The EU and Turkey: How to converge without falling into the trap of permanent deficit?

Abstract

One of Turkey’s main aspirations for EU membership has been to attain the economic development level of the member countries. In this context, the Turkish economy has undergone profound changes both in its economic structure, and the degree of integration with the world economy, particularly that of the EU. This article focuses on three major dynamics of the current account adjustment (degree and character of financial integration, savings-investment balance, and the competitiveness and the structure of the exports) in order to shed light on why the predictions of standard economic theory do not fully account for the observed relationship between Turkey’s convergence process and its current account structure. Accordingly, current account deficit appears to be a permanent feature of the Turkish economy rather than a temporary situation during the convergence process as is predicted by the theory and experienced by the new member countries from Central and Eastern Europe (CEE). One of the primary findings of this article suggests that the insufficient level of FDI, low level of savings and the lack of competitiveness in high-value added exports seem to keep current account deficit as a permanent feature of the economy. One common factor affecting the above dynamics seems to be some of the structural features of the Turkish labor force, such as low levels of education and low female labor force participation rate, which also place Turkey into a different category than the rest of the CEE countries.