Turkey - Economic development (Vol. 4 of 5) : Technical annex

Reporl No. 316a-TU The Economic Development FILE COPY of Turkey (In Five Volumes) Volume IV: Technical Annex April 22, 1974 Country Programs Department II Europe, Middle East and North Africa Region Not for Public Use Document of the International Bank for Reconstruction ancl Development International Development Association This report was prepared for official use orly by the Bank Group. It may not be published. quoted or cited without Bank Croup authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Prior to August 9, 1970 US $1.00 = TL 9.00 TL 1.00 = US $0.11 August 9, 1970 to December 22, 1971 US $1.00 = TL 15.00 TL 1.00 = US $0.067 After December 22, 1971 US $1.00 = TL 14.00 TL 1.00 = US $0.07  VOLUME IV TBEHNICAL ANNEX Table of contents Page No. Chapt. 14 ANALYSIS OF MEDIUM AND LONG TERM GROWTH PERSPECTIVE ***.*******..................... 1 Introduction .............................. 1 A. Growth and Enployment Perspective, 1972-87 .... 1 A Perspective Planning Model for Turkey .... 2 Basic Solution for 1987 ....................... 3 Alternative Growth Patterns ................... 20 Annex Al: Date Base for the Linear Programning Model .ooo.......... .... Annex A2: Further Improvement of the Model ... B. A Two-Gap Model for the Turkish Economy ..... 2.. 5 Annex B1: Structure of the Model   Chapter 14 ANALYSIS OF MEDIUM AND LONG TERM GROWTH PERSPECTIVES Introduction 14.1 Growth of the Turkish economy has been impressive in the last two decades. Turkey has reached a per capita income of $420 in 1972 compared to about $230 in 1950 in 1972 dollars, and is entering a new phase of development which should lead to a more radical transformation of its economic structure. The Government has recently adopted a new 22-year development strategy, with the aim of reaching a per capita income of about $1500 by 1995 while becoming a full member of the European Common Market. A fast industrialization and urbanization would bring the economy to the stage of development of Italy in 1970. Past performance and the natural and human resources of the country indicate that this expected radical transformation could be achieved. However, Turkey would have to overcome basic constraints and find the solution to many problems and imbalances. While growth in the last twenty years has been cha- racterized by nearly continuous foreign exchange shortages and inflationary pressure, the main problems of the next twenty years are likely to be employ- ment creation, income distribution and economic management, particularly demand management. 14.2 Macroeconomic models are usually not fit for exploring all aspects of economic development, but focus on some specific problems. We have ex- plored some aspects of the long-term growth of the Turkish economy with two models. These models are not substitutes to the long-term model prepared by SPO but rather are devised to focus on specific aspects of the economy and add to our knowledge of its potentials and constraints. With a linear pro- gramming dynamic model, we have explored the( link between optimum growth pat- terns following various criteria and employment growth. With a two-gap Harrod Domar type model, we have explored the link between growth, inflation and the balance of payments. The programming model has been developed with the coop- eration of the Development Research Center of the Bank, and data were partly supplied in Turkey by the SPO. The two-gap model has been developed in coop- eration with the Comparative Analysis and Projections division of the Bank. The possibilities of linking the two models in a systematic way have not been explored, but the two sets of projections are consistent. Both are based on the same Turkish statistics, and the linear programming model uses as exogenous variable the foreign exchange availabilities obtained endogenously in the two- gap model. The results of the two models can.add insight into the possible long-term development trends of the economy, but the magnitudes should not be considered as predictive of the future. A. Growth and Employment Perspectives of the Turkish Economy, 1972-87 An Exploration of Optimum Patterns 14.3 The object of this chapter is to analyze some of the results obtained from a linear programming model of the Turkish economy developed by Charles R. Blitzer of the Development Research Center, IBRD, in 1970, who also contributed substantially to