10.58867/ZVXY8807
Türkiye is at a crossroad. Should the country strive to break free from the middle-income trap, or accept the league of low-income countries and align itself accordingly? The emphasis is on the former. However, how this will be achieved remains unclear.
South Korea is one of the leading examples of countries that have successfully escaped the middle-income trap. It is one of the few nations that transitioned from a low-income to a high-income economy. Notably, South Korea is the only country that transformed from a recipient of aid from the Development Assistance Committee (DAC) of the OECD to a donor to the DAC.
It is often suggested that Türkiye, with a similar population size and conditions to South Korea, could also escape the middle-income trap. Both undergone a nearly identical process, with the primary difference being their experience with Japanese colonization, while Türkiye have not been subjected to another regime and carry the legacy of a vast empire. Although it is sometimes said that colonization brings certain gains, economists argue that only primary education was invested in during this period (with only 47 percent of children enrolled in school), and much of the infrastructure investments were destroyed during the Korean War. Moreover, like Türkiye, South Korea lacks significant natural resources, with most of them located in North Korea. These are similarities between our situations.
Today, structural reforms are said to be necessary for our country to escape the middle-income trap and for the economy to recover. But what structural reforms? Are reforms like judicial independence, the rule of law, transparency in institutions, and procurement laws sufficient or even necessary? Will the arrival of foreign investors bring development and help us escape the middle-income trap, or will it only improve certain parameters, as Türkiye saw in the process until the 2010s?
If we begin with America in the context of development, the result can be seen in Latin American countries. The Washington Consensus was a prescription for them. It was defined by principles like fiscal discipline, protection of private property, reduction of public spending, privatization of public enterprises, tax reform, trade liberalization, financial reform, the removal of barriers to international trade, the liberalization of capital movements, free interest rates, competitive exchange rate policies, and a strong intellectual property rights regime. According to Rodrik, Stiglitz, and Acemoglu (due to weak institutions), this approach failed. Glaeser, on the other hand, believes that economic growth brings about democratic institutions. Rodrik points out that Latin American countries implemented all the recommendations of the Washington Consensus simultaneously, while East Asian countries implemented them gradually. Additionally, East Asian countries applied a National Innovation System and a Science and Technology Policy that differed from those in Latin America.
Today, Latin America is grappling with various socioeconomic and security issues. Economic difficulties and high inflation have left people struggling, while crime rates and drug trafficking have risen. Borders and streets have become unsafe, with criminals roaming freely, and the state is plagued by corruption and mafia gangs gaining power. Inadequate education and increasing illiteracy have led many skilled people to leave the country. Problems like unplanned urbanization, the formation of ghettos, and stray dog issues have also worsened. Death rates from natural disasters are high, and street food and water infrastructure are left unregulated. With little interest from investors, illegal arms proliferation has increased. The authority’s power is only sufficient to suppress opposition.
Now, let’s look at South Korea. According to South Korean economist Prof. Keun Lee, over the past few decades, South Korea has successfully transitioned from an authoritarian regime and a semi-closed, state-centered economy to a strong democracy and a highly open market economy. South Korea achieved this transformation not by blindly applying the Washington Consensus but by progressing slowly and creating calculated detours when necessary. Lee argues that the failure of the Washington Consensus was not due to a lack of institutions but rather the absence of technology policies and higher education reform.
“In the 1950s and 1960s, while South Korea survived on food aid, it prioritized feeding its people before industrialization. In 1961, the military government implemented a dual-price policy, buying grains from farmers at high prices and selling them to consumers at lower prices. During this process, high-yield rice varieties were developed, and banks were nationalized. South Korea approached financial and trade liberalization cautiously, focusing on increasing domestic savings to support industrialization.”
“South Korean banks were later privatized after the government spent about twenty years promoting investment with low-interest policies and directing savings toward increasing the capacity of the manufacturing sector. This process contributed so strongly to income growth that, despite suppressed interest rates, the domestic savings rate rose from 9% of GDP in the early 1960s to around 30% by the mid-1980s.”
“South Korea also adopted a cautious approach to trade liberalization. When a country liberalizes trade, local firms must be able to compete with foreign companies; otherwise, foreign companies could establish monopolies or destroy the local industrial infrastructure if the government doesn't take protective measures. In South Korea, this protection came in the form of very high tariffs on consumer goods, allowing future export industries to develop without excessive foreign competition. Protected local firms used monopoly profits to finance investments, as the government’s protection measures were tied to export performance, subjecting firms to the discipline of global export markets. Meanwhile, capital goods that South Korea had to import were subjected to very low tariffs.”
“The success story of South Korea was shaped by simultaneous investments in human capital and an export-oriented growth strategy under an authoritarian regime. The country also applied import substitution policies and imposed high tariffs to protect against foreign competition. These strategies contributed to South Korea’s development, leading to a democratic and open economy.”
Was it Democracy that Came First, or Development that brought Democracy?
South Korea caught up, but how? Catch-up, according to the Schumpeterian school, is defined as narrowing the gap between developing and developed countries or following developed countries through imitation. Lee describes it as "If you want to be like developed countries, be different." Long-term success comes from taking a path different from that of developed countries. This is likened to the Zeno Paradox: if you aim for the place where the turtle is, you will never catch it, as the turtle will have moved ahead.
