Frost - The Process of Attaining Economic Development in the Middle East - A Turkish Case Study

2067

ECON 480 DEPAUW UNIVERSITY

10/16/14

THE PROCESS OF ATTAINING ECONOMIC DEVELOPMENT IN THE MIDDLE EAST: A TURKISH CASE STUDY

ABSTRACT

THROUGH THE LENS OF TURKEY, THE POTENTIAL TO OBTAIN ECONOMIC DEVELOPMENT IN THE MIDDLE EAST WILL BE EVALUATED. FIRST, A DEFINITION FOR DEVELOPMENT WILL BE DETERMINED THROUGH THE USE OF ECONOMIC GROWTH MODELS, NAMELY THE SOLOW GROWTH MODEL. NEXT, THE HISTORY OF TURKEY WILL SERVE AS A MEANS OF PROVING GROWTH TOWARDS DEVELOPMENT. PAST POLICIES IMPLEMENTED WITH THE GOAL OF OBTAINING DEVELOPMENT SUCH AS FINANCIAL AND TRADE LIBERALIZATION WILL BE EVALUATED AND CRITIQUED. FINALLY, A NEW PIECE OF DEVELOPMENTAL THOUGHT WILL BE ADDED TO THE ORIGINAL DEFINITION AND SUGGESTED POLICIES OF INVESTMENT IN HUMAN CAPITAL AND FISCAL LOOSENING WILL BE EVALUATED FOR FIT IN TURKEY AS WELL AS THE MIDDLE EAST.

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INTRODUCTION 3

SCOPE OF THE PAPER 3

THE SOLOW GROWTH MODEL AND AN ADAPTATION 5

THE DEVELOPMENT OF TURKEY 9

PREVIOUS GROWTH POLICIES THAT WERE NOT FULLY REALIZED 12

SUGGESTED FUTURE POLICIES FOR TURKEY AND THE MIDDLE EAST 16

CONCLUSION 24

WORKED CITED 28

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Introduction

Beginning in the early 1990s, Turkey was viewed as a model of development

for the former Soviet-‐controlled region in Asia (Mango 1993). The country was

given this title because of their humble beginnings and yet seemingly rapid

ascension into the world’s elite groups such as NATO and the United Nations.

However, Turkey did not view itself in the same positive light. Mango writes, “Talk

of a Turkish model...acted as a stimulant in the difficulties and disappointments...at a

time when it was still well behind the advanced industrialized states of the West”

Mango 1993, p. 726). Their inner struggles boil down to an identity crisis: should

Turkey pursue western methods of growth to achieve development or should they

hold on to their cultural roots? Through policies such as trade liberalization and

attempting to joining the European Union, the path toward development seems to

be the route they are pursuing. Based on the Solow growth model, there is a point,

deemed the steady state, at which economic development is attained. After altering

the definition of development to make it more realistic, Turkey is intentionally

growing toward their steady state, proving it is possible for development to be

realized in the Middle East. In order to attain the goal of development, Turkey needs

to make significant increase in human capital investment and adopt a marginally

looser fiscal policy to afford the corresponding investments.

Scope of the Paper This paper seeks to prove that through a case study of Turkey, fully realized

development is obtainable in the Middle East by implementing realistic expectations

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on classical growth and development models. Before going any further, it is

important to define what countries are included in the Middle East. According to the

CIA World Factbook, there are 19 countries in the Middle East. The region is a

conglomerate of countries bordered on the north by Georgia, East by Iran, South by

the Arabian Peninsula and West by Israel (Middle East).

In terms of economic models, the Solow growth model and how it defines

development will be discussed. Through critiques, the model’s assumptions will be

challenged and a new definition of development will be created. Next, the economic

history of Turkey will be examined, along with previous policies that, if

implemented correctly, could have significantly increased growth and moved the

country closer to development. In closing, the Human Development Index will be

examined and some of its aspects will be added into the initial definition of

development. Policies in line with the new definition will be recommended for

Turkey and the question of whether or not they can be practically implemented in

other Middle Eastern countries will be discussed.

It is important to note that this paper is not focused on the growth and

development of the Middle East, but rather that of Turkey. Given its relative success,

Turkey will be used as an example for the rest of the region to follow and learn from.

To the extent that the policies implemented in Turkey relate to other Middle Eastern

countries, recommendations will be extrapolated to them as well.

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The Solow Growth Model and an Adaptation In order to provide background for the topic of economic development, it is

imperative to discuss economic growth models and how they relate to development.