this exercise. The first section describes briefly the major characteristics of the model, the second section describes for 1987 some of the informations generated by the model in a basic case, with particular  -2- emphasis on sectoral production and investments, and the volume and composi- tion of labor skill. The third section will analyze various types of trade- offs between different development objectives. The description of how the data base of the model developed by C. Blitzer has been updated from infor- mations collected during the basic mission, and of possible further improve- ments in the model are given in Annexes. A Perspective Planning Model for Turkey - 14.4 This dynamic multi-sector model has been built to explore the link between the pattern and pace of growth and employment in the Turkish economy. The model maximizes a given function (GDP, consumption or employment) for each of five three-year periods, during 1972-1987, starting with the period 1972-75. Growth of the economy is bound by labor constraints, material con- straints and foreign exchange and savings constraints. All projections are given in 1972 prices and start from 1972 as a base year, for which an input output table, a transaction matrix and a capital coefficients matrix have been estimated by the Bank mission, in close cooperation with the Development Research Center of the Bank and the SPO in Turkey. (Tables Al to A4). 14.5 The economy is divided in eight sectors, and labor forces in each sector into six skill categories (Table A17). Turkey is considered as a labor surplus economy only for unskilled labor in agriculture (skill 6). The labor constraints ensure that availability of each skill level in each time period of the projection meets the various requirements. For skills 1 to 4, labor supply can come from three sources: 1) an exogenous supply of skilled labor by the existing education system (Table All), 2) upgrading of l1,wer skill levels through a human capital formation activity starting in previous periods and obtained at an investment cost for the economy (Table A4), and 3) down- grading of upper skill levels in excess supply. Additions to unskilled urban labor (skill 5) come from urban rural migration, and cost to the economy TL 2,900 per year and per migrant in 1972 prices 2/ (Table A9). Labor demand by sector is derived from an analysis of labor requirements per unit of output in 1972, and is prpjected after accounting for exogenous changes in produc- tivity (Tables A10, A12). Skill composition of the increase in labor force in each sector is kept constant overtime, but is different from the initial skill composition, and the changes of the skill mix of labor force overtime are due to changes in productivity and different sectoral grorwth rates. 3/ 1/ For a detailed presentation of the model and its equations, refer to "A Perspective Planning Model for Turkey: 1969-1984", Charles R. Blitzer, Memorandum No. 114, Research Center in Economic Growth, Stanford Univer- sity, California (August 1971). 2/ The question of who should bear the cost of these migrations has not been envisaged in this study. 3/ Introducing income elasticities of labor productivity is not possible at this stage for lack of statistical information.  - 3 - 14.6 Material Constraints (Bit). In each sector of the economy, material constraints ensure that for each time period resources (imports plus output) meet the demand for consumption, investment, export and migration costs. 14.7 Foreign Exchange Constraints (Ct). For each time period, foreign exchange earnings (exports, net foreign capital, workers' remittances) must meet the demand for imports of consumer goods, intermediate raw material and capital goods and of increase in reserves. Imports have been divided in each sector into competitive and noncompetitive in the dynamic sense, noncompetitive imports being those imports which Turkey is unlikely to produce at international cost within the projection period. The model allows for import substitution in the field of competitive imports only, and there are rigid import coeffi- cients for noncompetitive imports. Exports are divided into five categories, which is clearly too aggregated for a detailed study of comparative advantages, and each category is bound by an upper and a lower growth rate limit. The level of net foreign aid, workers' remittances and net changes in reserves are exogenous, and take into account the Turkish objective of less dependence on foreign resources and the balance of payments analysis carried out with a two-gap model (see part B and Table A16). 