How will Türkiye catch up? First, we need to identify the problem. In our country and other nations caught in the middle-income trap, the private sector is generally dominated by conglomerates and SMEs. According to Lee, conglomerates are structures that have emerged out of necessity over time, with their most notable feature being their role in sharing the domestic market. These structures usually rely on foreign partners for their R&D needs and have little appetite for R&D, which is often superficial. Their diversification into multiple business lines stems from their need for stability. A new foreign company entering the domestic market typically partners with these conglomerates, leveraging the conglomerate’s other business lines to create a leverage effect or spread risk. They often work closely with the government.
SMEs, on the other hand, produce low-value-added goods and are seen merely as job creators. For example, 99.8% of Türkiye’s enterprises are SMEs, and they employ 76.7% of the workforce.
When it comes to universities, the other critical player in development, according to Lee, the disconnect between universities and industry is apparent in these countries. In an industry with little need for R&D, university-industry collaboration inevitably falls short. SMEs' lack of interest in low-value-added or non-popular R&D does not fuel universities' appetite. This leads to universities becoming inward-focused and gravitating toward fundamental or popular topics. Academics with PhDs from abroad or those following the popular topics of developed countries inevitably continue to work around these subjects, and the scientific output of the country does not contribute to the national industry. From the courses taught to the research conducted, the output of universities barely touches industry. Universities that cannot create added value are seen by the state and industry as merely training grounds for employment. As R&D resources dwindle, teaching loads and student numbers for faculty increase, and universities begin to resemble vocational schools.
This is the central dilemma for countries in the middle-income trap: they cannot create high-value-added products or companies. Today, this is reflected in our country by the decrease in investment in R&D, the dominance of low-value-added sectors in industry, the lack of skilled labor, the onset of brain drain, the decline of transparency, the rise of bureaucratic obstacles, and currency fluctuations.
Even if improvements are made in these areas, the country's chances of escaping the middle-income trap are slim unless the university-industry collaboration dilemma is broken. If you increase R&D incentives, this industrial structure cannot utilize them; if you increase research budgets, the outputs go toward topics of developed countries; if you find high-value-added technology through research, the conglomerate structure cannot commercialize it, and SMEs lack the capacity. If you make institutional structures more transparent, foreign monopolies take over, and the domestic economy disappears. If you base it on low-interest rates, as in South Korea, you cannot find SMEs and conglomerates that will use it for exports because they all rely on import-based exports, and the currency will collapse.
In light of these findings, if a high-tech-driven development goal is to be pursued, it is essential to address two missing elements and one barrier, as Lee describes. The first missing element is the absence of large companies that need R&D. If there were such large companies, they would collaborate with universities, acquire startups, and drive the entrepreneurship cycle forward. The second missing element is the lack of a trained human pool in the technology focus area. The barrier is the intellectual property regime implemented by developed countries in areas where you enter late.
For this reason, according to Lee, a side path should be followed. One possibility is to select a late-entered field and focus on small sub-areas for catch-up. For example, if you enter biotechnology, you should not start with the health sector, but with agriculture, where the intellectual property regime is weaker. Likewise, if you enter digital technologies, you should focus on content rather than hardware, and instead of entering the energy sector directly, you should focus on industries like nuclear fusion or renewable energy. If you enter the field of semiconductors, it should be niche products.
This macro plan needs to be supported on a micro scale by America’s entrepreneurial economy. The actors in this economy are venture capitalists, risk investors, and entrepreneurs. This trio will establish the necessary cycle to launch large companies, create startups that big companies need, transform scientific outputs from universities into innovations, and utilize the human resources developed by universities. At the same time, it will create synergy through collaboration with developed countries and openness to developing countries.
To form venture capital, it is necessary to encourage the transfer of profits from old capital to entrepreneurial capital. Building a venture investor ecosystem requires patience, effort, and numerous mistakes. The education system must support this cycle from primary education onwards to open up and develop entrepreneurs. For this, the trio mechanism needs to advance through subjective decision-making mechanisms and be encouraged through focused incentive mechanisms. Beyond this, the tax exemption of the companies formed at this stage, the strength of their equity, and support through investments should also be considered. This process will enable the emergence of large companies with a monopolistic vision. Companies that show promise and potential to cross national borders should be supported to the fullest, as evidenced by sectors such as unmanned vehicles, digital games, and e-commerce. Universities should be given autonomy to keep up with this momentum and should be given freedom in curriculum and research topics. The state should indirectly control universities through funding for R&D and contributions to students’ free education.
And last, speed. The Singapore model is crucial for rapid industrialization. In a short period, Singapore renewed its industrial infrastructure and established modern industrial parks, achieving remarkable development milestones. The Jurong region, under the visionary leadership of Lee Kuan Yew, became one of the world’s largest petrochemical hubs. Despite having no domestic oil reserves, Singapore emerged as one of the top three global oil trading centers and the primary price-setting hub for petroleum products in Asia, including China. This transformation was instrumental in elevating Singapore into a high-income economy.
Speed, focus, and adaptability will be key. By integrating South Korea’s systematic approach to foster America’s entrepreneurial spirit plus Singapore’s rapid industrialization, Turkey can chart a unique path to overcome the middle-income trap and achieve sustainable economic development.