Progress on a well trodden path economic devel opment

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progress on a well-trodden path, economic devel - opment involves multiple transitions that lead to different configurations across countries and time. Turkey itself is undergoing multiple transitions, some more advanced than others. It is open to foreign trade and finance, and yet domestic capi - tal markets remain underdeveloped. A majority of its population has moved from their place of birth as Turkey has undergone a dramatic process of ur - banization, yet traditional gender roles in the family have largely stayed intact. Turkey has harmonized many of its laws and regulations with EU standards and dramatically expanded access to public servic - es, but concerns over economic and public sector governance persist. To many outside observers, Turkey is a country of contrasts. As this report il - lustrates, these contrasts result from uneven prog - ress along various dimensions of Turkey’s economic and social development. They are also linked with each other in ways that offer important lessons on the sequencing and sustainability of economic reforms.The drivers of Turkey’s progress since the early 1980s are similar to trends in other emerg - ing markets. China opened up to the international economy around the same time as Turkey; Eastern Europe and India around a decade later. Russian Federation and Brazil are prominent examples of countries that fundamentally overhauled economic management following financial crises at the end of the 1990s or early 2000s and have subsequently benefited – as Turkey has – from the “great moder - ation” of abundant global liquidity thanks to sound macro management and healthy financial and fis - cal buffers. Turkey’s economic catch-up with Eu - rope over the past decade mirrors the experience of other accession countries that benefited from Europe’s “Convergence Machine” (Gill and Raiser, 2012). The combination of these international driv - ers with Turkey’s unique national circumstances makes up the story of Turkey’s transitions. Three main features of this story stand out: Economic growth driven by structural change: The shift of employment out of agri - culture into industry and services has brought increases in productivity and rising income. Structural change has been seen as an engine of productivity growth in developing countries for many decades, going back to the work of Nobel Prize winning economist Arthur Lewis. But as Dani Rodrik and Margaret McMillan (2011) show, it is far from obvious that the en - gine actually works. That it did in Turkey has to do with the process of international and do - mestic market integration. Trade liberalization in the 1980s, followed by the Customs Union agreement with the EU in 1995, provided the price signals and competitive incentives for the modernization of Turkey’s industry. After 2001, banking sector restructuring allowed financing to flow to the business sector, and, together with more business friendly regulations, fa - cilitated the creation of jobs in manufacturing and services. Public and private investments in

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