Relative Stagnation alla Turca

Abstract

Turkey is the only founding member of the OECD that has not converged to the US in terms of per-capita GDP since 1950: its real GDP per capita is stuck at 20% of that of the US. At a proximate level, we show that Turkey's relative stagnation over the past 50 years is due to: (1) the relative decline in its labor force participation, and (2) the relative stagnation of its TFP. We argue that the first fact is due to policies of high personal income taxation, and high social security contributions for both employees and employers. The second fact we argue is due to price support policies in agriculture, which distorted the allocation of resources in favor of agriculture, thereby delayed the process of the structural transformation. We develop a dynamic general equilibrium model with agricultural and non-agricultural sectors. The production of the non-agricultural good can take place in the market or the household sector. We show the extent to which these policies can account quantitatively for Turkey's relative stagnationRelative Stagnation, Labor Force Participation, Income Taxes