metadata: authors: 0: author: Atamanov,Aziz
1: author: Azevedo,Joao Pedro Wagner De
count: Türkiye
docna: 0: docna: Pathways to the middle class in Turkey : how
            have reducing poverty and boosting shared prosperity helped?
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Labor Markets,Gender and Development,Economic Growth,Inequality,Rural Labor Markets
teratopic: Poverty Reduction,Macroeconomics and Economic Growth
abstracts: cdata!: Turkey's poverty reduction
            performance in the 2000s has been remarkably consistent.
            Extreme and moderate poverty have fallen considerably since
            2003. Between 2002 and 2011, extreme poverty fell from 13
            percent to 5 percent, while moderate poverty halved from 44
            percent to 22 percent (respectively, defined using the World
            Bank's Europe and Central Asia regional poverty lines
            of 2.5 and 5 USD/PPP). Most of this poverty reduction (89
            percent) has been driven by growth, a performance consistent
            with most countries in Europe and Central Asia. This is
            substantially different form the recent performance of other
            regions, such as Latin America, where redistribution
            contributed to poverty reduction almost four times more than
            in Turkey. Turkey has also achieved sustained consumption
            growth of the bottom 40 percent of the population, even
            during the years of the world recession. Turkey's
            performance in poverty reduction and increased shared
            prosperity has been complemented by the systematic expansion
            of the middle class by 20 percentage points. This paper
            analyzes the main drivers of poverty reduction, shared
            prosperity, and changes in inequality in Turkey from 2002 to
            2011. The analysis shows that labor markets, demographics,
            pensions, and social assistance have played a critical role
            in this process. It further explores some of the mechanisms
            that have facilitated these changes.
geo_reg_key: 517208,517198,517190,119229,517191
alt_title: 0: alt_title: Turkiye'de orta sinifa giden yollar
            : yoksullugun azaltilmasi ve paylasilan refahin arttirilmasi
            nasil yardimci oldu?
repnme: repnme: Pathways to the middle class in Turkey :
            how have reducing poverty and boosting shared prosperity helped?
display_title: Pathways to the middle class in
            Turkey : how have reducing poverty and boosting shared
            prosperity helped
listing_relative_url: /research/2014/04/19354560/pathways-middle-class-turkey-reducing-poverty-boosting-shared-prosperity-helped
topicv3: Economic Growth m1326241 471,Labor Markets m1326488 855,Poverty m1326687 695,Gender m1327621 615,Labor Earnings m1504041 2738
publishtoextweb_dt: 2014-04-01T00:00:00Z
historic_topic: Poverty Reduction,Macroeconomics and Economic Growth
no_of_pages: 46
author_keys: 0: author_key: 1182029
1: author_key: 675142
fullavailablein: node_id: 19354560
model_extractions: WPS6834 Policy Research Working Paper 6834 Pathways to the Middle Class in Turkey How Have Reducing Poverty and Boosting Shared Prosperity Helped?

_Joao Pedro Azevedo Aziz Atamanov_ The World Bank Europe and Central Asia Region Poverty Reduction and Economic Management Team April 2014
Policy Research Working Paper 6834

# **Abstract**

Turkey’s poverty reduction performance in the 2000s has been remarkably consistent. Extreme and moderate poverty have fallen considerably since 2003. Between 2002 and 2011, extreme poverty fell from 13 percent to 5 percent, while moderate poverty halved from 44 percent to 22 percent (respectively, defined using the World Bank’s Europe and Central Asia regional poverty lines of 2.5 and 5 USD/PPP). Most of this poverty reduction (89 percent) has been driven by growth, a performance consistent with most countries in Europe and Central Asia. This is substantially different form the recent performance of other regions, such as Latin America, where redistribution contributed to poverty reduction almost four times more than in Turkey. Turkey has also achieved sustained consumption growth of the bottom 40 percent of the population, even during the years of the world recession. Turkey’s performance in poverty reduction and increased shared prosperity has been complemented by the systematic expansion of the middle class by 20 percentage points. This paper analyzes the main drivers of poverty reduction, shared prosperity, and changes in inequality in Turkey from 2002 to 2011. The analysis shows that labor markets, demographics, pensions, and social assistance have played a critical role in this process. It further explores some of the mechanisms that have facilitated these changes.

