One of the areas where we are not alone globally is the “middle-income trap.”
Turkey has found itself in the middle-income trap — a situation that demands our immediate attention. The trajectory of our income levels over the past 15 years is a clear reflection of this. According to the World Bank’s 2024 World Development Report, published this month, we are not alone in this predicament. There are 108 countries worldwide in the same middle-income category as us. These countries are home to 75% of the world’s population and account for 40% of global income. Since 1990, only 34 countries have managed to transition from middle-income to high-income status. In other words, falling into the middle-income trap is the rule, and escaping it is the exception. Unfortunately, Turkey has not been one of those exceptions, and I don’t see that changing anytime soon. Let me explain why.
Middle-income countries occasionally experience fortunate periods when many positive factors align and investment accelerates. For example, the period between 2001 and 2008 was such a time in Turkey. Thanks to a macro stability program, the stability brought by single-party rule, closer relations with the European Union, and numerous reforms, investment grew by 15% annually, and productivity increases reached up to 4% per year. However, from 1980 to 2022, investment growth averaged only 4% outside of these seven years, and productivity declined. South Korea, on the other hand, experienced a similar investment boom between 1985 and 1996 through widely recognized successful economic policies. However, unlike Turkey, South Korea continued increasing its income afterward. So, how did this happen?
To escape the middle-income trap, you first need to attract investment. Then, the businesses established with these investments must learn the world’s best technologies and management techniques. The World Bank report refers to this as the “infusion” process. Once your businesses approach global productivity levels, they start elevating them. This phase is called the “innovation” process in the report. Significantly few countries have transitioned from investment to infusion and from infusion to innovation. The first group includes countries like South Korea and Taiwan, the so-called Asian Tigers. The second group consists of countries fortunate enough to possess valuable natural resources and have diversified their economies while those resources were still in demand, such as Chile. The final group is comprised of countries that have joined the European Union. 13 of the 34 countries that have escaped the middle-income trap owe this success to EU membership.
Of course, only some countries that join the European Union escape the middle-income trap. What matters is what you do after joining. Let’s compare the performances of Poland and Bulgaria, which had income levels similar to Turkey’s in the 1990s. Today, Poland’s income level is double that of Turkey, while Bulgaria remains at comparable levels. Why? Poland privatized its state-owned enterprises (SOEs) inherited from the socialist era promptly and established a rules-based economy with EU membership. Polish companies became suppliers to European firms and learned the trade. Now, they are capable of global innovation. Bulgaria, on the other hand, instead of privatizing its SOEs, protected these sectors with additional regulations. As a result, the economy shifted towards less productive sectors dominated by the mafia, such as construction and trucking. In this primitive economy, young Bulgarians saw no future for themselves and started relocating to other European countries after Bulgaria joined the EU. Today, Bulgaria’s population is 25% lower than in 1990. They no longer have the workforce needed to escape the middle-income trap. It’s too late.
So, where does Turkey stand on this journey? We are still in the early stages of the infusion process, but there is potential for change. We need to intensively acquire knowledge and skills (know-how) from abroad to bring our companies’ productivity closer to global levels. The easiest way to do this is by attracting foreign investment. However, the ‘domestic and national’ rhetoric, which was initially positive, has now been exaggerated to the point where it scares off foreign investors. The second way is to utilize our diaspora abroad. We lack the necessary tools for this. Third, we need an educated workforce that can understand what’s happening worldwide. However, with problems in curriculum and teacher quality, and considering that 9 out of 10 private-sector employees earn up to twice the minimum wage or less, is there any demand for a good education? Whether you study or not, you’ll earn the same salary.
What is happening globally? First, in the age of friend-shoring, foreign investment has become politicized. This means that while our rhetoric makes it harder to attract foreign investment, the leading companies in the world are also less inclined to invest in us due to the stances of their home countries. Second, we used to have budgetary resources to support and incentivize investment. Post-COVID-19, most middle-income countries are drowning in debt. Our situation used to be brighter than it was. Third, the countries that got rich while polluting the world now say, “The planet is full; you can’t pollute the environment while getting rich!” Green policies are increasingly becoming a way for the rich to protect their wealth. Unfortunately, global trends make it harder for us to escape the middle-income trap. The middle-income trap needs to be taken more seriously in Turkey. It’s been some tine since the World Bank report was published, and I’m the first to write about it. That’s the state we’re in.
This article is a translated version of “Dünyada yalnız olmadığımız alanlardan biri “orta gelir tuzağı” which was initially published in Economic Daily (Nasıl Bir Ekonomi Gazetesi) on August 9, 2024.