Specifically, this section will discuss the Solow Growth Model. Richard Solow (1956)

improved upon previous literature that attempted to model economic growth. The

prominent theory to explain growth prior to Solow was the Harrod-‐Domar (HD)

model (Harrod 1939; Domar 1946). Though these models were independently

written, they touched on the same notion of economic growth being a result of a

country’s productivity of capital and level of savings. As Harrod puts it, “A unique

warranted line of growth is determined jointly by the propensity to save and the

quantity of capital required by technological and other considerations per unit

increment of total output” (1939, p. 23). Again, by finding the amount of capital

available and the willingness to save in a given country, a growth rate can be

determined. Therefore, according to the HD model, the country’s growth rate is

determined exogenously.

For the most part, Solow agrees with the Harrod-‐Domar model. He affirms

that domestic savings is key to economic growth, and that capital and labor are the

two essential inputs in production. However, regarding the latter, he negates the

notion of fixed proportions of capital and labor, meaning one input cannot be

equally substituted for the other. The fixed proportions assumption is what he

considers to be critical to the balance of the equilibrium growth in the HD model. In

contrast, Solow notes that in the long run, changes in technology necessitate a

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change in the labor-‐capital ratio, hence disarming the HD model leading to the

Solow model1.

After describing three key assumptions above, a deeper look at the model

itself is required. As labor and capital create output, or income in the case of Solow’s

example, that income can either be consumed or saved. Therefore, there are two

functions within the model, that of output and savings. Given that savings is defined

by the marginal propensity to save, it is a fixed fraction of income2, and thus lies

below the consumption function. There is one other essential function to the model,

which relates to the inflow and outflow of capital in a country. Solow defines the

function as the size of the labor force multiplied by the capital-‐labor ratio, otherwise

known as the country’s capital replacement needs. Unlike the diminishing returns

model of the consumption and savings functions3, the replacement needs of a

country is a ray beginning at the origin of the graph.

The point of intersection between the income function and the capital

replacement function is of major importance to the model. As Solow writes,

“At the point of intersection, [capital replacement rate] = [income function] and [capital-‐labor ratio] = 0. If the capital-‐labor ratio r* should ever be established, it will be maintained, and capital and labor will grow thenceforward in proportion. By constant returns to scale, real output will

1 There is one more critical assumption, specifically that of full employment, that the model hinges on. This will be discussed later in the paper. 2 MPS is fixed in the short-‐run, however as noted above, a change in technology could alter the labor-‐capital ratio, which in turn could also affect the country’s MPS. 3 The nature of the income and savings functions are derived from the Cobb-‐Douglas production function, which assumes diminishing marginal returns as capital and labor continue to rise. Hence, as capital and labor rates rise in this example, thus moving along the income and savings curve, diminishing returns are seen.

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also grow at the same relative rate...and output per head of labor force will be constant” (1956, p. 70)4

This important intersection is deemed the steady state of a country. In other words,

the point at which the country is able to produce just enough to meet the

depreciation of the labor force is the point at which growth is no longer being

realized, otherwise known as their steady state. Solow goes on to write that if a

country is not at their steady state, thus their capital replacement need is either

outweighing their production or vice versa, the country’s allocation of resources will

be tweaked until their steady state is achieved. It is important to keep in mind that

this model is focused on the long term; therefore the process of altering the capital-‐

labor ratio will take a significant amount of time. This can be verified in the real

world by the presence of varying levels of development across the globe and, on a

micro level, the changes in development of a country over time.

The notion of a steady state indicates there is a point at which a country can

become economically developed. In a long-‐run, according to Solow, it should be

feasible for all countries to achieve their steady states, thus achieving economic

development. If this holds, then shouldn’t there be more countries at their steady

states? The answer is no and is based on another critical assumption made in the

Solow Model.

The reason more countries have not realized their steady states is because

the Solow model hinges on the notion of full employment5. As he states in his model,

4 The text in brackets was substituted for variables used in Solow’s equation. They were omitted from this paper because they do not provide any added value; the description of the variable was deemed suitable for explanatory purposes.

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“In [Equation 3] L stands for total employment; in [Equation 4] L stands for the

available supply of labor. By identifying the two we are assuming that full

employment is perpetually maintained” (1956, p. 67). Therefore, in order to achieve

a steady state, a country must employ all available labor supply. Otherwise, it will

fall short of development and the production will not equal the country’s capital

replacement needs. Research done by A. W. Phillips (1958) refutes Solow’s

assumption, noting that it is not beneficial for a country to pursue total employment.

