However, given the economic transformation of fast-growing countries, such as Japan and South Korea, we see that the contribution of capital accumulation to growth in these countries has been moderate (at around 50 percent), whereas the contributions of employment growth and the increase in total productivity have been higher (at around 25 percent), as compared to Turkey. In other words, Turkey’s efforts for development are mostly based on increasing the current sources of production rather than using them more effectively and efficiently. In a country, where the propensity to save is low, any attempt at development through capital deepening would cause a high level of current account deficit and a restricted increase in employment. At this point, I would like to annotate that the contribution of total factor productivity to economic growth climbed significantly to 30 percent on the back of the reforms and structural transformation implemented in the post-2001 period. I believe that the labor market and total factor productivity are crucial for improving the potential growth rate of Turkey. In the next part of my speech, I will cover these two issues, respectively. 2  BIS Review 104/2010  3. Labor market  As I have already mentioned, the contribution of the employment increase in the growth composition of the Turkish economy is very limited. Although it is often voiced that Turkey’s younger population structure compared to other countries constitutes demographic window of opportunity, non-participation of this young population in the labor market is an important problem that should be addressed.

Our currency did not mark a notable change against emerging market economies competing with Turkey in the exports markets. In this respect, the relatively stable course of the real exchange rate index compared to developing countries underpinned the maintenance of Turkey’s competitive power in foreign trade. As is the case across the world, the Central Bank’s decisions on monetary and exchange rate policy also affects the economy as a whole in Turkey. Under a fixed exchange rate regime, it is possible to control the nominal level of the foreign exchange rate. Nevertheless, under free market conditions, whatever the exchange rate regime and exchange rate policy are, it is impossible to control the real exchange rate level. The real exchange rate level will ultimately move towards the long-term balance level according to the structural features of the economy. In an environment of pressurized nominal foreign exchange rate, this movement will emerge by the changes in the prices of goods and services; i.e. inflation. In countries like Latvia, Estonia, Lithuania, Bulgaria, where a fixed exchange rate regime was implemented, this was experienced before the global crisis and these countries faced the problem of high inflation. We foresee that the distinguishing characteristics of countries will come to the fore in the upcoming period and currencies of those countries with lower risk, stronger economic and financial fundamentals and high growth potential are expected to perform better. Should macroeconomic stability be maintained and structural reforms be put into effect, Turkey will also have a place among these countries.