This paper is a product of the Poverty Reduction and Economic Management Team, Europe and Central Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank. org. The authors may be contacted at jazevedo@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# _Pathways to the Middle Class in Turkey: How Have Reducing Poverty and Boosting Shared Prosperity Helped?_<sup>_*_</sup>

_Joao Pedro Azevedo_<sup>_+_</sup> _and Aziz Atamanov_<sup>_+_</sup> JEL: D6; I3; J11; J3; J6 Keywords: Middle Class; Poverty; Inequality: Shared Prosperity; Economic Mobility; Decompositions
# Acknowledgement and Disclaimer

The authors’ benefitted from comments from Martin Raiser, Carolina Sanchez-Paramo, Marina Wes, Kamer Ozdemir, William Wiseman, Jose Guilherme Reis, Stephen Karam and Çevdet Cagdas. The author’s would like to thank the comments received from the participants of the ECA-Poverty Seminar in October 2013, the Turkey Country Team seminar in October 2013, and the Turkey Flagship Workshop held in November 2013, and participants from discussions with TUIK, the Ministry of Development and Treasury. Finally we thank Kimberly Bolch for editing the paper.

The numbers presented in this brief are based on a regional data harmonization effort known as ECAPOV that increases cross-country comparability of selected findings from official household surveys. For that reason, the numbers discussed here may be different from official statistics reported by governments and national offices of statistics. Such differences should not be interpreted in any way as a claim of methodological superiority, as both sets of numbers serve the complementary objectives, namely, regional comparability and the best possible representation of the facts of individual countries. The usual disclaimer applies.

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# **Outline**

|Introduction.................................................................................................................................... 6|
|---|
|I.<br>Growth, poverty and shared prosperity............................................................................. 7|
|II. Intra-generational (class) mobility in Turkey..................................................................... 9|
|III.<br>Determinants of poverty reduction and intra-generational mobility......................... 15|
|_3.1_<br>_Drivers of changes in poverty, inequality and intra-generational mobility_....................... 15|
|_3.2_<br>_Mechanisms of poverty reduction in the labor market_........................................................ 19|
|IV.<br>Going forward.................................................................................................................. 24|
|References.................................................................................................................................. 27|
|Annexes....................................................................................................................................... 29|
|_A1. Other figures and tables_............................................................................................................... 29|
|_A2. Methodology to create “synthetic panel” to estimate intra-generational mobility_................ 37|
|_A.3 Methodology for income poverty decomposition_...................................................................... 38|
|_A.4 Welfare aggregates_....................................................................................................................... 44|
|**Figures**|
|Figure 1.1: GDP per capita growth in selected countries ............................................................... 7|
|Figure 1.2: Shared prosperity indicator for selected countries ...................................................... 8|
|Figure 1.3: Poverty and inequality in Turkey, 2002-2011 ............................................................... 9|
|Figure 2.1: Poor, vulnerable and middle class in Turkey during 2002-2011, %............................ 10|
|Figure 2.2: Churning in the bottom 40 percent of the population ............................................... 13|
|Figure 2.3: Average consumption per capita in different groups in the bottom 40 percent of the<br>population, upper bound .............................................................................................................. 13|
|Figure 2.4: Share of the middle class and GDP per capita in PPP in selected countries, circa 1993<br>and 2010 ....................................................................................................................................... 14|
|Figure 3.1: Income poverty decomposition, 2002-2011 .............................................................. 15|
|Figure 3.2: Income Gini decomposition, 2002-2011 .................................................................... 15|
|Figure 3.3: Sources of welfare improvement across urban and rural areas in 2002-2011, % ..... 16<br>Figure 3.4a: Sources of welfare improvement across classes in 2002-2011, % .......................... 17|

