Turkey: Preparing for the long term

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In late December Turkish parliamentarians approved a budget that would expand public spending, even as their European neighbours begin fiscal austerity programmes. Major increases in public employment and education spending are meant to help soften an expected economic downturn while investing in future growth.

The budget, proposed in October, includes expenditures of TL350.9bn ($187bn) in 2012, an increase of 12.25% from 2011. With revenues projected at TL329.8bn ($175bn), the Ministry of Finance expects a TL21.1bn ($11.2bn) deficit. That will be a steep rise from 2011, when the deficit reached TL17.4bn ($9.8bn).

“A combination of strong revenues and spending controls enabled us to reduce the general government deficit from 2.9% of GDP in 2010 to around 0.6% in 2011,” the minister of finance, Mehmet Şimşek, told OBG. “There would have been a small surplus if we had not spent an extra TL11.1bn ($6.24bn) on infrastructure, education and research and development, all of which are essential to Turkey’s long-term growth prospects.”

A main driver of the budgetary increase is an additional 90,000 workers for the public sector. “There has been a strong recovery in the Turkish economy since the 2008-09 global crisis,” Şimşek said. “The recovery, 9% of real GDP growth in 2010 and about 8% in 2011, has led to record job creation. Turkey has created net 3.7m jobs since the crisis, bringing its unemployment rate down from a peak of 16.1% to 9.1%.”

The spending to create jobs has been criticised by some economists, who believe it an inefficient use of labour and a drain on government coffers. Moreover, unemployment has indeed dropped to its lowest point in a decade, so the move hardly comes amidst desperate times.

In contrast, eurozone unemployment has ticked upwards in the past year, hitting 10.3% in November 2011. The hardest hit were Greece and Spain, where unemployment is 18% and 22.5%, respectively.

One explanation for Turkey’s expansion in government jobs is as a bulwark against expected turbulence in the next several years. Sustained levels of high unemployment are familiar to Turkey, which has not seen its joblessness rates drop below 8% since 2000. In the depths of the economic recession in 2009, unemployment peaked at 15%. Policymakers may be looking at the continued troubles of the eurozone and seeking to hedge against deleterious effects on Turkish employment rates.

To do this, investments in education will be critical to boosting Turkey’s productivity for the long term. Human capital is one stumbling block the government is looking to address. The performance of 15-year old Turkish students on the internationally recognised Programme for International Student Assessment exam in 2009 was ranked 43rd of 65 countries in science and mathematics and 41st in reading.

The country faces a similarly uphill climb when it comes to English proficiency. A December 2011 research brief from the Economic Policy Research Foundation of Turkey, a Turkish think tank, revealed that the country scored 43rd in English proficiency globally, a disappointing result for the world’s 16th-largest economy.

The study’s authors argue that English proficiency leads, rather than follows, economic development. English skills will be necessary to enable Turkey’s “jump from mid-technology activities such as machine assembly and textile production, to high-tech production such as pharmaceuticals, robotics and other research and development and knowledge-intensive work,” said the report.

One explanation for Turkey’s weak results may be budgetary. Turkey spends a lower percentage of its GDP on education – just under 3% – than any other member of the OECD. The government has begun to pay attention to this deficiency in the past decade, and expenditures tripled between 2002 and 2011. The trend is expected to continue, with a 14.8% boost in funding for the Ministry of Education in the 2012 budget, bringing the total allocation to TL39.1bn ($20.8bn).

Part of the increase in education spending is coming from a major programme in educational computing, nicknamed the Fatih Project. Also known as “Movement of Enhancing Opportunities and Improving Technology,” this initiative looks to equip 40,000 schools and nearly 600,000 classes with laptops, projectors and tablets.

The government has met with top technology companies, including Microsoft and Apple, to discuss the purchase of 15m tablets for students. Fatih would include a transition to electronic textbooks, the adoption of smartboards in classrooms, and the introduction of nationally recognised long-distance learning courses.

Turkey’s modest projected budget deficits will keep the country’s fiscal picture in relatively healthy shape. At 42.5% of GDP, public debt is manageable, especially compared to Germany (83.9%), the US (94.4%), and Greece (143%). Moreover, restrained spending leaves room for fiscal expansion in the future should eurozone issues develop into a full-fledged recession. Overall, however, Turkey is looking to balance present needs with the investments required to ensure long-term productivity growth.

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