Turkey and the EU: On the costs and benefits of integrating a small but dynamic economy

Conclusions  Seen on the whole, one of the biggest economic challenges for Turkey is to make its recent macroeconomic stabilisation sustainable. Of utmost importance in this respect is a significant catch-up in quality of institutions and governance to the EU level. Although starting with a small GDP, Turkey could significantly contribute to high growth rates of the EU as a whole (as already aimed at by the Lisbon agenda). The analysis of Turkey's human resources has identified a large gap in human captial formation and its centra role for backlogs in convergence between Turkey and the EU. Hence, one important policy conclusion would be to link up pre-accession financial support with the accumulation of human capital instead of the usual support for standard infrastructure projects. Another example would be in the area of trade integration. For instance, enhancing the currently existing customs union with Turkey in the direction of free trade in services would generate benefits to Turkey and to the EU which should not be underestimated. Finally, one could imagine the implementation of joint and specific transition policies in the areas of energy, agriculture and education. If Turkey is able to stick strictly to its reform-oriented path of modernisation, nothing can prevent us from expecting enormous benefits from the integration of two regions with significantly different factor endowments — a straightforward economic insight not often well understood by politicians or the public.