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|Figure 3.4b: Sources of welfare improvement for the bottom 40 percent of the population in<br>2002-2011, % ................................................................................................................................ 17|
|---|
|Figure 3.5: Income poverty decomposition by gender, 2002-2011 ............................................. 18|
|Figure 3.6: Income Gini decomposition by gender, 2002-2011 ................................................... 18|
|Figure 3.7: Income poverty decomposition by gender and public/private wages, 2002-2011 ... 18|
|Figure 3.8: Income Gini decomposition by gender and public/private wages, 2002-2011 ......... 18|
|Figure 3.9: Employment creation and economic growth by sectors, % ....................................... 19|
|Figure 3.10: Growth rates in minimum wages across Europe, 2002-2011 .................................. 20|
|Figure 3.11: Structure of employment +15, % .............................................................................. 21|
|Figure 3.12: Share of workers with non-zero labor earnings, % .................................................. 21|
|Figure 3.13: Female labor force participation and GDP per capita across countries in 2011, % . 22|
|Figure 3.14: Returns to experience for females, 2002-2011 ........................................................ 22|
|Figure 3.15: Returns to experience for males, 2002-2011 ........................................................... 22|
|Figure 3.16: Returns to education for females, 2002-2011 .......................................................... 23|
|Figure 3.17: Returns to education for males, 2002-2011 ............................................................. 23|
|Figure 4.1: Benchmarking performance of Turkey in poverty reduction based on 1.25, 2.50 and|
|5 USD/PPP 2005 poverty line in 2008-2011, % ............................................................................. 24|
|Figure 4.2: Access to financial institutions in Turkey, ECA and Euro area countries, % of|
|population +15 .............................................................................................................................. 25|
|Figure 4.3: Access to financial institutions in Turkey across groups with different level of<br>income, % of population +15 ........................................................................................................ 25|
|Figure A1: Shared prosperity indicator for different welfare aggregates and years, % ............... 29|
|Figure A2: Income per capita Gini for Turkey and selected EU and LAC countries ..................... 29|
|Figure A3: Poor, vulnerable and middle class in Turkey during 2002-2011 based on income per|
|capita, % ........................................................................................................................................ 31|
|Figure A4: Income and consumption per capita poverty in Turkey, % ........................................ 32|
|Figure A.5: Income poverty decomposition by years ................................................................... 34|
|Figure A.6: Income Gini decomposition by years ......................................................................... 34|
|Figure A.7: Share of married individuals across gender, age groups and years ........................... 35|
|Figure A.8: Income poverty decomposition by size of pensions and the share of pensioners .... 35|
|Figure A.9: Estimates and projections of total dependency ratios, 1950-2065 .......................... 36|

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Figure A.10: Minimum wages as proportion of the mean value of average gross monthly earnings, 2012 ............................................................................................................................... 37

# **Tables**

|Table 2.1: Mobility matrix, 2002-2011, upper bound.................................................................. 11|
|---|
|Table 2.2: Mobility matrix for the bottom 40 and top 60 percent of the population ................. 12|
|Table A.1: Summary of the distribution comparison for all years between 2002-2011 .............. 30|
|Table A.2: Consumption per capita model .................................................................................. 30|
|Table A.3: Mobility matrix, 2002-2011, lower bound .................................................................. 30|
|Table A.4a: Mobility matrix for urban areas, 2002-2011, upper bound ..................................... 31|
|Table A.4b: Mobility matrix for rural areas, 2002-2011, upper bound ....................................... 31|
|Table A.5. Likelihood of being poor, vulnerable or in middle class by individual characteristics in<br>2002 and 2011, % .......................................................................................................................... 32|
|Table A.6: Profile of population in the bottom 40 percent for selected years ........................... 33|
|Table A.7: Profile of households in the bottom 40 percent for selected years ........................... 34|
|Table A.8: Income components .................................................................................................... 44|
|Box 1. Churning in the bottom 40 percent of the population ...................................................... 12|
|Box 2. Illustrative diagram of proposed decomposition of income per capita ........................... 39|
|Box 3. Barros et al. (2006) Methodology ...................................................................................... 41|
|Box 4. Proposed Methodology along One Possible Path ............................................................. 42|

