Enhancing Turkey's Growth Prospects by Improving Formal Sector Business Conditions

Turkey's business sector has achieved high growth over the past few years and - on average - hascoped well with increased competition. However, some labour-intensive sectors lost competitiveness priorto the currency depreciation in mid-2006 and faced employment losses, raising political pressure forinterventionist policies. This paper argues that the government should resist such pressure and insteadfollow a broad-based strategy to improve framework conditions for firms, irrespective of their size, sectorand legal status. Overcoming the duality between the formal and informal sectors should be the centralpoint of this strategy. In particular, the cost of labour should be reduced and regulatory hurdles in labourand product markets should be minimised, to help formal firms to remain competitive and increaseemployment. This would also make it easier for the many small and medium-sized firms to move into theformal sector, thereby raising productivity through economies of scale. This would increase the growthpotential of the whole economy, broaden the tax base and level the playing field for doing business inTurkey, not only for the wide variety of domestic firms but also for foreign investors.