Economic Research Forum (ERF)

Human capital and regional disparities in Turkey

127
Turkey has a longstanding problem of uneven economic development across its regions. This column explores the interactions between the market access of central and remote parts of the country, the varying levels of human capital accumulation in those places, and the wage returns to education. The research evidence indicates the potential of regional policy to reduce inequalities.

In a nutshell

Regional disparities demarcated by a developed west and an underdeveloped east are widening in Turkey.

Not only regional incomes but also development of education-based human capital are rapidly polarising among Turkish regions.

Evidence shows that there is still room for policy: the influence of policy-insensitive measures on education is less pronounced compared with the influence on wages.

Regional inequality is one of biggest socio-economic problems facing the Turkish economy. Indeed, it is a longstanding problem: our knowledge of the early Republican era confirms the existence of a west-east dichotomy.

There are numerous sources in the country’s history for regional disparities: the collapse of ties with eastern countries following the downfall of the Ottoman Empire; the loss of young people after the First World War and the Turkish War of Independence; the inability to raise and distribute capital at regional scale, largely owing to the profit and capital allocation of the Ottoman system; the priority given to macroeconomic development and country-level economic fundamentals; and so on.

These issues seem to form the backbone of inequalities. But after the 1980s and the liberalisation of the Turkish economy, there has been a worsening of imbalances at the regional level. Numerous scholars discuss the reasons behind these large differences in production style, income level, employment structure and so on. In general, the consensus is that factor allocation is the key driving force behind the deepening of spatial inequalities.

Underpinning these concerns, human capital accumulation deserves special attention. More specifically, the determinants of the development of educational human capital should be elaborated in order to understand the potential impact of regional policies on spatial development.

On the one hand, individuals invest in education as they expect higher earnings with increased education levels. Since firms with greater access to markets will have a larger surplus of funds to be distributed to workers, we expect that in central locations there will be stronger incentives to invest in education in.

On the other hand, there are some other micro factors that influence individuals’ decisions to increase their education levels, such as cultural factors, rules and norms at the regional level, legal rights related to labour, experience, etc.

While the former explanation relies on the ability of a region to transfer more premiums to educated workers, the latter basically spends more time on individual issues that are thought to be more policy-sensitive.

Our research traces the roots of human capital development by revisiting these two contradictory views as we have enough reasons to believe that the development of educational human capital influences regional development. Eventually, there is a chicken-egg problem – the so-called ‘endogeneity’ issue. Human capital development seems to be not only a determinant but also an outcome of this whole process.

Therefore, we first investigate whether regions’ overall profitability (thus their market access) influences the development of educational human capital. At this early stage, we rule out the impact of a sub-channel over returns to education (thus wage distribution). Next, we use returns to education, the level of education and market access in the same framework by taking account of endogeneity.

The education level of Turkish regions that are not remote (thus central) are observed to be higher. Without controlling for the impact of wages (returns to education) but taking account of various other issues, market access of locations influences people’s educational decisions.

At this stage, the problem is the rigidity of market access; that is, historically, there is a very limited change in the distribution of province-level market accessibility. So, once a region is central, it is central. For these regions, as well as the remote ones with lower market access, few policy measures are in effect. Therefore, if we rely on these results, development of education-based regional human capital seems policy-insensitive.

But we are highly concerned about the inability to account for returns to education and some other individual factors that can also affect educational investments. Moreover, possible bi-directional links and the endogeneity issue deserve more attention. As a final attempt and in order to focus on the individual characteristics; returns to education (wages), educational attainment and market accessibility are integrated into the same framework.

Our findings should be central to policy-making. Importantly, accessibility of regions heavily influences returns to education. Assuming that the firms in central locations with high market accessibility are more profitable, a natural outcome is the ability to distribute higher wage premiums to individuals.

But unexpectedly, this does not directly cause higher development of educational human capital. The impact of market access on education is no longer visible when returns to education is further controlled for.

