Ahmet O. AkarliExecutive DirectorEconomic ResearchGoldman Sachs International

July 2007

BRICs, the Next-11 and Turkey2050: A Space Odyssey

2

BRICs, the Next-11 and Turkey

BRICs and the N-11

Where does Turkey stand?

2050: A Space Odyssey

3

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!

4

World in 2006 – G-7 Dominate

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000U

SJa

pan

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man

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$bn 2006

GDP ($bn 2006)

5

World in 2050 – BRICs and the N-11 take over

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GDP 2050

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It is a new world!Overtaking the G7: When BRICs' and N-11's GDP Would Exceed G7

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

China

India

Brazil

Mexico

Russia

Indonesia

Nigeria

Korea

Turkey

Vietnam

Philippines

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

Canada

Canada

Canada

Canada

Canada

Canada and Italy

Canada

USJapan

Japan

Japan

Japan

Japan

Japan

France

France

Germany

Germany

Germany

Germany

UK

Germany

Italy

Italy

Italy

Italy

Italy

Italy

Italy

Italy

Italy

France

France

UK

France

France

UK

GermanyUK

Canada

UKCanada France

Italy

7

World in 2050 – BRICs and the N-11 grow richer

0%5%

10%15%20%25%30%35%40%45%50%

06 09 12 15 18 21 24 27 30 33 36 39 42 45 48

BRICs/G-7 (GDP per capita)

N-11/G-7 (GDP per Capita)

8

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)

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A relatively favourable growth environment

0

2

4

6

8

10

12

Infla

tion

Gov

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ent

Def

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Exte

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Deb

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Educ

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Polit

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Stab

ility

Rul

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Law

Cor

rupt

ion

PCs

Phon

es

Inte

rnet

GES Index 2006 Turkey GES 2006 Developing GES

2006 BRICs GES 2006 N-11 GES

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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

11

Could become a $4tr economy by 2050

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

06 10 14 18 22 26 30 34 38 42 46 50

$bn 2006

Turkey GDP ($bn 2006)

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Turkey may overtake Italy and Canada

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200003000040000

5000060000

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$bn 2006

GDP 2050

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Per Capita income may catch up rapidly with the G-7…

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

06 10 14 18 22 26 30 34 38 42 46 50

$bn 2006

0%

10%

20%

30%

40%

50%

60%

Turkey Per Capita Income ($2006)Turkey/G-7 Per Capita Income($ 2006)

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…but probably not as explosive as the BRICs

100%

120%

140%

160%

180%

200%

220%

240%

07 10 13 16 19 22 25 28 31 34 37 40 43 46 49

Turkey/BRICs Per Capita IncomeTurkey/N-11 Per Capita Income

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Challenges: The BoP Constraint

05

1015202530354045

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Viet

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Mex

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Turk

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Ban

glad

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Paki

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Phili

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Egyp

t

% of GDPGross Domestic Savings

Gross Fixed Capital Formation

16

Challenges: TFP Growth

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10

Infla

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Gov

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Exte

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Deb

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Educ

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Polit

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y

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Phon

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Inte

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%2006 Turkey GES

2006 G7 GES

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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

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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

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2050: Turkey a Space Odyssey - $4.7tr economy?

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

06 09 12 15 18 21 24 27 30 33 36 39 42 45 48

$bn 2006

Turkey GDP Base Line

Turkey GDP High Growth

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2050: Turkey a Space Odyssey – Overtaking France?

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Italy

Iran

Egyp

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$bn (2006)

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2050: Turkey a Space Odyssey – More Prosperous?

0

10,000

20,000

30,000

40,000

50,000

60,000

06 09 12 15 18 21 24 27 30 33 36 39 42 45 48

$bn 2006

Turkey Per Capita Income Base Line

Turkey Per Capita Income High Growth

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2050: Turkey a Space Odyssey – Catching up faster?

0%

10%

20%

30%

40%

50%

60%

70%

80%

06 09 12 15 18 21 24 27 30 33 36 39 42 45 48

2006

Turkey Base Line/G-7 Per Capita IncomeTurkey High Growth Per Capita Income

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2050: Turkey a Space Odyssey – BRIC-like potential?

100%120%140%160%180%200%220%240%260%280%300%

07 10 13 16 19 22 25 28 31 34 37 40 43 46 49

Turkey Base Line/BRICs Per Capita Income Turkey High Growth/BRICs Per Capita IncomeTurkey Base Line/N-11 Per Capita IncomeTurkey High Growth/N-11 Per Capita Income

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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

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