According to the Phillips curve, if a country were to reach zero-‐percent

unemployment, the inflation rate would increase dramatically, indicating that there

is a tradeoff between unemployment and inflation. Given that a country does not

want to see dramatic increases in inflation, it is thus derived that there is an

optimum level of unemployment; one that is greater than zero. Therefore, a country

cannot realistically achieve their steady state, or economic development in strict

terms of the Solow model because the full employment assumption cannot be met.

Taking this idea a step further, Stiglitz (1974) offers an adaptation to the

Solow model. Instead of pursuing their natural steady state, a country should choose

a path of production that suits their country and seek the corresponding steady

state. In order words, a country should employ their resources in the best interest of

their country instead of what is theoretically recommended. Therefore, a country

could potentially have multiple steady states depending on which production path,

or policy they choose. A critical assumption to this argument is that a country’s

policy makers are choosing programs that are in the best interest of the country. 5 The full employment assumption, as are many other assumptions, is also a carry-‐over from the HD model.

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Therefore, the deployment of labor and capital is intentional. Though their steady

state as defined by the Solow model is unobtainable, policy makers will utilize labor

and capital resources to come as close as possible to that achievement. This notion

implies a new definition of development, one that is based on both growth and

policy. Therefore, economic development will be defined as the end result of growth

aimed at achieving a country’s policy-‐determined steady state6. Next, Turkey’s

historical growth will be discussed and their potential for development will be

considered.

The Development of Turkey

By most indicators, Turkey is considered to be a developed nation. Turkey

became a member of NATO in 1952 and joined the UN two years later. These two

organizations can be viewed as an elite club of the most developed countries in the

world, as is in fact used by Nations Online as a benchmark to be considered as a

developed country7. They are also slowly moving away from their agricultural roots

towards a more service-‐based economy (Altug, Filiztekin & Pamuk, 2008), which

can be also viewed as indication of a country moving toward economic

development. In terms of infrastructure, The World Bank defines Turkey as an

upper-‐middle income country, noting that its income per capita is above average for

6 In the Suggested Future Policies section, this definition will take a step further, however this definition is suitable for now. 7 Turkey. (n.d.). Nations Online. Retrieved October 16, 2014, from

http://www.nationsonline.org/oneworld/turkey.htm

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Europe and Central Asia8. However, as it relates to theoretical economic models as

well as research that will be described below, Turkey still has room to grow before

it reaches development. Therefore, Turkey will be considered a semi-‐developed

economy9.

In order to show the progress Turkey has made and to prove that

development can be further realized in Middle Eastern countries, a history of its

long-‐term growth will be discussed. Altug, Filiztekin and Pamuk (2008) reviewed

the growth timeline for Turkey beginning in 1880 and ending in 2005. They split

this timeframe into four distinct eras, the first of which was from 1880 to 1913.

Turkey saw modest GDP per capita growth due to their export-‐oriented agricultural

model in their first era, however, this modest growth did not compare to the booms

being realized in Europe and America. The authors indicate that Turkey’s GDP per

capita as a percentage relative to high-‐income economies decreased eight percent

from 1880 to 1913 (2008, p. 398). During this timeframe, Turkey took steps back

from development and therefore had an even greater hurdle to overcome than

initially thought.

The second era ran from the start of World War I in 1914 to 1950. During

this time, Turkey experienced wild volatility due to population and GDP fluctuation.

Once the Great Depression hit, Turkey was forced to majorly shift its policies. Altug,

8 Turkey. (n.d.). Central Intelligence Agency. Retrieved October 13, 2014, from

https://www.cia.gov/library/publications/the-‐world-‐factbook/geos/tu.html 9 This notion is backed by Turkey’s economic data relative to the rest of the world. For instance, though its GDP ranks in the top 20 in the world, Turkey’s per capita GDP ranks 90th (The World Factbook: Turkey).

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Filiztekin and Pamuk write, “...The Great Depression ushered in new economic

policies in Turkey, [namely] protectionism and inward-‐oriented industrialization

led by the state sector” (2008, p. 400). Given the tumultuous world economic

environment at the time, it was a logical decision to apply protectionist policies.

However, by the time World War II began, Turkey’s protectionist policies caused

them to face another economic downturn. By 1949, they had recovered and were

ready to begin a new era.

