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Weathering the crisis: A Turkish recipe

Turkey has managed to overcome the global financial crisis better than many European countries. How did it do it?

Analysis | 06 August 2012
GENEVA (ILO News) – With GDP contracting by almost 5 per cent in 2009 and the unemployment rate soaring to 14 per cent, Turkey was severely affected by the global financial crisis.

But unlike many European countries, Turkey has managed to recover relatively well. By early 2011, the unemployment rate was back to its pre-crisis level, falling to a little less than 11 per cent in March 2011. So, what types of policies have made this possible?

In addition to macroeconomic policies aimed at regaining stability, the government adopted measures to reduce non-wage labour costs. As a result, companies were encouraged to recruit workers rather than cut jobs and there was a drop in informal employment.

Measures included a general reduction of social security contributions; incentives to hire youth, women and long-term unemployed; the promotion of training, as well as significant tax reductions for enterprises investing in less developed regions.

For example, in October 2008, employer social security contributions for disability, old age and death were reduced from 19.5 per cent to 14.5 per cent of gross wages. These cuts were offset by public transfers to social security institutions.

Thanks to this measure, more than 61,000 jobs were created in 2009 and more than 63,000 in 2010.

Also, employers who provided vocational training to their staff benefited from lower social security contributions, and employers who hired workers in the fields of technology, research and development were reimbursed half of their social security contributions for five years. This not only boosted the country’s employment record, but also the qualifications of its workforce.

For women and youth in particular, the government decided to cover the employer share of social security contributions during a five-year period for those recruited between May 2008 and May 2010.

Special attention to less-developed regions

Since 2007, incentives for less-developed regions have been available in all sectors and no longer require a transfer of activities from more developed regions. Originally planned to be phased out in 2009, these measures were extended in 2010.

In this scheme, social security contributions for current and newly-recruited workers are covered by the state for an average of five years, while corporate tax is reduced from 20 per cent to 5 per cent for the same period. Interest rates on loans are also subsidized, and businesses receive value-added tax and customs duty exemptions for the procurement of machinery and equipment.

A total of 730,000 workers, representing 17 per cent of total manufacturing employment in Turkey, were employed under these regional incentives in the first two months of 2011.

What’s more, job creation for women exceeded that for average male workers.

Informal employment, defined as employment of workers not registered with any social security institution, declined from almost 53 per cent of total employment in 2001 to less than 45 per cent in 2010.

Challenges remain

Subsidizing employer social security contributions raises various challenges however. First, it increases public debt. Second, the boost to employment may not last if taxes are subsequently increased to cover the associated costs. Last but not least, the replacement of taxes on (formal) labour by taxes on consumers also raises equity issues, especially in countries with high informality.

In addition, financing social security through general revenue instead of through contributions provides no stable source of income for social protection and consequently for the pension system.

The decrease in social security contributions is therefore an acceptable means to boost labour demand in the short run, but not necessarily over longer periods of time.

In the crisis context however, the scheme did provide employment to new categories of workers.

We should also bear in mind that employment growth in Turkey is also driven by other factors, including a large number of jobs created in the less-developed regions by circumventing labour market regulations, and the geographical proximity to export markets in Europe and the Middle East.

By Catherine Saget, Senior economist at the ILO's Employment and Labour Market Analysis Department

This analysis is based on the ILO-World Bank Inventory of policy responses to the financial and economic crisis.
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