14.8 Savings Constraint. The marginal propensity to save is constrained by an upper limit taken as 26Z for domestic savings for the basic case. Basic Solution for 1987 14.9 The basic case of the programming model has been solved by maximimiz- ing GDP in the terminal year. 1/ It will serve as a benchmark from which trade- offs between various objectives and formulations will be measured. 14.10 Macroeconomic Results. The major macroeconomic results are presented in Table 76. The growth rate of GDP is projected to be 7.2% during 1972-87. Investment grows at 8.5% per year, and domestic savings increase at 10.2% per year, the marginal savings remaining always at their upper limit. In 1987, investment reaches 24.5% of GDP and domestic savings 22% of GDP, com- pared to 20.4% and 14.6% respectively in 1972 (with the same definition of GDP). Per capita consumption increases by 4.1% per year during the period. The incremental capital output ratio averages 3.32. The reorganization of the economy towards the optimum pattern of growth which occurs in the early years explains the low growth rate of GDP in 1972-75, the slightly decreasing ICRO, and some peculiar sectoral growth rates of investment during this period, particularly in transport and agriculture, which should not be taken as nor- mative. 1/ Terminal and post terminal conditions have been set up on GDP, consump- tion, and investment to avoid the end projection disturbances normally associated with programming models.  - 4 - Table 71_ Summary of constraint rows Constraint.group Definition Number of rows Ast labor balances 25 Bit material balances 40 Ct foreign exchange balances 5 Eit output capacity 40 Fst education capacity 15 Gzt upper bounds on exports 25 -Hzt lower bounds on exports 25 Ilit sectoral investment levels 48 it aggregate investment levels 6 TXi,t sectoral.gross output 40 St marginal propensity to 5 consume ACt total consumption 5 ,GDPt grossAdomestic product .5 C6 terminal consumption I Ki terminal investment levels 8 Ks terminal education levels 4 OBJ .objective function 1 298  Table 72: Sumr f Act:ivity Columns activity type number of activity columns Ct per capita consumption increase 6 between base year and period t; unit: 1963 TL XJ t gross output increment in sector j 40 between base year and period t (j=1,...,8;t-l,...,5); unit: billions of 1963 TL VJ,t annual increase in capacity of sector 66 j during time period t (j=l,...,ll;tO0, ...,5) N.B. sectors 9,10, and 11 are education sectors; unit: billions of 1963 TL Mit annual "competitive" imports of item i 15 during time period t (i=1,2,3;t=l,...,5); unit: billions of 1963 TL Z annual earnings from export activity 25 z during time period t (z=1,...,5;t-1,...,5); unit: billions of 1963 TL MLt level of migration during period t 5 unit: thousands of persons EDj Jt level of education activity j during 20 the time period t (j=1,...,4;t-1,...,5); ullit: thousands of persons LD J,t labor downgraded from skill level j 20 during period t (J=l,...,4;t=l,...,5); unit: thousands of persons IJ,t annual investment level in sector j 48 during period t (j-l,...,8;t-0,1,...,5); unit: billions of 1963 TL TX ilt annual gross output level in sector j 40 during period t (j.1,...,8;t'1 ,...,5); unit: billions of 1963 TL AC annual total consumption during period 5 t t (t=l,...,5); unit: billions of 1963 TL It annual total investment level during period 5 t (t=l,... ,5); unit: billions of 1963 TL GDPt annual level of gross domestic product during 5 period t (t=l,...,5); unit:billions of 1963 TL 300  -6- Table-73: (Ast) Constraints: requirement requirement for skill for skill level s in + level s in L productive production of sectors human capital 8 o ~~8 4 (Ls0 _ I 10 : TXj O) + I lS, TXj,t + I 1'5 ED, Jt B'O J-1 ~~J=1 j=l exogenous net additions and losses net gains Rrban-rural supply, time + from training activities + from down- + migration; t in prior periods j grading only for s=5 + t-F1 + [EDs. - ED *1 + LDs-t - LDst + I ML T=1 , -, , Tla  Table 74: (Bit) Constraints: ,year 0_ increase + :=netitive" output, net + -above base porto i-1,2,3 > of induftry year output, demand - net of industry demand 8 L+ I ai,j j,t I xi,t - opulatio g capita 1 + investmenFl + export + migration - L J~~1 sumption L demand J Ldemandj Losts J E12 -1 1, ,t + It t 5 t Ft [ C