The perfect consistency in Turkey’s troubled economy

Recent economic figures on Turkey show a clear positive correlation between the rule of law and economic growth. This means that a country with higher legal standards, such as better protection of property rights, enjoys greater investment, which leads to higher growth rates.

Turkey held the 101st position out of 113 countries in the World Justice Project’s 2017-18 Rule of Law Index, a comprehensive measure of the rule of law. Accordingly, direct capital inflows fell to $12 billion in 2018, down from $22 billion in 2007. Meanwhile, the growth rate, which was 7 percent in 2007, is likely to be negative in 2019.

Seasonally adjusted industrial production decreased by 3.9 percent in June compared with the same month last year, and by 3.7 percent compared with the previous month, according to Turkish Statistical Institute (Tüik) data released last week.

Turkey has seen similar drops in agriculture. Cheese production from cow’s milk fell 13.8 percent in June, to 51,742 tonnes on a year-on-year basis. Cheese production from sheep, goat, buffalo and mixed milk declined by 4.1 percent compared to the same month in 2018. Meanwhile, yoghurt production was down 1.6 percent.

According to the table below, which shows Tüik’s May labour force statistics, there have also been decreases in total employment, total agricultural employment and total non-agricultural employment. The Turkish economy has entered a very troubled period that in part to the decline in capital inflows, which is partially a result of backsliding in the rule of law. 

Non-seasonally adjusted main labour force indicators, May 2018, May 2019.
Non-seasonally adjusted main labour force indicators, May 2018, May 2019. (Source: Tüik)

The issue of unemployment is a side effect of economic contraction but it has reached a perilous level, 12.8 percent in May, compared to 9.7 percent a year prior. 

Even more alarming is the fact that non-agricultural unemployment has increased to 15 percent, up from 11.6 percent in May 2018. I should note here that Turkey’s agricultural employment figures are not reliable for various reasons. Therefore non-agricultural employment figures provide a more credible outlook of the trends in the labour market.

While unemployment increases, labour force participation has started to decline, with Turkey now in second-to-last place among OECD countries.

Tüik figures show that unemployment among those aged 15 to 24 increased to 23.2 percent in May, up from 17.8 percent the same month last year. The statistics also show that almost one-fourth of Turkish youth are neither in education or employment. 

But the jump in youth unemployment in one year might not be only related to the economic downturn. It is also related to the pathetic situation of Turkey’s educational system. 

Unfortunately, Turkey’s education system is incapable of equipping young people with the skills and qualifications that appeal to employers. 

Veli Ağbaba, deputy head of the main opposition Republican People’s Party (CHP), said last week that the average rate of youth unemployment in EU countries was around 15 percent, while Turkey was just behind Iceland as the country with the second highest increase in unemployment.

Ağbaba is deeply concerned about youth unemployment but he sees it as a result of decreasing growth, not in relation to the decreasing quality in education. 

By the end of 2019, Turkish imports will fall below their 2008 level of $202 billion. Import figures are clear indicators of growth as they show the demand for energy and other goods. 

Turkey posted a current account surplus of $151 million in May. What is most troubling is that Turkey’s ministers present this surplus as a success, while in reality it is only the result of plummeting demand for foreign goods within Turkey due to contracting economy. 

It is possible to list several other indicators to highlight that Turkey’s economy is following textbook economic theories about the relation between the rule of law and the economy. For a country that faces trade deficits whenever there is high growth, there are limits to authoritarianism. 

The problems of the Turkish economy display a perfect consistency.