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BRICs, the Next-11 and Turkey 2050: A Space Odyssey Ahmet O. Akarli Executive Director Economic Research Goldman Sachs International July 2007 BRICs, the Next-11 and Turkey BRICs and the N-11 Where does Turkey stand? 2050: A Space Odyssey 2 BRICs and the Next-11 Globalisation, the primary driving force BRICs have a potential to change the face of the World Brazil, Russia, India and China Size matters! The N-11 stand out with their solid long-term investment potential Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam Population matters! 3 14,000 12,000 US Japan Germany China UK France Italy Canada Brazil Russia India Korea Mexico Turkey Indonesia Iran Pakistan Nigeria Philippines Egypt Bangladesh Vietnam World in 2006 – G-7 Dominate $bn 2006 GDP ($bn 2006) 10,000 8,000 6,000 4,000 2,000 4 80000 60000 0 China US India Brazil Mexico Russia Indonesia Japan UK Germany Nigeria France Korea Turkey Vietnam Canada Philippines Italy Iran Egypt Pakistan Banglades World in 2050 – BRICs and the N-11 take over $bn 2006 70000 GDP 2050 50000 40000 30000 20000 10000 5 It is a new world! Italy Overtaking the G7: When BRICs' and N-11's GDP Would Exceed G7 France Germany Japan China US Canada Italy France UK Germany Japan India Canada Brazil Italy France Canada UK Italy Germany France UK Mexico Canada Italy France UK Japan Japan Germany Germany Japan Russia Canada Italy France UK Germany Japan Indonesia Canada Italy France Nigeria Canada Korea Italy Canada and Italy Turkey Italy Vietnam Canada Italy Philippines 00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 Note: Cars indicate w hen BRICs and N-11 US$GDP exceeds US$GDP in the G7. The N-11 countries not included in the chart do not overtake any of the G7 countries over the projection horizon. Source: GS 6 World in 2050 – BRICs and the N-11 grow richer 50% 45% BRICs/G-7 (GDP per capita) 40% 35% N-11/G-7 (GDP per Capita) 30% 25% 20% 15% 10% 5% 0% 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 7 Where does Turkey stand? Turkey stands out among the N-11 $400bn economy Ideal location Close proximity to European, MENA and Asian markets Emerging as an energy hub, at the cross-roads of Middle East, the Caspian and Europe Hugely favourable demographic dynamics 73m, overwhelmingly young population Disciplined and relatively skilled labour force Highly dynamic entrepreneurial class Well established market institutions Property rights, consolidated and well-enforced A solid regulatory framework Well-integrated into the global economy Through trade (EU Customs Union) Through the capital account (full currency convertibility and open capital account) 8 0 Internet Phones PCs Corruption Rule of Law Life Expectancy Political Stability Education Openness GES Index Investment 10 Government Deficit External Debt 12 Inflation A relatively favourable growth environment 2006 Turkey GES 2006 Developing GES 2006 BRICs GES 2006 N-11 GES 8 6 4 2 9 What are the assumptions? Standard neo-classical growth model (Cobb-Douglas) Growth function of population, investment and TFP Population growth Scaling down from 1.2% p.a. to 0% by 2050 Investment Rate 20.8% of GDP (Average of the previous 10 years) Convergence ratio 0.8% p.a. 2006-2020 1.5% p.a. 2021-2050 10 Could become a $4tr economy by 2050 4,500 4,000 $bn 2006 3,500 Turkey GDP ($bn 2006) 3,000 2,500 2,000 1,500 1,000 500 0 06 10 14 18 22 26 30 34 38 42 46 50 11 60000 0 China US India Brazil Mexico Russia Indonesia Japan UK Germany Nigeria France Korea Turkey Vietnam Canada Philippines Italy Iran Egypt Pakistan Banglades Turkey may overtake Italy and Canada 80000 $bn 2006 70000 GDP 2050 50000 40000 30000 