The third era of Turkey’s developmental history began in 1950 and lasted

until 1979. From a world perspective, this time period was rich with economic

growth. Globalization was in full force, however Turkey chose to apply import-‐

substitution policies and thus removing themselves from the global trade market. In

a study analyzing Turkish trade policies, Yilmaz (2002) writes, “It was a widely held

view that rapid industrialization can only be achieved with the help of the import

substitution policy” (p. 61). Furthermore, he adds that Turkey looked to the self-‐

guided increase in Russian development around the same time and determined it

would be a good example to follow. Though these policies were not necessarily

unsuccessful, they did limit Turkey’s potential for economic growth (Kar, Peker &

Kaplan 2008). Once policymakers figured out that domestic industry growth was

not the best option, they implemented trade and financial liberalization policies

beginning in 1980, which will be discussed below, denoting the fourth an final era.

Growth fluctuated during the final era (Özatay and Sak 2002), but on average the

Turkish GDP per capita grew faster than its high-‐income counterparts and the rest

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of the world. By 2005, Turkey’s GDP per capital was 117% of the world average,

posting a 40% increase from 1950 (Altug et. al. 2008).

There is no doubt that marginal development was realized in Turkey,

however the notion of full development is not yet proven. In order to obtain that

status, the country will have to learn from their previous policy mistakes and

implement those findings as they continue to grow over time. Next, some of the

policies mentioned briefly in this section will be examined in greater detail. Their

lessons will then be applied to future policy recommendations in the hope that

Turkey can achieve full economic development.

Previous Growth Policies That Were Not Fully Realized One attempt at achieving a higher level of development was the liberalization

of the trade and financial markets during the 1980s. Beginning with trade policy, it

was noted above that until the 1980s, Turkey did not consider an open trade policy

to be their best option. Yilmaz (2002), however, would argue that it was a much

better strategy than remaining closed. In order to prove this, he researched the

outcomes of South Korea, or Korea for simplicity, which implemented liberalized

trade policies during the same time that Turkey remained closed, and compared the

two country’s results. He begins by pointing out that although the two countries

were similar in population size and both had major OECD trade partners, Turkey

had a more robust economy to begin with. Yilmaz writes, “By 1955...Turkish per

capita income was three times than that of Korea...Turkish exports were fifteen

times those of Korea, and the Turkish savings rate was much higher than Korea”

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(2002, p. 59). From this data, it is apparent that Turkey got off to a significant head

start over Korea. It was only a few years later, in the early 1960s to be exact, that

Korea began its trade liberalization while Turkey remained protected by tariffs and

quotas. In Korea’s case, they focused heavily enough on trade to increase their

exports relative to GNP nearly tripled to 31.9% from 1971 to 1981; In contrast, the

Turkish remained protected and their exports to GNP decreased from 5.2% to 4.6%

over the same time frame.

The results of the respective policies are quite telling. Though Turkey’s GNP

per capita quintupled from 1970 to 1990, Korea’s grew by over 2,300%10. To

reiterate this point, it is not being argued that Turkey did not see economic

development through their policies; in fact they did. However, relative to a country

that opened its door to the world trade market, Turkey’s growth is limited11.

In a study on the Turkish financial liberalization, Özatay and Sak (2002)

describe the main goal of this process by saying, “It is aimed at strengthening the

role of economic agents in the fund allocations process by limiting the role of

government” (p. 6). In other words, the power of economic reform was shifted from

the government to the institutions that provide private financing, namely banks.

During this process, Özatay and Sak sought to find evidence of a deepening of the

financial sector and if that deepening translated into countrywide economic growth.

As it relates to this particular paper, the latter will be addressed in greater detail.

10 Statistics were calculated from Table 1 on page 60 in Yilmaz (2002). 11 The authors note that since the 1980s, Turkey has maintained an open trade policy and have used it to their advantage.

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In the study, Özatay and Sak found that liberalization resulted in a significant

deepening of the financial sector. Total bank deposits, the purchase of securities,

and total financing all grew relative to GDP after the liberalization (2002, p. 8).

However, there was a peculiar finding when the balance sheets of banks were

analyzed in greater depth. Although total bank assets grew at an impressive rate,

both in real terms and as a percent of GPD, total credit growth relative to GDP

actually declined. This finding presents a major blockade for growth. They write,

“According to the financial repression theory, the economic growth impact of

financial liberalization depends upon the financial intermediation process” (2002, p.

