Economic Liberalisation, Internal Migration and Income Inequality: A Case Study for Turkey

Economic Liberalisation, Internal Migration and Income Inequality:

A Case Study for Turkey

UTIP- UNIDO is a global data set of University of Texas Inequality project (UTIP) based upon the UNIDO industrial statistics. Theil measure is computed for measuring the industrial pay-inequality. The figure below shows the variation in Theil measure for Turkey and Mexico from 1975 to 2000.

UTIP- UNIDO is a global data set of University of Texas Inequality project (UTIP) based upon the UNIDO industrial statistics. Theil measure is computed for measuring the industrial pay-inequality. The figure below shows the variation in Theil measure for Turkey and Mexico from 1975 to 2000.

 

Income inequality in the labor-abundant industrializing countries has not decreased in the recent decades in contrast with the predictions of the Stolper-Samuelson theorem (World Bank Development Indicators). The Stolper- Samuelson theorem suggests that as countries start trading with each other, income inequality decreases in the industrializing countries as production moves towards unskilled-labor intensive products, increasing the demand for unskilled labor.  This paper seeks to illustrate that the supply-side determinants of labor markets, along with labor market policies have a significant impact on income inequality. Taking Turkey as a case study, this paper presents a qualitative analysis on sources of income inequality in the transition period to open-economy.

The trade literature has commonly focused on relaxing the identical technologies assumption [1] in order to test the demand side determinants of wage inequality both in developed and developing countries. Feenstra and Hanson have proved in their influential work that the relative wages of skilled workers in South (labor-abundant industrializing country) rises due to the increase in the capital stock in South relative to that of capital-abundant North (Feenstra and Hanson, 1). The Stolper-Samuelson projection for the relative demand of skilled labor in South stands out against the Feenstra-Hanson projection for the latter. Zu and Trefler report that Southern technological catch-up alters the export portfolio towards the South’s most skill intensive goods, which causes wage inequality to rise (Zu and Trefler, 42). Meschi and Vivarelli confirm the results of some other investigations, which fail to predict a strong and significant relationship between trade and within-country income inequality (Meschi and Vivarelli, 292). Given that the effect of trade liberalization on demand for unskilled labor is rather unclear, further attention must be paid to the country-specific labor market conditions and supply-side determinants of labor markets to address the sources of income inequality.

Since 1980, Washington consensus has shaped the line of economic policy making in Turkey. The major international institutions such as the World Bank and the IMF have promoted the neo-liberal economic policies for the industrializing economies such as Turkey. The economic course of action put into practice in 1980 was not only a stabilization package but also aimed at changing the pattern of industrialization by putting a particular emphasis on export expansion (Guncavdi and Kucukcifcti, 82). The accession to the European Customs Union in the 1990’s, has led to a boom in the manufacturing exports of Turkey. The share of European Union countries in Turkish exports was approximately 57% in 2003 (Ince and Demir, 168).  Turkey is a labor abundant country vis-à-vis her major trade partner, the EU. Since Turkey is an emerging country, where the factors of production are assumed not to be specific to the sectors, the returns for labor, more precisely for unskilled labor should have increased with the trade liberalization according to the Stolper-Samuelson theory. Nevertheless, in contrast with this theory, transition to an open economy has not led to higher-wages. Onaran claims that “the adjustment of wages and changes in functional income distribution in favor of capital has played a central role in relieving the pressures over profits during Turkey’s integration to the global economy” (Onaran, 243). Goldberg and Pavcnik add that factors other than trade liberalization such as capital market liberalization, which have induced exchange rate instability have become major aspects of emerging countries’ integration in world markets (Goldberg and Pavcnik, 4).

The economic program of the 1980’s intended to gather the productive resources towards those sectors in which Turkey could have a comparative advantage in the international markets. Labor costs were considered as the key difficulty in the face of export promotion policies. With the help of military rule from 1980 to 1983, real wages were suppressed along with the ban on trade unions (Guncavdi and Kucukciftci, 76). The working class that has been left short of the organizational engagement in politics has carried the burden of transition to an open-economy. Additionally, the integration of the labor-abundant industrializing countries such as China, India, and the former communist states of Eastern Europe with the global economy has put more downward pressure on labor costs in Turkey in the recent decades. The rising competition for the international market of low-skilled products is likely to contribute to the falling earnings of unskilled labor in Turkey as a result of further integration of the previously secluded economies.

