This paper presents evidence on structural change in Turkey and provides an overview of the evolution of industrial policy in the last three decades. Turkey has experienced substantial growth in labor productivity in the last decade. About two thirds of the increase in aggregate labor productivity arises from reallocation of employment from low to high productivity sectors and one third from productivity increases within sectors. Decomposition of productivity growth using micro-data also reveals an important contribution from reallocation. We also document substantial change in the composition of exports. We argue that structural change was not a direct result of selective industrial policy, simply because the incentive system displayed little sectoral selectivity during the period when major structural change took place.

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In the last three decades, the Turkish economy has become much more open and market-oriented. This paper provides an account of the changes in the underlying economic institutions that have accompanied this transformation. In particular, it assesses whether or not new economic institutions have emerged that constrain the discretionary powers of the executive in the area of economic policy and whether institutional change has resulted in a more rule-based and transparent policy framework. The story that broadly emerges is that the first two decades of the neoliberal era were predominantly a period of increased discretion at the expense of rules. By contrast, after the crisis of 2000-2001 one witnesses a substantial delegation of decision-making power to relatively independent agencies, and the establishment of rules that constrain the discretion of the executive. But this transformation is not uniform across sectors, and there are divergences between the de jure rules and their de facto implementation. Moreover, there are also examples that do not fit the general trend, especially in the case of the construction industry. Finally, recent signs suggest that the government may be having second thoughts about the “excessive” independence of regulatory and policy making bodies.

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