What can Tunisia and Turkey learn from each other?

In a series of past Future Development posts my colleague Martin Raiser has described Turkey’s impressive performance over the past 15 years, documented in a fascinating report, “Turkey’s Transitions: Integration, Inclusion, Institutions.”  At a recent launch of the report, I was asked to comment on the lessons Turkey could provide for the Middle East and North Africa (MENA) region. 

My first reaction was that, superficially, Turkey’s performance does not look that different from that of another MENA country, Tunisia, during the 2000s. Tunisia’s GDP grew at 4.4 percent a year during that decade, only slightly slower than Turkey’s 4.6 percent. The trade regimes in both countries were relatively open. In Tunisia, poverty rates fell in half, with the share of people living on $2 a day at 4.3 percent. The per-capita incomes of the bottom 40 percent grew at least as fast as that of the average in both countries. Finally, Tunisia’s human development indicators are impressive—more girls than boys attend school at all levels, and the infant mortality rate is 14.8 per 1,000 births.

Yet, Tunisia had a revolution in 2010 that no one saw coming. In fact, just before the revolution, the IMF and World Bank were heralding Tunisia as a “role model” for other countries in the Arab world. The World Competitiveness Index ranked Tunisia the most competitive economy in Africa. One implication could be that Turkey, too, may be on the brink of a revolution, especially if, as recent reports indicate, growth is likely to slow down considerably.

However, a closer look reveals that Turkey is very different from Tunisia, and other MENA countries, for that matter. First, unemployment is much higher in MENA (10 percent), especially for young people and women. And there is a significant informal sector, estimated to be about 40 percent of the labor force. During this same period, Turkey created jobs at a rapid clip, and the size of the informal sector shrank. The difference is that small and medium enterprises—which are the source of job creation in most countries—grow in Turkey, whereas in Tunisia and other Arab countries they stay small or fail. The reasons include the fact that under the Ben Ali regime in Tunisia several sectors were protected from domestic and foreign competition because they contained firms that were politically connected. Not only did this make it harder for small firms to enter these industries (which included banking, transport, and telecommunications), but the price of these sectors’ output was so high (thanks to the monopoly power they enjoyed) that they made exporting firms that bought their output uncompetitive. By contrast, in Turkey agreements with the European Union (and the prospects for membership) made it possible to enforce competition policies in domestic and foreign markets. And success built on success, as the case of Turkey’s auto industry shows.

In addition, Turkey appears to have almost eliminated energy subsidies—delegations from various countries visit to see how they did it—whereas the MENA region has half the energy subsidies in the world. There is some evidence that these subsidies, by favoring older, larger and more capital-intensive firms, discriminate against younger and more dynamic firms, which are the ones that create jobs.

Second, Turkey seems to have managed regional inequalities well, by managing urbanization (clarifying responsibilities), allowing for informal settlements, and encouraging the growth of smaller cities. A previously lagging region is now booming—giving rise to the phrase “Anatolian tigers.” In Tunisia and other MENA countries, governments have provided subsidies to poorer areas, but these have not led to urban agglomerations. Quite simply, it may be better to spend on infrastructure that enables people to move out of lagging regions than on subsidies that keep them there.

Third, although Tunisia has achieved much in terms of human development, the quality of public services remains poor. Turkey has improved the quality of its health services by a series of reforms, all of which have strengthened the patient’s ability to hold providers accountable. In MENA, these supposedly free services are of such low quality that people pay to use the private sector, which then discriminates against poor people.

Despite these differences, both Turkey and MENA countries face a similar challenge: the development model that delivered quite well in the past may not be the one to deliver in the future. In Turkey’s case, the challenges are to increase firm productivity and education quality, and to strengthen public institutions. MENA countries need to shift accountability in public services to students, patients, and citizens; replace energy subsidies with targeted cash transfers; and promote competition in domestic markets. Neither set of challenges will be easy, especially in MENA where civil conflict and turbulent transitions have slowed growth to a trickle. Having the experience of Turkey assessed in an objective manner will be valuable to policymakers in the MENA region as they chart their way through difficult waters.