5
# **Introduction**

1. **Turkey is classified as an upper middle income country, and has a Gross National Income per capita of $18,190 USD PPP (2012)** . With a Gross Domestic Product of 789 billion USD (2012), it is the 17<sup>th</sup> largest economy in the world.  Turkey is a member of the Organization for Economic Development and Cooperation (OECD) and an EU accession candidate country. After a volatile period in the 1990s and the economic crisis in 2001, Turkey’s economy demonstrated steady growth and modest inflation. Since the global economic crisis, Turkey has recorded among the strongest recoveries in the ECA region, even though growth has recently slowed significantly as concerns over external imbalances have intensified.

2. **High economic growth translated into remarkably consistent poverty reduction.** Between 2002 and 2011, extreme poverty fell from 13% to 5% while moderate poverty fell from 44% to 22% (respectively defined using the World Bank’s Europe and Central Asia regional poverty lines of 2.5 and 5 USD/PPP).<sup>1</sup> This systematic increase in welfare led to a significant increase of the middle class in Turkey during 2002-2011.

3. **Turkey’s economic performance and social gains have attracted a lot of attention from other countries, in particular countries in the Middle East and North Africa.** This raises demand for analytical work explaining the factors behind this success story. There are several important works published on the labor market and jobs, public finance, saving and economic growth in Turkey (Grun et al, 2013; World Bank, 2010, World Bank, 2011; World Bank, 2013a; World Bank, forthcoming), but analytical studies about poverty reduction, shared prosperity and intra-generational mobility are rather limited. There was a comprehensive poverty assessment conducted by the World Bank (2005) and a study on how the economic crisis affected the welfare of families in Turkey by the World Bank (2013a). There is a study by Şeker and Dayıoğlu (2014) which looks at mobility in and out of poverty during 2005-2008. Şeker and Jenkins (2013) analyzed poverty trends in Turkey during 2003-2011 and decomposed the changes into growth and redistribution components. Nevertheless, to the best of our knowledge, there are no comprehensive studies of the main drivers of poverty reduction, shared prosperity and inequality in Turkey during the last decade.

4. **This paper contributes to filling this knowledge gap and presents stylized facts on poverty reduction, shared prosperity and intra-generational mobility in Turkey from 2002 to 2011** . Using different econometric and statistical techniques, the drivers behind these changes are quantified in order to identify which factors were responsible for poverty reduction and intra-generational mobility during this period. Some of the mechanisms behind the main drivers of poverty reduction are also explored in this paper.

5. **The paper is structured as follows:** (i) explanation of the interrelationships between growth, poverty and shared prosperity; (ii) stylized facts about intra-generational class mobility; (iii) exploration

> 1 This trend is also consistent with national official poverty reduction statistics produced by the Turkish Statistical Institute (TUIK) and published on their website although TUIK uses a different welfare aggregate and hence the level of underlying trends is not the same.

6
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Notes: Welfare aggregate is consumption per capita including health, durables and rent. Thresholds used are 5 and 10 USD/PPP 2005 <u>per day.</u>

|**Table 2.1: Mobility matrix**|**, 2002-2011, u**<br>**Origin**|**pper bo**|**und**<br>**Percentage**|**moving to 2011**||
|---|---|---|---|---|---|
||**(In 2002)**|**Poor**|**Vulnerable**|**Middle Class**|**Total**|
|**Poor**|43|40|40|20|100|
|**Vulnerable**|37|17|42|40|100|
|**Middle class**|20|6|26|68|100|
|**Total**|100|22|38|40|100|

Source: Authors’ calculations based on ECAPOV data.