This, we believe, is something positive in terms of regional and human capital-based policy-making. That is, the strong influence of market access on wages signals the inability of any policy measure to influence the distribution of wages (leaving the regional wage determination completely to markets).

On the contrary, the failure to establish a causal link between education level and market access broaches a discussion of the possibility of policy measures to combat disparities in the development of educational human capital.

Further reading

Karahasan, Burhan Can, and Firat Bilgel (2018) ‘Economic Geography, Growth Dynamics and Human Capital Accumulation in Turkey: Evidence from Regional and Micro Data’, ERF Working Paper No. 1233.

Most read

The impact of hosting refugees on the labour market

What are the labour market effects of a massive influx of people on members of the host community? This column examines the experience of Jordan resulting from the conflict in neighbouring Syria. Evidence shows that Jordanians living in areas with high concentrations of Syrian refugees had no worse labour market outcomes than Jordanians with less exposure to the influx.

Economies of agglomeration and firm productivity in Egypt

There is a strong body of international evidence that firms are more productive when they cluster near one another geographically. This column reports new findings on the substantial productivity benefits of such agglomeration in Egypt. The results have important implications for policy, including the value of establishing specialised industrial zones for promising business clusters with high growth potential.

Unemployment in Tunisia: why it’s so high among women and youth

Why is unemployment among women, youth and educated people so high in Tunisia? Drawing on a new ERF book – The Tunisian Labor Market in an Era of Transition – this column explores three key factors - labour supply pressures; weak demand for skilled labour; and rigidities in the core institutions of the labour market – as well as potential policy responses

Lebanon’s austerity budget of 2019: a last resort to avoid crisis?

Lebanon’s high and rising public debt has become unsustainable. This column explains why it is essential that the austerity measures in the draft budget of 2019 are approved in order to avert imminent debt and exchange rate crises.

Return migration and income mobility in MENA

The emigration and return migration of working-age men in the Middle East and North Africa have significant effects on national economies. This column summarises new evidence on the contribution of moving to another country for work and later returning home to the lifetime earnings and intergenerational socio-economic mobility of workers in Egypt, Jordan and Tunisia.

Falling rents should make way for institutional reforms in Arab states

Can the development prospects of the Arab countries be separated from the natural resource endowments that have been shaping their economies for so long? This column outlines the likely downward trajectories of per capita natural resource rents to 2030 – and the sense of urgency that those numbers should bring to discussions of the need for institutional reform.

Why reforms in the Middle East are unavoidable

One striking feature of the recent economic history of the Middle East is high-income Gulf economies financing the persistent external imbalances of its geo-strategically important neighbours. This column asks what happens when, as a consequence of the technological disruptions of the global fossil fuel market, the current account deficits of key countries in the region are no longer sustainable.

Unemployment in Tunisia: why it’s so high among women and youth

Why is unemployment among women, youth and educated people so high in Tunisia? Drawing on a new ERF book – The Tunisian Labor Market in an Era of Transition – this column explores three key factors - labour supply pressures; weak demand for skilled labour; and rigidities in the core institutions of the labour market – as well as potential policy responses.

France’s headscarf ban: the effects on Muslim integration in the West

What is the effect of religious bans on the economic and social integration of Muslim minorities in Western countries? This column reports evidence on the effects of France’s 2004 legislation banning conspicuous religious symbols in schools, which particularly affected the headscarves worn by Muslim women. There has been a damaging impact on the educational attainment and later life outcomes of young Muslim women affected by the ban.

Women, work and social norms in Saudi Arabia

Employment rates for women in Saudi Arabia are very low. By custom, they cannot decide for themselves whether to work or not – they need the consent of their male guardian (either their husband or father). Whether men permit their wives or daughters to work depends crucially on social norms. This UBS Center column reports evidence that most Saudi men privately believe that women should be allowed to work, but that they underestimate the extent to which other men share their views.