9). Though banks were able to increase their level of reserves, they were not

utilizing it to produce more credit. Without an increase in credit, firms could not

borrow the funds necessary to achieve growth. At the aggregate, this led to the less

than expected levels of GDP growth in the country during the 1980’s and 90’s12.

To further understand the discrepancy between asset and credit growth,

Özatay and Sak looked into exactly why there was no credit expansion after financial

liberalization policies were implemented. The largest factor involved was increased

risk during the same time period; namely that of credit risk, interest rate risk, and

foreign exchange risk (2002, p. 13). Beginning with the latter, by opening up their

financial market, Turkey’s banks became prone to volatility in foreign exchange

rates, which could potentially hurt their earnings. Interest rate risk is based on a

similar notion; by letting the market dictate the interest rate, banks began to see

increased volatility and were weary of it. Credit risk is defined by the risk of 12 It should also be noted that this policy was launched in the midst of worldwide recession, so the lack of growth cannot be solely related to lack of credit.

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borrowers defaulting on their loans. Though a risk on its own, the increase in

volatility of interest and foreign exchange rates could affect the ability for large

debtors to repay their loans, thus increasing potential defaults. Additionally, Özatay

and Sak found that firms themselves were deterred from taking out credit due to the

increased volatility, decreasing credit demand all together.

The overall impact of sluggish credit growth and a decrease in demand for

new credit played a major role in the lack of growth in the two decades following

financial liberalization in Turkey. To prove this, Özatay and Sak ran a Granger-‐

Causality regression of how well real credit and real liabilities were able to predict

real income growth. They used lagged real income growth as the dependent variable

and used lagged real credit and real liabilities as predictive variables. After testing,

they write, “In sharp contrast [to real liabilities], real credit did contain predictive

power for the growth rate of real income in both of the samples” (Özatay and Sak

2002, p. 13). In other words, they were able to determine that Turkey’s slow

economic growth was in fact caused by poor credit growth. Therefore, the policy did

not have the effects that were initially expected.

Maintaining a course of closed trade policies and the inefficient

implementation of financial liberalization negatively affected Turkey’s economic

growth potential. In addition to the research provided above, Kar, Peker and Kaplan

(2008) studied the relationship between both methods of liberalization and growth.

After analyzing the important factors to consider when measuring the level of trade

and financial liberalization, the authors created indexes for both and ran a

regression with economic growth as the dependent variable. They found that levels

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of trade and financial liberalization both have a positively affect economic growth.

In other words, the more time spent at lower levels of liberalization resulted in

forgone growth. By waiting nearly thirty years to open trade barriers and another

twenty to fully implement financial liberalization, Turkey fell behind and therefore

have yet to fully realize its development potential.

Suggested Future Policies for Turkey and the Middle East

Contrary to previous literature on economic growth that is based solely on

production and output, new research has focused more on how economic growth

impacts society as a whole. The Human Development Index (HDI) looks at the

development of the people within the country rather than just a percentage increase

in GDP. According to the United Nations Development Programme website,

“The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. The HDI is the geometric mean of normalized indices for each of the three dimensions” (UNDP).

Traditional economic growth theory of increasing GDP per capita is present in the

model in the form of standard of living. The other two factors, life expectancy and

knowledge, are trickle-‐down effects from the standard of living factor. The former is

calculated as the life expectancy at birth, while the latter is calculated using the

mean years of schooling and the expected years of schooling. Ultimately, if a country

is experiencing a period of growth, they will reinvest in their domestic institutions.

By providing staple institutions like hospitals and schools with proper resources,

they will be able to grow and provide a better service to the people. With this new

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information, the definition for economic development will once again be added to.

Henceforth, economic development will be defined as the end result of growth

aimed at increasing the quality of civilian life through attaining a country’s policy-‐

determined steady state. If Turkey wants to continue their growth and potentially

realize their full developmental potential, they will need to determine exactly how

to invest their dollars back into the nation so that it provides the greatest good to

Turkish civilians.

Research has been conducted in countries that are similar to Turkey on how

to best allocate their resources to achieve a higher Human Development Index.

Levin and Raut (1997) collected data from 30 semi-‐developed countries and sought

to prove the causational relationship of increased human capital on economic

growth. Oddly, they found no relationship whatsoever between the two. Even after

accounting for time lags, population growth and export growth, human capital

seemed to have no effect on changes in GDP.