Notes: transition matrix is based on a synthetic panel for 2002-2011. Welfare aggregate is consumption per capita including health, durables and rent. Sample: heads of household 25-55 years of age. Detailed results of the regression predicting consumption per capita are presented in table A.2 in the annex. Methodological details are presented in Annex A2.

15. **Strong upward mobility is observed in urban areas, while chances of falling into poverty are much higher for rural residents.** Tables A.3ab in the annex show upper bound mobility matrixes for urban and rural areas. The poor in urban areas have non-negligible chances to move to the middle class and low chances to fall back to poverty: 25 percent of the poor in 2002 moved to middle class and only 5 percent moved back to poverty in 2011 in urban areas. In contrast, the rural poor have lower chances to move up to the middle class and higher chances to fall back to poverty. Namely, 14 percent of poor rural residents in 2002 moved to the middle class in 2011 and 16 percent of the middle class shifted back to poverty in 2011. This is not counterintuitive taking into account the nature of income generating activities in rural areas with agricultural playing an important role.

16. **Age, education and labor force status seem to be important predictors for economic classes.** Table A.5 contains the shares of poor, vulnerable and the middle class in population with different individual characteristics. As have been already said, urban residents have much higher chances to be in the middle class than rural residents. Individuals with tertiary education have the highest chances to be in the middle class. Children of age 5-15 have highest chances to be in poverty, while the retired population, especially those between 50-65 years has the highest chances to join the middle class. As will be further shown pensions (both increase in size and coverage) played a very important role for welfare improvement of all groups in the population.

17. **Consistent welfare improvement is also observed for the bottom 40 percent of the population.** As shown in table 2.2, there was a churning in the bottom 40 percent of the population in Turkey during 2002-2011.<sup>6</sup> Between 14 and 42 percent (depending on upper or lower bound of estimate) of the population in the bottom 40 percent in 2002 moved to the top 60 percent in 2011, while 9 to 28 percent of the population in top 60 percent moved to the bottom 40 percent. However, in spite of all churning, overall mobility was positive. Figure 2.2 helps to unpack the shared prosperity growth into two components: (i) the average consumption of those households staying in the bottom 40 percent during two

> 6 Box 1 explains potential scenarios for churning of the bottom 40 percent of the population.

11
periods (persistent group) and (ii) the average consumption of those who moved out of (graduates) or into (entrants) the bottom 40 percent. As illustrated in figure 2.3, there is an average welfare improvement in the persistent group of the population staying in the bottom 40 percent during two periods. Moreover, entrants have a higher average consumption per capita than graduates (see Box 1 for definitions). Overall, this led to welfare gains across the whole distribution and positive consumption growth among the bottom 40 percent of the population.

**<u>Table 2.2:  Mobility matrix for the bottom 40 and top 60 percent of the population</u>** a) Upper bound b) Lower bound

|**2002**|**Top 60**|**2011**<br>**Bottom 40**|**Total**|**2002**|**Top 60**|**2011**<br>**Bottom 40**|**Total**|
|---|---|---|---|---|---|---|---|
|**Top 60**|43|17|60|**Top 60**|54|6|60|
|**Bottom 40**|17|23|40|**Bottom 40**|6|34|40|
|**Total**|60|40|100|**Total**|60|40|100|

Source: Authors’ calculations based on ECAPOV data.

Notes: Transition matrix is based on a synthetic panel for 2002-2011. Welfare aggregate is consumption per capita including health, durables and rent. Sample: heads of household 25-55 years of age. Detailed results of the regression predicting consumption per capita are presented in table A.2 in the annex. Methodological details are presented in Annex A2.

