Structural Change and Growth Prospects in the Turkish Economy: A Demand-Side Decomposition Analysis

Over the past four decades, Turkey has undertaken a wide range of reforms that aim at the liberalisation of foreign trade, relaxation of the tariff system, deregulation of the financial system, and foreign investment regulations. Significant structural change experienced in the Turkish economy pursues access to the global market. This paper presents an empirical investigation of the growth prospects in both the Turkish economy and manufacturing industry during the whole period from 1995 to 2015 and the sub-periods of 1995–2001, 2001–2008, 2008–2015 and 1995–2015. Since investigating the dynamics of economic growth from the supply-side has been well documented in the literature, this work contributes to the literature on the sources of economic growth by providing a more up-to-date analysis from a demand-side perspective in the case of the Turkish economy. We make use of Chenery’s factor decomposition method that decomposes output growth into the growth of domestic demand, import-substitution, growth of export and intermediate demand. Conclusions revealed that the total output evolution of the whole economy and the manufacturing industry was mainly responsive to final domestic demand during the whole period of 1995–2015 and the sub-periods of 1995–2001, 2002–2008 and, 2008–2015. However, the nexus between the final domestic demand and the output evolution tended to weaken during the period from 2001 to 2008, but recovery took place again in the following periods. Moreover, the output growth that stemmed from export expansion was more prevailing in the manufacturing industry. To these ends, policies aimed at increasing income, demand, product diversity and reducing poverty should be applied to encourage the deepening of domestic demand. Furthermore, selective micro policies of industrial and technological upgrading and diversification should be applied to sustain output and export growth and, create a more resilient economy to external shocks.