However, Levin and Raut took their research a step further and sought to

understand if human capital growth specifically in the export sector would result in

growth. They hypothesized that the export sector values quality of human capital

more so than the economy as a whole due to the technologically driven nature of the

industry (Levin & Raut 1997). In a sector with a steeper learning curve, higher

skilled workers will be more productive than lower skilled. They compiled data on

average educational attainment and primary and secondary school enrollment rates

for employees in the export sector and incorporated it into a productivity function.

They found that human capital was positively significantly correlated to the growth

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of the export-‐to-‐GDP ratio, while the growth of export-‐to-‐GDP on its own is not

(Levin & Raut 1997, p. 167). In other words, the level of human capital in the

workforce significantly affects the growth of a semi-‐developed country’s exports

relative to their GDP.

Fittingly, Levin and Raut relate their findings to the export sectors of Asian

Tigers. They write, “The externalities and increasing returns to scale attributed to

the export sector in newly industrializing countries like Hong Kong and Korea

cannot be achieved without simultaneous public investment in education” (Levin &

Raut 1997, p. 167). As examined above, another potential reason for the tremendous

growth of Korea is related to the investment in human capital backing their export-‐

oriented policies. Investing in human capital has an increase on labor force

productivity, and therefore increases total factor productivity (Yilmaz 2002). By

getting the labor force to become more productive over time through the exit of

under-‐educated workers and their subsequently educated replacements, growth

was achieved.

Turkey is has immense potential when it comes to human capital. According

to Ederer et. al. (2011; qtd. in Owings et. al. 2012), this is due to their increasing

birth rate and lack of brain-‐drain. Additionally, beginning in 1924, Turkey

centralized its education under the Ministry of Education, increasing the chance for

non-‐religious students to receive an education (Owings et. al. 2012). Since then,

literacy rates have gone from 10% to 89% in 2010. However, the quality of their

education is extremely low. Owings writes, “For the most part, schools are not

preparing students with the complex competencies and achievement they need to

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be competitive in the high-‐knowledge, high-‐tech Turkish economy” (2012, p. 51). It

is one thing to provide educational opportunities for citizens, but it is another to

make sure that education is suitable. Given the high-‐tech nature of the Turkish

economy, in order for their investments in education to be realized in the form of

growth, students need to be taught how to perform the skills required of their

domestic industries. Otherwise, the country will not see a growth in GDP at the

hands of human capital.

The idea of increasing investment in human capital may be a daunting one

for Turkey. In order to do so, a looser fiscal policy would have to be adopted. Since

the turn of the century, Altug et. al. (2008) point out that Turkey has kept a tight

stance on fiscal policy. Mainly this was a response to the loosening after the 1970s

oil shock and subsequent increases in inflation and government deficit.

Figure 113

Figure 1 shows the relative changes in inflation and government spending due to

loose fiscal policy over time. As is visible, both graphs show relative stability up

until 1970, and have been experiencing a steady upward trend up until 2000. At that 13 Altug et. al. (2008)

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point, the government tightened up their fiscal policy as a result of the millennium

financial crisis, thus cutting back on spending significantly. Altug et. al. write, “In

order to finance a growing fiscal deficit, public investment, including expenditures

on education, declined sharply and continues to remain low” (2008, p. 420). By

reducing spending towards education, therefore reducing investments in human

capital, tightening of the fiscal policy could have resulted in a negative affect on the

accumulation of knowledge. Because knowledge is a component of the HDI index,

the decline in knowledge, ceteris paribus, would result in a move away from

development. Furthermore, the fiscal tightening, which caused a decrease in the

potential human capital stock, did not exhibit an economically developmental focus.

The logical policy prescription would be to loosen fiscal policy and increase

spending on education. However, given the current state of their economy, this

recommendation would not be advisable at this time. As of 2013, Turkey’s budget

deficit relative to GDP is 2.6% and their inflation rate is 7.6%, ranking 91st and 192nd

in the world, respectively (CIA World Factbook: Turkey). Before any fiscal policies

are altered, Turkey will have to reduce both of these values and find macroeconomic

stability. Henceforth, all policy recommendations related to domestic investment

and spending are to be advised once stability is achieved.