Box 1. Churning in the bottom 40 percent of the population The shared prosperity indicator, which measures consumption per capita growth of the bottom 40 percent of the population is an anonymous indicator. In other words, there is no guarantee to observe the same individuals in the bottom 40 percent of the population across years. In particular, several potential scenarios may occur. First, individuals can be the same in the bottom 40 percent in two periods _[(1) in Figure 2.2]_ . Second, individuals from the bottom 40 percent in the first period can move to the top 60 percent in the second period (graduates) _[(2) in Figure 2.2]_ . Third, individuals from the top 60 percent of the population in period one can move to the bottom 40 percent in the period two (entrants) _[(3) in Figure 2.2]_ . The forth scenario, in which the population in the top 60 percent is the same across periods, is not relevant to this analysis of the bottom 40 percent [ _(4) in Figure 2.2]_ . The overall impact of churning will depend on the magnitude of these movements.

There are several options to see the described scenarios. The first option is to track the mobility of people using panel data. This will allow tracking the same people over a particular period. The second option is to use a synthetic panel approach based on repeated cross-sectional data (see annex A2 for more details of this methodology). This provides an opportunity to predict the consumption of households in the first period using information about their consumption in the second period and permanent household characteristics. In this paper, the second approach is used.

12
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# **II. Determinants of poverty reduction and intra-generational mobility**

20. **This section shifts from stylized facts about poverty, inequality and shared prosperity to the analysis of determinants of observed changes in wellbeing and intra-generational mobility.** Income poverty decompositions are used to quantify the contribution of different factors to changes in welfare and inequality across classes, areas and gender. Having identified the labor market’s contribution as the most important driver of poverty reduction in Turkey, we explore the mechanisms behind this impact.

## _2.1 Drivers of changes in poverty, inequality and intra-generational mobility_

21. **The labor market was the most important factor driving poverty reduction in Turkey in the 2000s.** As income and consumption poverty trends are very similar in Turkey, an income poverty decomposition was used to quantify the contribution of different factors to poverty reduction (see figure A.4 in annex). As shown in figure 3.1, overall income poverty declined by 30 percentage points between 2002-2011 years. Labor market (earnings and added worker effect<sup>7</sup> ) was responsible for 18 percentage points of this reduction, making it the largest single contributing factor. The role of pensions was important as well, accounting for 7 percentage points, with demographics (share of adults) and social assistance each accounting for 3 percentage points of poverty reduction.

22. **The relative contribution of different factors to poverty reduction is not the same across urban and rural areas.** Social assistance, pensions and added worker effect played a more important role in rural areas in relative terms. For example, pensions were responsible for more than one third of poverty reduction in rural areas compared to 20 percent in urban areas. In contrast, labor earnings played a more important role in urban areas. Thus, labor earnings were responsible for 42 percent of poverty reduction in urban areas compared to 28 percent in rural areas (figure 3.3).

**Figure 3.1: Income poverty decomposition, Figure 3.2: Income Gini decomposition, 20022002-2011 2011**

<!-- Start of picture text --> 5 USD/PPP 2005 0.02<br>4<br>0.01<br>0<br>0<br>-4 -0.01<br>-0.02<br>-8<br>-0.03<br>-12<br>-0.04<br>-16 -0.05<br>Source: Authors’ calculation based on ECAPOV data. Source: Authors’ calculation based on ECAPOV data.<br>Notes: Poverty line is 5 USD/PPP per day. Welfare aggregate Notes: Welfare aggregate is income per capita. Higher Gini<br>is income per capita. Methodological details are presented in means higher inequality. Methodological details are presented<br>chnages in Gini<br>points<br>pensions pensions<br>poverty reduction, percentage<br>share of adults share of employed labor earnings social assistance remittances agricultural income other income share of adults share of employed labor earnings social assistance remittances agricultural income other income<br><!-- End of picture text -->

> 7 The added worker effect (share of employed) measures the impact of having household members with non-zero labor income.

