied by a highly satisfactory and encouraging economic performance; Turkey was even able to maintain a satisfactory performance after the global financial crisis of 2007–2008. But a slump in recent years and an unpromising economic performance has raised questions about the future. Of course, we mustn’t forget the effect of the dramatic events that have taken place in and around Turkey on our politics and economy. Considering these developments, how should we approach this idea of “Turkey at the crossroads”? What kind of crossroads is it? What can we do to ensure we choose the right direction? Can we begin with these points?


I think it would be a great place to start. In fact, I’d like to add one more supporting story here; in 2005, after Turkey had implemented the IMF reform program, the IMF published a document also called Turkey at the Crossroads. So, you’re right about the constant reference to crossroads, but this time certain things are slightly different. For example, Turkey’s GDP per capita stagnated for many years. Then came a major growth surge, and we grew richer. I’m referring to per capita GDP at market exchange rates, by the way, not in purchasing power terms – but let’s not get distracted with technicalities here. The point is that per capita GDP has begun to decline over the last three to four years. Perhaps this time the situation is truly different, in that we’ll either reverse this trend and aim for the 2023 goal of US$25,000, or the decline will continue. At any rate, we’re already down to US$10,000 from US$12,000 or US$13,000 a few years ago. Will we be able to devise a new game plan and move up to the next level, whatever that is? Maybe that’s the sense in which we really are at a different crossroads now. We’d always stagnated, and then we managed to soar for the first time in decades. But now we’re falling again, and falling fast. Perhaps the crossroads are different this time because of what’s at stake.


We keep finding ourselves at crossroads because we can’t make up our minds about what sort of country we are. We’ve yet to make a number of permanent, foundational, and momentous choices. Today, we’re discussing the economic dimension of the crossroads, but the same is true for every aspect of life in our country. Are we a proper democracy or not? We could address this subject the same way, and it has major implications for the economy. As a capitalist country, are we going to achieve an orderly form of capitalism? Or are we going to remain a nation of crony capitalism? That is yet another junction that we’ve reached, and one where we’ve been marking time for far too long. It’s not only the government who pays for our failure to make fundamental decisions; we all do, and it drags us down.


Related to these points is the increasingly popular concept of the “middle-income trap.” How important is it, and also how true? Could we discuss it a little? I’m asking this because it would seem to me that you need two things for there to be a trap that one can fall into. First of all, you need someone to set the trap, such as foreign powers, people, institutions or countries. Or perhaps the trap emerges of its own accord. Secondly, we must be doing something wrong to fall into and remain in this trap. If we weren’t, we wouldn’t fall in, or we’d be able to climb out, at least. In this light, I wonder whether there really is a trap. If so, how can we get out? Because recently there’s been a good deal of commentary on how Turkey is a typical example of a country in the middle-income trap.


As a concept, the middle-income trap is highly memorable and seems to explain a phenomenon observed in many countries. What is it exactly? At some point in time, certain poor countries grow rapidly to attain middle-income status, but then they remain there. They’re unable to become high income countries.

This is a real phenomenon, but I find the term “trap” to be misleading. Because if we call it a “trap,” as you say, then our explanation is that it wasn’t our fault, something happened to us. But countries aren’t helpless. A country is a middle income country because it does a middle-income job, and that, in my view, is the result of choices made by countries themselves. There is no trap here that anyone’s fallen into.

There are two aspects to this. First of all, if you’re quite poor to start off with, you can achieve fast growth by doing certain basic things. It’s not that difficult to grow when you’re very poor. How does that work? Let’s say you don’t have any highways, so when you link two of your biggest cities with a new road you spur growth. All right! Now, you link a third city as well, but the rate of growth you achieve isn’t as high. Growth is quite obviously a matter of scale.

The second aspect is based on essential reforms. Reforms can have financial costs as well as political costs, but it’s the latter that are especially daunting. And there’s the view that middle income isn’t so bad, anyway, compared to how badly off we were fifteen years ago. If anyone had said then, “You’ll get to such and such a point in fifteen years,” we’d have been delighted, and never asked for anything more. But here we are! Why push it? That mindset is all too common. At any rate, it’s obvious that neither aspect has anything to do with a trap.

These are all matters of choice; there are countries who’ve done it differently. Take Japan for instance, or even countries that emerged relatively unscathed from the Second World War. Some grew quite quickly without stalling in the middle-income stage. Take our favorite example of South Korea: It was much poorer than we were in the 1950s, and now its GDP per capita has left us in the dust. What’s more, it didn’t achieve that through higher growth rates than Turkey’s; no, it was a growth rate only a tiny bit higher than ours but held steady over fifty years. The cumulative effect was tremendous growth. 