Washington Consensus has recommended flexible labor markets for industrializing countries; thus the employment protection legislation (EPL) was relaxed in countries such as Turkey (Sakallioglu, and Yeldan, 500). The employment protection legislation (EPL) strengthens the bargaining power of workers, which results in higher wages than the market clearing wages. Guscina reports that for a 1 percentage point increase in the employment protection index, labor’s compensation share increases by 0.02 to 0.04 per cent, which translates into a decline in the income inequality (Guscina, 16). On the other hand, it is often argued that the strict EPL may encourage firms to operate in the informal sector. Despite the flexibility of the EPL in Turkey, the informal sector accounts for an important share in the overall economy (Taymaz and Ozler, 224). In the Turkish context flexible labor markets have led to higher working hours and to the rise of the informal sector. It is also noteworthy that the working population ratio [2] has been steadily rising since 1980 (World Bank). High rates of economic growth and low rates of inflation after 2002 have not yet translated into job creation, and unemployment has remained as the most prominent problem in Turkey in the last decade. Flexible labour markets, along with the pattern of jobless (consumption-led) growth might also contribute to persistent income inequality.

Pamuk asserts that since 1980, disparities between incomes of unskilled and skilled labor have increased, and that distribution within the urban sector dominates the debates of income distribution (Pamuk, 295). The aims of new economic policies of 1980 were to create a market-based economy in the long term, and the policy package included the elimination of various government subsidies (Pamuk, 286). The elimination of agricultural subsidies has reduced the real incomes of agricultural producers. Turkey has discontinued supporting small-scale agriculture, which led to the process of de-peasantation and de-agrarianization.  Zulkuf Aydin defines de-agrarianization “as a long-term process of occupational adjustment, income-earning reorientation, social identification and spatial relocation of rural dwellers away from strictly agricultural-based modes of livelihood (Aydin, 223)”. A rising income inequality between urban and rural sectors (IIE)[3] is most likely to be one of the other reasons that create an incentive for rural population to migrate to the urban centers. According to the calculations based on the data provided by the World Bank that can be found in the appendix, the average IIE between 1975 and 1980 was 2.79 and jumped to an average of 3.60 in the 1980s[4].

 To what extent the trade liberalization has affected the growth of the urban sector is open to discussion. In order to link trade with the internal migration directly, data on the demand schedule for the unskilled labor in the urban markets for the traded goods must be scrutinized. Internal migration is not solely an outcome of neo-liberal agenda. There are country-fixed political factors that affect the pace and nature of internal migration. In the Turkish case, Kurdish forced migration due to war on terror has caused Kurdish villagers to leave their occupations in the countryside to become unskilled laborers in the urban sector. What this paper seeks to investigate, however, is not the sources of internal migration. Rather, it aims to show that internal migration rates in Turkey and in the other newly industrialized countries have increased in the recent decades.

In Turkey the rural population as a percentage of total population has gone down from 56.2 in 1980 to 30.9 in 2009 (World Bank). Agriculture, the value added as a percentage of the GDP decreased to 9.3 in 2009 (World Bank). The urban population as a percentage of the total population has jumped from 43.8 in 1980 to 59.2 in 1990 and to 69.1 in 2009 (World Bank).  This migration pattern has clearly increased the relative supply of unskilled labor in urban areas, which has induced downward pressure on wages of unskilled labor in accordance with the traditional supply-demand equilibrium theory. Supply-side determinants of labor markets such as internal migration and human capital must be given further attention in industrializing countries in order to address income inequality within the urban sector.

In conclusion, internal migration plays an important role on overall income inequality. In the Turkish context, trade liberalization was accompanied by economic liberalization policies that required deregulation of urban labor market and an ending to subsidies in the agricultural sector. These deregulatory policies have reduced the bargaining power of urban working class, which in turn has contributed to the persistent income inequality.

A rise in the urban population induced by the migration of relatively uneducated masses from the rural areas has translated into an increase in the relative supply of unskilled labor in the urban labor markets. Keeping in mind that neo-liberal economic policies of the last three decades have caused structural changes in the entire economy in Turkey, the supply-side consequences of such changes have to be taken into consideration in order to draw conclusions about the causal relationship between economic openness and income inequality.