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<!-- Start of picture text --> All (3 years interval)<br>sample: Global<br>1.25 USD-PPP per day 2.50 USD-PPP per day 5.00 USD-PPP per day<br>c<br>5<br>3 = oe e<br>2 5 £ =<br>> o is rs]<br>g S oOg = 3 a|<br>:=<br>z| 2 Fs} Fs}<br>g= -10 55 c}5 c-}5<br>2 oO Oo<br>-15<br>Oth 20th 40th 60th 80th 100th Oth 20th 40th 60th 80th 100th Oth 20th 40th 60th 80th 100th<br>Percentile of countries performance (Unconditional distribution) | Percentile of countries performance (Unconditional distribution) | Percentile of countries performance (Unconditional distribution)<br>Benchmarking: Turkey Betas:<br>Betas: Global; Poverty line: All; Model ; 3 years(s) interval Global hd<br>Europe & Central Asia (all income levels), Turkey<br>1.25 USD-PPP per day 2.50 USD-PPP per day 5.00 USD-PPP per day<br>2008-2011 2008-2011 2008-2011<br>87th<br>79th<br>65th 62th<br>za 50<br>><br>| 0 po' a =<br>Unconditional percentile Conditional Percentile Unconditional percentile Conditional Percentile Unconditional percentile Conditional Percentile<br><!-- End of picture text -->
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38. **Unequal access to financial services among different groups is a more important problem than the level of financial intermediation per se** . There is a huge gender gap in access to banking accounts in favor of men. In particular, 82 percent of men older than 15 have access to financial accounts, compared to only 33 percent of women (figure 4.2). The gap also exists across groups with different level of income. Among the top 60 percent of the population, 63 percent have access to financial accounts in formal institutions, compared to only 51 percent among the bottom 40 percent (figure 4.3). Financial inclusion is thus an important policy agenda to sustain shared prosperity going forward.

39. **Further poverty reduction in Turkey will depend tremendously not only on intragenerational class mobility, but also on intergenerational mobility.** Hentschel et al. (2010) demonstrated that intergenerational transmission of inequity is powerfully affecting Turkey’s youngest generation today. The authors show that circumstances, or factors any single person can do nothing about, are very important in determining life chances in Turkey. In particular, factors such as one’s area of birth and parental education explain two-thirds of the inequality of opportunity related to the wealth distribution in the country. The socioeconomic background of families is an important factor driving inequality of opportunities in education as well. While Turkey has been making progress in reducing the importance of socio-economic background for education outcomes (see OECD, 2013), it still ranks among the countries in the OECD with the largest effect of these factors on individual achievement. Early childhood education and measures to improve the quality of education particularly in schools in disadvantaged regions and districts are important to sustain and accelerate recent improvements.

40. **Turkey will continue to benefit from demographic dividends, but after 2025 the situation will change dramatically.** As shown in figure A.9 in annex, Turkey has been benefiting from demographic window of opportunity since the 1980s. The share of children and elderly was declining, while the share of working age population was increasing and will be highest in the 2020s. However, once the window closes, Turkey will face the challenge of aging. While the elderly are not among those most likely to be affected by poverty (children are more at risk) and pensions in fact contribute significantly to income growth in the bottom 40 percent, the pension system is projected to continue to run significant deficits given a low effective retirement age and relatively generous replacement rates. Rising health care costs will add to the fiscal burden of aging. Encouraging longer working lives will be important to manage these costs as well as ensure resources can be concentrated on reducing vulnerability in old age.

41. Summing up, Turkey had a remarkable performance in reducing poverty and boosting shared prosperity. As a result, there was a strong upward intra-generational mobility expanding the size of the middle class in the country. The main drivers of these positive changes were coming from the labor market, social assistance and pensions. Nevertheless, continuing the same path will require addressing several challenges including: (i) improving access to markets with a focus on reducing gender and rural/urban gaps, (ii) increasing female labor force participation, and (iii) reducing intergenerational inequality by weakening the link between circumstances people cannot be held accountable for and socioeconomic outcomes.

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