Did the rising importance of services decelerate overall productivity improvement of Turkey during 2002–2007?

Abstract

This paper answers the question of what would have been the growth rate of aggregate productivity in Turkey between 2002 and 2007, had it realized China’s rates of productivity growth in agriculture, industry, and services. It does this in a three-sector general equilibrium model calibrated to the Turkish economy over the 2002–2007 period. The main findings are: (i) Turkey would have had much higher aggregate productivity growth over this period if it had experienced China’s service sector productivity growth; (ii) very low productivity growth rates in finance and in the non-market service sector are the main culprits behind Turkey’s weak service-sector performance.

Keywords:

• sectoral productivity
• services
• China
• Turkey

AMS Subject Classifications:

• O11
• O40
• O57

Acknowledgements

The author is very grateful for the valuable comments and suggestions from the editor and the two referees. The author would like to thank Cengiz Cihan, Burcu Gürcihan and Şeref Saygılı for sharing data. The views expressed herein are those of the author and not necessarily those of the Central Bank of the Republic of Turkey.

Notes

No potential conflict of interest was reported by the author.

1 Data are in PPP-adjusted units to account for differences in relative price levels between countries, and are from the 2014 version of the Conference Board Total Economy Database. I use the variables “GDP per capita in 1990 US$ (converted at Geary Khamis PPPs)” and “Labor productivity per person employed in 1990 US$ (converted at Geary Khamis PPPs).”

2 The acronym BRIC stands for Brazil, Russia, India and China, the four emerging markets some believed it would become a dominant part of the world economy in the years ahead. The term MIST has been coined to describe the next tier of large emerging economies - Mexico, Indonesia, South Korea, and Turkey: http://www.theguardian.com/global-development/poverty-matters/2011/feb/01/emerging-economies-turkey-jim-oneill

3 Data are from Saygılı and Cihan (2011).

4 All data for Turkey are from Üngör (2011) and output (in current prices) data for China are from the China Statistical Yearbook (2012, Table 2-1). I use de Vries et al. (2012) for sectoral employment in China and compare these data with those from the China Statistical Yearbook (2012, Table 4-3). Sectoral employment shares for China are very similar in these two sources. Data for sectoral output in constant prices in China are also from de Vries et al. (2012).

5 I use constant prices in local currency to derive the growth rates of labor productivity in each country, since the focus of the paper is on the sectoral productivity growth differences. The levels are not directly comparable since they do not reflect the purchasing power parity adjustments.

6 Appendix A.1 provides information on sectoral productivity growth in Turkey before 2002.

7 The utility function belongs to the following general type of utility function:

This specification implies that the economy specializes in agriculture until the subsistence level is reached. Moreover, the economy will never produce more agricultural goods than (Stokey 2001; Gollin, Parente, and Rogerson 2007).

8 Üngör (2011) collects the data as follows: Sectoral GDP data (at basic prices in 1998) are from the Turkish Statistical Institute and sectoral employment data are from the Household Labor Force Survey of the Turkish Statistical Institute. The Turkish Statistical Institute has revised the Labor Force Survey results for 2004 and later by the new population projections. Revisions for the earlier period are not completed yet. Thus pre-2004 employment data are adjusted to account for the changes in population projections.

9 The model predicts that agricultural employment share decreases by 4.72% (from 31.3% in 2002 to 24.7% in 2007, a % annual decrease) while in the data the decrease is 5.72% (from 31.3 to 23.5%, a % annual decrease). Thus, the model accounts for % of the decline in agricultural employment share during 2002–2007.

10 See Sengul and Üngör (2011), Gürsel and İmamoğlu (2012), and İmrohoroğlu, İmrohoroğlu, and Üngör (2014) for detailed studies focusing on the secular changes in the agricultural employment share in Turkey throughout the time.

11 This finding is consistent with the literature on the relative prices of services. For example, Canzoneri, Cumby, and Diba (1999) study a panel of OECD countries and argue that relative prices generally reflect relative labor productivity in the long run. Metin-Özcan and Kalafatcılar (2009), using econometric techniques, study Turkish economy during 1995–2007 and find that differences in productivity have significant share (along with the real exchange rate) in accounting for relative price movements between industry and services.

12 This can also be thought in the context of the Balassa-Samuelson effect regarding the open economy issues. Since manufactured goods are tradable across borders while services are largely not, one may observe a secular increase in the price of nontradables relative to that of tradables in an open economy. In other words, differential productivity rates between these two sectors along with the hypothesis of perfect labor mobility leads to inflation rates in the tradable sector (say, industry) that are different from those held in the nontradable sector (say, services).

13 Sectoral productivity growth data for China are from de Vries et al. (2012). Based on a critical assessment of the reliability and consistency of various primary data sources, de Vries et al. (2012) bring together a new database that provides value-added and employment at a detailed 35 sector level for the BRIC countries.

14 Table A1 reports the allocation of employment across sectors, compared to the benchmark results, under alternative scenarios.

15 Alesina et al. (2005) use data on regulation in several sectors of many OECD countries to provide evidence that regulatory reform of product markets is associated with an increase in investment. Barone and Cingano (2011) study the effects of anti-competitive service regulation by examining whether OECD countries with less anti-competitive regulation show better economic performance in manufacturing industries that use less-regulated services more intensively; and find that that service regulation has a significant negative impact on the growth rate of value-added, productivity, and exports of service dependent industries in some of the OECD countries.

16 www.oecd.org/economy/pmr

17 I thank an anonymous referee for bringing this issue to my attention.