Anıl Doğan, Executive Assistant, Centre for Policy and Research on Turkey (ResearchTurkey)

Please cite this publication as follows:

Doğan, Anıl (February, 2014), “Economic Liberalisation, Internal Migration and Income Inequality:  A Case Study for Turkey”, Vol. III, Issue 2, pp.35-43, Centre for Policy and Research on Turkey (ResearchTurkey), London, Research Turkey. (http://researchturkey.org/?p=4818)

REFERENCES

Aydin, Zulkuf.  “Chapter 11: The De-agrarianization and De-peasantation: Dilemmas of Neo-Liberal structuring in Turkish Agriculture” in (L) Öniş and Şenses (eds.), Turkey and the Global Economy, (2009): 223- 242. LSE Moodle Resources. 1 February 2011.

Cizre-Sakallioglu, Umit, and Erinc Yeldan. “Politics, Society and Financial Liberalization: Turkey in the 1990s.” Development and Change 31 (2000):  481- 508.

Feenstra, Robert C., and Gordon H. Hanson. “Foreign Investment, Outsourcing Relative Wages” National Bureau of Economic Research (1995).

Guncavdi, Oner, and Suat Kucukciftci. “Foreign Trade and Factor Intensity in an Open Developing Country: An Input-Output Analysis for Turkey.”

Russia and East European Finance and Trade 37 (2001): 75-88.

Guscina, Anastacia. “Effects of Globalization on Labor’s Share in National Income.” IMF Working Paper (December, 2006): 1-14.

Ince, Meltem, and Hulusi Demir. “Comparative Advantage and Competitiveness: Case of Turkey and Germany.” Review of Social, Economic, & Business  Studies 5/6 (Fall 2004/2005): 149-71.

Meschi, E., and M. Vivarelli. “Trade and Income Inequality in Developing Countries” World Development 37.2 (2009): 287-302. Print.

Onaran, Ozlem. “Crises and post-crisis Adjustment in Turkey, Implications for Labor”, in (L) Öniş and Şenses (eds.), Turkey and the Global Economy, (2009): 243-261. LSE Moodle Resources. 1 March 2011

Pamuk, Şevket. “Economic change in twentieth-century Turkey: is the glass more than half full?.” Turkey in the Modern World. Ed. Reşat Kasaba. Cambridge University Press, 2008. Cambridge Histories Online. Cambridge University Press. 22 August 2011 DOI:10.1017/CHOL9780521620963.011

Taymaz, Erol and Özler, Sule. “Labor Market Policies and EU Accession: Problems and Prospects for Turkey” in (L) B. M. Hoekman and S. Togan (eds.), Turkey, Economic Reform and Accession to the EU, Washington DC, USA: World Bank and Centre for Economic Policy Research Co-publication, 2005,311-30.

Zhu, S., and D. Trefler. “Trade and inequality in developing countries: a general Equilibrium analysis.” Journal of International Economics 65 (2005): 21-48

World Bank. (2011). Data retrieved June, 2011, From Work Bank Development Indicators Online (WDI) database.

APPENDIX:

Table 1: Calculations for IIE

app1

Notes for Figure 1: Internal migration makes the relative supply of skilled labor to shift to the left. RDs stands for the relative demand for skilled labor. The intersection of RSs’ and RDs is the new equilibrium.  A similar diagram for a model with two different factor endowments: capital and labor can be redrawn by capital/ labor ratio x-axis and rental/wage ratio on the y-axis.

Notes for Figure 1: Internal migration makes the relative supply of skilled labor to shift to the left. RDs stands for the relative demand for skilled labor. The intersection of RSs’ and RDs is the new equilibrium. A similar diagram for a model with two different factor endowments: capital and labor can be redrawn by capital/ labor ratio x-axis and rental/wage ratio on the y-axis.

UTIP- UNIDO is a global data set of University of Texas Inequality project (UTIP) based upon the UNIDO industrial statistics. Theil measure is computed for measuring the industrial pay-inequality. The figure below shows the variation in Theil measure for Turkey and Mexico from 1975 to 2000.

Figure 2: UTIP- UNIDO Wage Inequality Theil Measure For Turkey and Mexico

Figure 2: UTIP- UNIDO Wage Inequality Theil Measure For Turkey and Mexico

  


FOOTNOTES

[1] The author refers to one of the basic assumptions of the Heckscher- Ohlin model. The identical technologies assumption relies on the proposition that trading countries have identical technologies of production, which allows trade to equalize factor prices.

[2] The share of the working age in the total population is the ratio of the adult population aged between 15 and 64 divided by the total population.

[3] IIE is a proxy for the inter-income inequality between urban and rural areas that depend on the author’s calculations.

[4] Pamuk says that inter-income inequalities between urban and rural sectors have been decreasing recently due to the rapid contraction of agricultural labor force (Pamuk, 295).

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