In terms of the Middle East as a whole, there are also many challenges facing

the improvement of education, most of which are found in Turkey as well. Chapman

and Miric (2009) studied the region’s education sector and found that, similar to

Turkey, there is immense potential for increases in human capital. However, that

potential is not being realized in the region (Chapman & Miric 2009). Similar to

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Turkey (Owings et. al. 2012), the main reason for this is the disparity between

education participation and the quality of that education. Specifically, education

policies put that emphasis on participation rate, which increased the percentage of

school-‐aged children going to school in the region. This shift in demand for

education was met with, and sometimes even lagged behind a shift in teacher

supply14. Interestingly, though the surplus of teachers decreased class sizes, which

should in theory increase educational understanding of the students, the quality of

education decreased15, hence the disparity of participation and quality. On this

point, Chapman and Miric write, “Instructional practice has not improved, nor has

student learning increased despite the potential of smaller class sizes to enable

individualized instruction” (2009, p. 320). The main reason for that decline, as

mentioned, is the stagnation of instructional practices. Though the study gives no

evidence as to why quality has gone down, it is inferred that there is a disconnect

between the capabilities of the teacher, which have increased on an aggregate level

(Miric & Chapman 2006; qtd. in Chapman & Miric 2009), and the quality of

education they are providing to the students. An alternative hypothesis may be that

due to the increase in percentage of students in school, there are more students in

school now that would not have otherwise attended in the past. That is to say, the

average intelligence of students relative to years past may be declining due to the

14 This is not the case for Turkey, where demand for education exceeded the supply of teachers (Owings et. al. 2012). 15 Oddly enough, this was the same result in Turkey, though it resulted from different factors (Owings et. al. 2012).

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inclusion of students who are less intelligent than those who previously attended16.

Regardless of the reason, educational quality will have to be increased across the

region to realize development. Without quality, the human capital stock cannot be

increased, and therefore will have no effect on growth towards development.

One of the most promising policies to improve educational quality is the

Turkish FATIH initiative. Noting that their current schooling methods are lacking

practical application, FATIH is attempting to make every classroom in the country a

“Smart Classroom” (FATIH). By connecting their students with the latest

technological instruments, the Turks hope to prepare their students for the fast-‐

paced and tech-‐reliant world they will enter post-‐schooling. In a pilot phase of the

project, the Ministry of Education distributed 8,500 tablet PCs to 52 high schools in

17 provinces. Immediately following, they expanded their scope and provided

49,000 tablets to 81 provinces across the country.

Though impressive, this policy will face enormous challenges. First and

foremost, teachers, as well as students will have to learn how to use the new

technology in order to teach with it effectively. It is very possible for the teachers

themselves could be just as clueless as the students when it comes to understanding

how the tablets work. Furthermore, Michael Trucano, an information and

communication technologist specializing in educational policies for the World Bank,

took the concept a step further by saying, “With every student equipped with a

tablet, connected schools and interactive projection devices in every classroom,

there will be massive needs for useful, relevant, high-‐quality digital teaching and 16 More research on this topic will need to be completed before it is accepted as a viable reason for lower student achievement.

23

learning materials” (Trucano 2013). Content creation will be a major hurdle for the

FATIH initiative given the inequality of schooling across the country (Owings et. al.

2012). Unless there are other major economic reforms, such as rolling out a uniform

curriculum much like the Common Core Standards in the United States, each

province, if not school district, will have to create its own content. With an already

struggling teacher workforce, putting the responsibility of digital content creation,

an otherwise foreign concept in their hands might not result in the quality of

materials the Ministry of Education desires. Obviously, this policy and its desired

outcomes are incredibly bold. That being said, in order to catch up to the technology

advances of the world and prepare Turkish students for an increasingly tech-‐savvy

workplace, it is absolutely a step in the right direction.

The implementation of a similar policy in other Middle Eastern countries

would most likely face similar challenges, but the upside potential remains. For the

richer countries in the region, financial costs associated with this policy

recommendation should be relatively insignificant, whereas for poorer countries

such as Yemen17, the implementation would be nearly impossible. If the financial

barrier were to be overcome, whether through foreign direct investment or a gift,

the outcome could be largely the same as is projected for Turkey. By investing

heavily in human capital, the Middle East could also accelerate its growth and move

closer towards economic development.

17 Yemen’s GDP per capita is 1.4% of Qatar’s (Middle East: GDP per Capita).

24

Conclusion Contrary to various organizational bodies focused on growth and

development, Turkey is not a developed country; rather it is on a path toward

development. Using the Solow (1956) model, development was original defined as

the point at which capital replacement needs of an economy are directly met by

their capital-‐labor ratio as it relates to output. With help from Phillips (1958) and

Stiglitz (1974), the idea of a policy-‐determined steady state was introduced. Instead

of pursuing a theoretical state dependent upon unrealistic assumptions, countries

have the ability to determine and achieve development set by domestic policies

related to labor, capital and output. By eliminating these assumptions, development

is now considered achievable in theory as well as practice.

