Turkish economy: taking stock of the last decade

Turkey successful combination of fiscal discipline and welfare policies yielded desired results. The next step forward requires more R&D spending Waves of economic globalization accelerated the pace of change in the global political economy and national units operating within that ecosystem.

Turkey successful combination of fiscal discipline and welfare policies yielded desired results. The next step forward requires more R&D spending

Waves of economic globalization accelerated the pace of change in the global political economy and national units operating within that ecosystem. Therefore, a fair analysis concerning the transformation of Turkey's domestic economy should take contemporaneous developments in the wider world in the same timeframe. The international system witnessed a gradual shift from the unipolar post-Cold War regime based on undisputed U.S. dominance to a more heterogeneous political and economic configuration in the first decade of the new millennium. The consequence was the development of a larger space of maneuver for the emerging and regional powers to assert their respective politico-economic interest formulations and worldviews. On the other hand, the diversification of national/regional, hard/soft and public/private power assets began to create obstacles for the unilateral temptations of major powers.

Deepening and widening interdependence among the established and new actors in the global system became one of the fundamental features of the emerging order, which rendered issues of global governance more vital.

Against this backdrop, the emerging powers of the multipolar global system, chiefly exemplified by the BRICS (Brazil, Russia, India, China, South Africa) and MINT (Mexico, Indonesia, Nigeria, Turkey) countries, were involved in a "competitive game" to build up large international reserves, diversify their export markets, upgrade their technological know-how and increase their manufacturing capacities.

Viewed from this perspective, the transformation of Turkey's political economy over the course of the last decade arguably evolved in conjunction with prominent global dynamics. At the beginning of its reign, AK Party governments had to rehabilitate a fragile macroeconomic structure devastated by recurrent financial crises in 1989, 1994, 1999 and 2001 as a result of acute institutional inability to regulate financial liberalization. Fiscal indiscipline and populist redistribution have been the characteristics of incumbent political parties in the history of Turkey's political economy, hampering the sustainability of economic growth and developmental momentum.

But in the aftermath of the twin crises in 2000-2001 the pursuit of fiscal discipline and prudence in macroeconomic management gradually became the norm, while political stability and policy coordination advantages of successive single-party governments improved the effectiveness of structural reforms. In the early 2000s, substantial reforms were accomplished in critical areas such as the regulation of banking and financial markets; management of public debt and expenditure regimes for increased fiscal discipline; reinforcement of the independence of the central bank and autonomy of regulatory agencies; and streamlining the subsidies for agricultural producers and state economic enterprises. Over time, crucial institutions holding the pulse of stability, such as the Turkish central bank and Banking Regulation and Supervision Agency (BRSA-BDDK) developed substantial human and governance capacities to the extent that they became innovative models for the developing world before, during and after the global economic crisis in 2008.

Taking due advantage of favorable global liquidity conditions, Turkey displayed a shining economic performance associated with high economic growth, fiscal discipline, single-digit inflation and record inflows of foreign direct investment (FDI). Particularly important among these was the issue of FDI as with the impetus provided by the start of EU accession negotiations; the country managed to attract unprecedented amounts of inward investment. The annual FDI figure for the critical year of 2007 just before the global crisis was around $20 billion which represented a record in the republic's history and exceeded the total FDI inflows between 1980 and 2000 as a whole. Although there was an anticipated drop in FDI inflows at the height of the global crisis, a speedy recovery meant that the figures became stable around the $10 billion mark annually, which shall be considered high for a country that has been historically unable to attract substantial foreign investment.

In this period, some of the massive privatization projects in critical sectors such as energy (Tüpraş), petrochemicals (Petkim) and telecommunications (Türk Telekom) were successfully completed at globally competitive prices. Attainment of high primary surpluses in the existence of high economic growth brought the ratio of public debt to GDP to manageable levels and the single-digit inflation target was accomplished.

Attainment of sustainable growth and galvanization of the "regulatory state" were widely interpreted as a sign of departure from the vicious cycle of politico-economic instability, chronic hyper-inflation and macroeconomic crisis that hampered failed development attempts in previous decades.

In other words, the transformation of Turkey's political economy in the new millennium produced a new structural pattern that approximated to the "post-Washington consensus" principles of the Bretton Woods institutions with marketfriendly yet robust regulatory mechanisms, fiscal discipline and prudence in macroeconomic management.

From a different vantage point, the close coordination between the conduct of foreign policy and macroeconomic governance precipitated new openings in international trade strategy which supported Turkey's nascent institutional reflexes as a BRICS-like "trading state." In this context, visa-free travel arrangements, preferential trade agreements (PTAs), and "high-level strategic cooperation councils" applied to numerous countries in the Middle East; Africa, Latin America and East Asia intensified the cross-border mobility of goods, services and people to support ongoing international trade dynamism.

In terms of main macroeconomic parameters as well, Turkey's overall performance in the post-2002 era has been impressive as a result of which the country became a regional hub and respected political actor. At the end of 2013, GDP figures rose to $822 billion; GDP per capita neared $11.000; annual exports reached $152 billion (within which the share of MENA countries increased threefold in 10 years); the reserves at the central bank rose to $136 billion; and crucial credit repayments to the IMF (in the order of $23.5 billion) were completed enabling the Turkish state increased policy autonomy. But the positive picture had to be complemented by new initiatives in social policy aimed at poverty alleviation, more equitable societal/ regional distribution and broader reforms in health, education, transportation and the justice system for wider socio-economic development.

The evidence from the last decade on this count is quite encouraging given substantial investments in physical infrastructure and modernization of public services, as well as the steady reduction in acute poverty and unemployment rates. However, the fact that Turkey, which represents the 17th largest economy in the world in terms of GDP, occupies a much lower position in the human development index shows that there is still a long distance to cover in terms of improving the living standards of ordinary citizens.

Going forward, a structural transformation strategy based upon dynamic competitive advantage that derives from high-quality human capital and cutting-edge technological upgrading should be consistently pursued. In order to back up its political and economic ambitions for regional leadership, Turkey's industries should increase their R&D spending and improve their competitiveness in the flourishing sectors of the knowledge economy such as software, micro-electronics, nanotechnology, biotechnology and ICT's. Despite positive trends in overall export performance, the relative share of high-technology manufactures in exports should come closer to countries such as Korea, Malaysia and Brazil which share Turkey's ambitions of regional leadership. To this end, a strategic FDI policy will also be vital in the coming years to promote "greenfield investments" in strategically selected high-technology sectors, instead of frequently-seen mergers, acquisitions, or privatization of state-owned economic enterprises.

Overcoming the infamous "middle income trap" and getting promoted to the "premiere league" of the global economy would require nuanced micro-level strategies and sectoral fine-tuning for increased R&D, better access to venture capital and more effective university-industry linkages. It is exactly these kinds of issues that the next phase of Turkey's transformation should concentrate on, regardless of heightened debates in domestic politics that we observe at this point in time. Crucial long-term policy agendas in this vein would involve widening and deepening the knowledge base of local industries through comprehensive reforms in technical and higher education; looking for new ways to generate and adopt up-to-date technology to increase the relative share of high-value added goods in manufacturing production and reducing the structural import dependency of export sectors through new investments in intermediary goods and materials. Again, the key to successfully accomplishing these second-generation reforms will be political stability, social support for wider developmental goals and macroeconomic prudence. As the saying goes, "If there is a will, there is a way."

Resource: Daily Sabah, March 14, 2014

Sadık Ünay
Sadik Unay completed his B.A. in Politics and International Relations at Bogazici University. He continued with his M.A. and Ph.D. studies at Manchester University. He is currently a faculty member at Istanbul University, Economics department.