20000 10000 12 Per Capita income may catch up rapidly with the G-7… 50,000 $bn 2006 60% 45,000 40,000 35,000 30,000 Turkey Per Capita Income ($ 2006) Turkey/G-7 Per Capita Income ($ 2006) 25,000 50% 40% 30% 20,000 20% 15,000 10,000 10% 5,000 0 0% 06 10 14 18 22 26 30 34 38 42 46 50 13 …but probably not as explosive as the BRICs 240% 220% 200% Turkey/BRICs Per Capita Income Turkey/N-11 Per Capita Income 180% 160% 140% 120% 100% 07 10 13 16 19 22 25 28 31 34 37 40 43 46 49 14 Challenges: The BoP Constraint % of GDP Gross Domestic Savings Egypt Philippines Pakistan Bangladesh Turkey Brazil Mexico India Vietnam Indonesia Nigeria Russia Korea Iran Gross Fixed Capital Formation China 45 40 35 30 25 20 15 10 5 0 15 10 9 8 7 6 5 4 3 2 1 0 Internet Phones PCs Corruption Rule of Law Political Stability Life Expectancy Education Openness Investment External Debt Government Deficit Inflation Challenges: TFP Growth % 2006 Turkey GES 2006 G7 GES 16 What is to be done? Increase the saving ratio Public Sector/Fiscal consolidation Address the tax-base problem Social Security Reform Streamline/Privatise inefficient SEEs Wide ranging administrative reforms Private Sector Technology and Know-How; Human Capital (Education and Health); Infrastructure Incentives to a number of key sectors, where Turkey has competitive advantage Consolidate the capital account Improve business climate Level playing field Stronger legal system Corporate governance 17 What if? A high growth scenario Population growth Unchanged Investment Rate Up by 1 std dev. to 24.5% of GDP form 20.8% (Average of the previous 10 years) Convergence ratio Up to 1.0% from 0.8% p.a. 2006-2020 Flat at 1.5% p.a. 2021-2050 18 2050: Turkey a Space Odyssey - $4.7tr economy? 5,000 4,500 $bn 2006 4,000 3,500 3,000 Turkey GDP Base Line Turkey GDP High Growth 2,500 2,000 1,500 1,000 500 0 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 19 80000 0 China US India Brazil Mexico Russia Indonesia Japan UK Germany Turkey H-Growth Nigeria France Korea Turkey Vietnam Canada Philippines Italy Iran Egypt Pakistan Bangladesh 2050: Turkey a Space Odyssey – Overtaking France? $bn (2006) 70000 60000 50000 40000 30000 20000 10000 20 2050: Turkey a Space Odyssey – More Prosperous? 60,000 $bn 2006 50,000 Turkey Per Capita Income Base Line 40,000 Turkey Per Capita Income High Growth 30,000 20,000 10,000 0 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 21 2050: Turkey a Space Odyssey – Catching up faster? 80% 70% 60% 2006 Turkey Base Line/G-7 Per Capita Income Turkey High Growth Per Capita Income 50% 40% 30% 20% 10% 0% 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 22 2050: Turkey a Space Odyssey – BRIC-like potential? 300% 280% 260% 240% Turkey Base Line/BRICs Per Capita Income Turkey High Growth/BRICs Per Capita Income Turkey Base Line/N-11 Per Capita Income Turkey High Growth/N-11 Per Capita Income 220% 200% 180% 160% 140% 120% 100% 07 10 13 16 19 22 25 28 31 34 37 40 43 46 49 23 Conclusions Turkey has immense long-term growth potential Already a sizeable economy, enjoying favourable demographics and location, as well as: A young, relatively skilled and highly disciplined labour force A dynamic local entrepreneurial class; and Reasonably well developed market economy and institutions But there are serious challenges to be overcome Market institutions need to be strengthened Further integration with the world economy will be the key to sustained high growth Has to do better on TFP – Education, health, infrastructure and technology And confidence matters – Policy processes need to be well-anchored 24 Copyright © 2007 by Goldman, Sachs & Co. 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