So, what we need to ask is this: Why did this middle-income trap fail to hold South Korea back but is restraining Turkey? The answers are now quite clear. Korea made different choices. Take the education system; it’s an obvious example. When viewed from this angle, it’s clear that no one has set a trap for us; if there is one, we set it ourselves. That’s why it’s useful to consider this concept in terms of political choices. We might ask ourselves the following question, “Why is it that our income level has risen, but our rate of growth has dropped again?” When we say trap, it gets one wondering if foreigners are doing this to us. Well, they’re not. Ultimately, these are the consequences of decisions we made.

I agree with quite a lot of that; this is a choice, after all. It’s not something that’s been imposed on you from outside. There are developed economies, and then some 10 to 15 countries that are considered to have escaped from the middle-income trap. South Korea is our favorite example, as Professor Gürkaynak says, but there’s the southern European bloc, too. Their situation is up for debate, but the fact is they’ve grown richer over the past two or three decades despite the eurozone crisis. There are other countries in Asia like Taiwan, and then there are unique examples like Botswana, Mauritius and Israel. Their development, as I recall from my studies, dates back to the 1950s and 1960s, and Japan, too, can be held up as a country that escaped from the middle-income trap.

What we’re actually discussing might be this: Whether we call it the middle-income trap or not, countries run out of low-hanging fruit after a certain stage of growth. What interests me as an economist is how some countries manage to break through this threshold. I mean, what do they do, what sort of model do they use to succeed? Those aren’t easy questions. Turkey needs to agree on a strategy and implement it enthusiastically. Do we want more government, for example? What are we going to do with our education system? What sort of institutions and corporate structures do we want? How much priority do we give to macroeconomic stability, and should reducing inflation or spurring growth be our first goal? What we need is a set of priorities and decisions. What should Turkey’s strategy be?

Call it a “trap” or “stumble” or even a “failure.” Ultimately, all of this is semantic. At the end of the day, some countries succeeded, and we failed. What was the difference in those countries, and what do we learn when we ask this question in Turkey today? That’s an important question in my opinion.


My understanding, then, is this: When it’s presented as a “trap,” it sounds as if it were attributable to certain external factors. But the problem is our failure to do certain things right and at the right time. So, we stumble, unable to advance; we can’t break away from the middle-income group. Would it make sense to come to the following conclusion, then, based on your examples?  

As you said, some countries “rose from the ashes,” and others developed without ever falling into the trap. Could we say that a well-trained, qualified workforce was what these countries had in common? Or are there countries that have avoided the trap without educational progress? Leaving aside certain exceptional cases like countries with enormous natural resources, would it be possible to state that no country will grow richer unless it tackles education first? It seems to me that this point will lead us to other essential talking points.


We can express it in two different ways. No country has grown rich unless it’s tackled education, and no country that has tackled education has failed to grow rich.


The conclusion I draw here is that we have to make decisions on fundamental matters, and they’re not limited to the economy, either. On the whole, I agree, although we do face a more practical question: What should the priorities of our programs be, and what should our approach be to ensuring that we exit the crossroads in the right direction? Moreover, we have to do this in an environment defined by both democratic rules and the global and national context. But if we focus on this question, our debate is likely to get stuck on how to identify priorities. Let’s adopt a more practical approach and elaborate a little on the factors that we believe have always hindered us.

I’m not an economist, but as a businessman who’s long been immersed in debates about the economy, I notice we always return to certain issues, among them the savings deficit and current account deficit. Clearly, we have serious problems in Turkey in these areas. Where they come on the list of priorities and how important they are is something the two of you are much better qualified to assess. But whenever we increase our growth rate, the current account deficit and the risk it poses become an issue. Economists occasionally remark on how the savings deficit is a challenge that distinguishes Turkey from similar countries. I’ve yet to come across any proposals for solutions. As economists, you’re likely to have different views. Yet, it seems to me that this issue involves more than economic solutions, including customs, habits and consumer psychology. How can we tackle it?

Where to begin is indeed a very important question and a very difficult one to answer. The savings deficit, however, seems to me to be more of an outcome. Perhaps it makes sense to frame the question somewhat differently and ask whether our main problem is the savings deficit or productivity. I happen to think the real issue is productivity. There is a savings deficit, of course, because you want a certain level of investment, but you haven’t got the necessary savings in the country to finance the investment. But we also know that savings increase with income. So, how do you increase income? An approach that starts with savings, therefore, might not be all that easy. A multi-pronged strategy is obviously needed, but I think the focus should be on productivity, on how the private sector can become more productive, for example, or how we can lower inflation – which will raise productivity, encourage financial deepening, and ultimately promote savings. Needless to say, there’s a lot to do on the savings side, too. You could run campaigns to incentivize saving, you could prevent credit booms, and you could tighten fiscal policy – but what’s happening in Turkey is the complete opposite. You could, in time, develop a sound pension system, which is being worked on at the moment despite a number of shortcomings. But when it comes to savings, we don’t have many tools that can directly influence private sector savings.