Türkiye: The Anatomy of a Dynamism Slowdown

Between 2006 and 2016, Türkiye looked like a growth story. After the reforms that followed the 2000 to 2001 crisis, the economy grew more than 6 percent a year on average until 2008, weathered the global financial crisis, and rebounded to roughly 9 percent growth in 2010 and 11 percent in 2011. To see what was happening beneath those headline numbers, Ufuk Akcigit and four co-authors at the Central Bank of the Republic of Türkiye assembled a near-universal administrative panel of Turkish firms, the Entrepreneurship Information System, and focused on manufacturing, a sector that accounts for 19 percent of employment and 26 percent of real sales.

The firm-level view told a different story from the macro one. Business dynamism, the constant churn of firms growing, hiring, entering and exiting, was stable and even improving until 2012, then turned down. Average employment growth among manufacturing firms had climbed toward an 18 percent peak around 2010 and 2011. After 2012 it fell steadily, reaching about 5 percent by 2016. The paper reads this as the opening phase of a broad decline that the aggregate figures alone did not explain.

Why did all of this begin around 2012 and 2013? The paper points to the cost of capital. When the U.S. Federal Reserve signaled tapering in May 2013, capital flowed out of emerging markets and domestic financing tightened. Turkish firms lean heavily on bank credit for long-term investment, and much of that long-term money is denominated in foreign currency. FX credit made up 56.8 percent of all manufacturing credit by December 2016, and 52 percent of it carried maturities longer than five years, against only about 20 percent for lira loans. As global funding grew scarce and costly, banks concentrated that credit on their safest, largest borrowers. Follower firms, the mid-to-large companies best placed to challenge the leaders, lost access to the money they needed to compete.

The authors formalize this in a model of two firms racing for market leadership. An adverse shock to the followers' investment costs reproduces the whole pattern. Leaders face less pressure, so they raise prices, invest less, and grow more slowly, and concentration rises even though productivity does not. The policy conclusion runs against instinct. The remedy is not to subsidize the market leaders. It is to support their immediate followers, for example through R&D support, so those firms can press the leaders into cutting prices and investing again, restoring competition and moving performance back toward its pre-2013 path. Türkiye's slowdown, read at the level of the firm, was a competition problem before it became a macro one.