Looking back at a history of Turkey, it has faced a series of growth cycles due

to previously implemented growth-‐oriented policies. More specifically, the country

missed out on massive growth potential by remaining in a protectionist state as well

as the slow implementation of financial liberalization tactics. To address the former,

a case study of Turkish vs. Korean trade policies in the middle to late twentieth

century was examined to find a reason for their differing levels of growth (Yilmaz

2002). Though Turkey began the timeframe with a much stronger economy, the

Koreans quickly passed the Turks using their newly liberalized trade. Now, Korea is

one the world’s most successful exporters, and as such, their country has flourished

on the global stage. In comparison, Turkey stuck with protectionism and therefore

saw only incremental growth during the ascension of Korea, namely because of their

refusal to engage in the innovative idea sharing called globalization.

25

As for financial liberalization, Turkey had the correct policy prescription, but

the timing and implementation resulted in their downfall (Özatay and Sak 2002).

Not only did they attempt to liberalize at the height of a global stagflation, increasing

the riskiness of bank lending causing banks to reduce the credit supply, but it also

took them until the next major financial crisis to get it right. As a result, Turkey saw

slower-‐than-‐expected growth and required stabilization from the IMF to get back to

a relatively sound macroeconomic position (Altug et. al. 2008). If both liberalization

policies had been implemented appropriately, they would have resulted in

significant growth in Turkey (Kar et. al. 2008). Instead, they floundered in the wake

of two major economic crises and arguably came out of the latter worse off than

they began.

Moving forward, Turkey will need to learn from its previous mistakes as well

as apply new theory if it wishes to get back on the path toward economic

development. By introducing the Human Development Index, a measure of

development that focuses on human wellbeing over classic GDP growth, the

definition of development in the context of this paper evolved once more; that is:

development as the end result of growth aimed at increasing the quality of civilian

life through attaining a country’s policy-‐determined steady state.

The main focus of Turkey’s growth moving toward economic development

should be on human capital investments through a loosening of fiscal policy. It has

been shown that investments in human capital in the export sector increase the

ratio of exports to GDP (Levin & Raut 1997). The investment in human capital will

also show increasing returns to scale because of its effects on all of the inputs into

26

the HDI. These investments will increase knowledge by providing a higher quality of

education, thereby increasing productivity and ultimately export growth. There is

also a relationship between export growth and domestic savings (Yilmaz 2002),

which aligns with assumptions in the Harrod-‐Domar (1939; 1946) and Solow

(1956) models. The savings could be put towards public health investments,

increasing the average life expectancy in the country. By comparison to Asian Tiger

economies such as Korea, increasing a country’s share of exports relative to GDP,

thus adopting an outward-‐focused growth policy, has the capabilities to accelerate

growth, which would increase living standards. Putting these ideas together, Yilmaz

writes, “The success story of Korea demonstrates the importance of a government’s

export push policy and ability to foresee a major trend coordinate with

complementary investments for education and vocational training together” (2002,

p. 75). An interesting addition to this piece is that of vocational training, which has

yet to be previously discussed. By investing in specific trade schools, the time lag for

new skilled labor enters the workforce will decrease, providing the economy with a

preliminary boost while school-‐aged children continue their development in

primary and secondary schools. The reforms themselves do not seem to have any

controversial measures associated with them that would make it infeasible to

uniformly roll out to the Middle Eastern region, therefore the benefits of human

capital investment should be able to affect more economies than just Turkey.

In order to fund this educational reform, fiscal policies will need to be

loosened and government funds will have to flow toward schools. However, much

like previous policy implementations, the timing is not right. Here, Turkey will need

27

to show self-‐restraint and learn from its past. If they were to loosen fiscal policy

now, there is a strong likelihood that government deficit and inflation would

continue growing beyond their current levels, putting their entire economic stability

at risk. Instead, they should continue to focus on reducing their deficit and deflating

prices.

Turkey has the ability to be a role model in the Middle East as one of the first

countries to achieve development. Given its history, the country should be able to

grow carefully and avoid pitfalls along the way. Though immediate growth and

subsequent development would be the ideal case, it is important to recognize that

development in a long-‐run goal. Therefore, all policies should be evaluated

thoroughly for content, implementation, and timing before implementation within

the country and/or region.

28

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