Turkish Economy

In this article, we are going to discuss the recent history of the Turkish economy, particularly Turkish economic growth in the recent decades. We will examine how Turkey was able to grow its economy, and the effects that this has had on the population. In addition, we will also discuss more recent developments in the country, and the impact that domestic politics such as the war in southern Turkey, as well as Turkey’s international relations in Syria have had on their economy. In addition, we also want to examine the effect that the failed coup had on Turkey’s economy.

History of Turkey’s Economy

In order to understand more recent developments in Turkey’s economy, it is important to look at the history of how governments in Turkey have attempted economic growth. Prior to World War I, the Ottoman Empire had seen some economic growth, but it was not very substantial. Following the end of World War I, the modern state of Turkey was effected economically, not only from the war, but also declines in population, and also drops in GDP. In fact, the GDP fall was as high as 40 percent (and in some cases higher). However, it was in the 1920s the the government attempted to building up the economy. Moving away from the Ottoman Empire economic model, Turkey, following its formation as a state in 1923 looked to Western structures for law and also for their economy. This was not without difficulties, however. As Celâsun & Rodrik (1989) argue, “At the outset, the national leadership faced colossal tasks in the reconstruction of a war-torn and long-neglected economy. Throughout the 1920s, the government grappled with difficulties in two sets of economic policy: (1) the renegotiation and servicing of a huge external debt; and (2) the dismantling of the remaining portions of the so-called capitulations inherited from the Ottoman era. As a balancing factor for political favors received in earlier times, the capitulations granted foreign powers the rights to collect tax revenue and fix import tariffs, which effectively limited domestic policy initiatives to redesign the foreign trade and fiscal regimes for an improved management of the national economy” (619).

The removal of these restrictions were stopped by the end of the 1920s. So, given the weak economic conditions in the 1920s, Ataturk embarked on a new plan that could build up the Turkish economy. It was during the 1930s that he shifted his approach towards an ISI policy (import-substitution industrialization). Finding success with this strategy, the state went further, officially establishing a statist (etatism) model. This approach was viewed to be between free market economics advocated by the US and others in the West, and the communist structures and significant government control of the Soviet Union (Celâsun & Rodrik, 1989). This approach of statism emphasized domestic savings, and also looked to push industrial growth, and also work to improve technologies in Turkey.

Because the plan was viewed as being successful, the Turkish government tried to do more of this from the mid-1930s to as late as 1939. However, the Turkish economy changed for the worse leading up to and during World War II. The government spent time trying to appeal to both sides (with closer ties to the allies), but their economy was greatly affected during the war. There were not as many commodities available in Turkey, and there was a great amount of inflation during the war period. The period during World War II hurt many countries throughout the world.

In fact, “The period after World War II was a period of high rates of growth around the world. After a brief experiment with agriculture-led growth in the 1950s, Turkey settled once again on import-substituting industrialization (ISI), this time led by the private sector. Exports of manufactures remained low during this period and the reasonably high rates of economic growth, exceeding 3 per cent per annum for GDP per capita, were led by domestic market-oriented industrialization during these decades” (Altug, Filiztekin, & Pamuk, 2008: 400). There were a couple of reasons for the growth in the Turkish economy during the postwar period. One has to do with the international relations alliances that Turkey established with the United States and Western European countries. Looking to prevent the spread of communism, the United States embarked on a series of plans to help bring in democratic allies. One country they looked to was Turkey, and not only did they bring Turkey into NATO in the early 1950s, but Turkey was also under the Marshall Plan, which provided foreign aid to countries. However, in order to accept this aid package, countries had to embark upon a “shift in economic priorities away from industrial development and toward primary production, as called for by the newly emerging perceptions of the optimal division of labor in Europe” (Celâsun & Rodrik, 1989: 620). The second factor that helped in this was the move towards multiple parties in the country (Celâsun & Rodrik, 1989).

The 1950s witnessed large economic growth, in great part due to the rise in agricultural production in Turkey, as well as increased exports (which was in part related to the increased trade because of the Korean War) (Celâsun & Rodrik, 1989). Things shifted downward in the mid to late 1950s due to a crop issues in 1954. The decline in the growth of the GDP led to “The central bank financing of public enterprise deficits and agricultural support purchases resulted in high inflation, which eventually led to the reluctant introduction of an IMF-designed stabilization and devaluation program in mid-1958. This program was supported by a sizable package of external financial assistance and debt consolidation under a multilateral agreement” (Celâsun & Rodrik, 1989: 621).

The 1960s and 1970s Turkish economy was one that saw higher rises in GDP, with gains of around 6.7 percent for the ten years (1963-1973). It was during this time that domestic savings ratios were high, namely as high as 32 percent at times within this timeframe. But during this time, Turkey continued to protect local industries by putting up various trade barriers in the form of tariffs, quotas, and also licenses). But it should be noted that “These instruments were used more for limiting imports to foreign exchange availability than for evolving a selective and increasingly competitive import-substitution pattern in the economy” (Celâsun & Rodrik, 1989).

It was in the 1960s and 1970s that Turkey also strengthened economic ties with European countries through the EEC. For example,

In September 1963, Turkey and the EEC signed the Association Agreement, which envisaged two consecutive stages (preparatory and transitional) before Turkey’s eventual accession to a full member status. Upon the completion of the preparatory stage at the end of the 1970s, the Additional Protocol was signed in November 1970, which became effective in January 1973. This protocol specified the ground rules for the transitional stage, which projected the establishment of a customs union before the full membership stage.

In the Additional Protocol, Turkey agreed to remove gradually tariff and nontariff barriers for EEC manufactured exports according to two timetables (over 12- and 22-year periods, as differentiated by products). In turn, the EEC removed tariff barriers for Turkish manufactured exports, except for particular product categories such as cotton yams, textiles, and processed food items in which Turkey had a comparative advantage. The selective trade advantages granted to Turkish agricultural exports rapidly eroded after the EEC’s subsequent agreements with other Mediterranean countries. The EEC also agreed, in principle, to allow free movement for Turkish labor by 1986 (Celâsun & Rodrik, 1989: 622).

Turkey’s Economic Growth

Much of the Turkish economic growth occurred in early 2000s onwards. As it has been noted, Turkey was behind many of the Western states from World War II onwards. But as scholars noted, “Per capita income in Turkey in 1950 had been at 1,620 purchasing-power- parity-adjusted 1990 US dollars. This was equal to 24 per cent of the per capita income of the high-income countries and 188 per cent of the per capita income in the developing countries. By 2005, GDP per capita in Turkey had reached 7,500 dollars, an increase of more than five-fold since 1913. This figure corresponded to about 30 per cent of the level of GDP per capita in the high-income countries of western Europe and the United States, and approximately 225 per cent of the GDP per capita of the developing countries for the same year. In other words, average incomes in Turkey have increased at about the same rate as those in high-income countries since 1913 and somewhat higher than the rates experienced by these countries since 1950” (Altug, Filiztekin, & Pamuk, 2008). So, the question is how was Turkey able to do this? Below we shall talk about the different ways that the Turkish economy was able to grow.

The Growth of the Turkish Economy

Historically, up until the early 2000s, the Turkish economy was hurting on a number of fronts. The Turkish economy was not establish high growth, and this had to do with the fact that there were attempts to push an import substitution policy (which would eventually lead to more production within Turkey, instead of reliance on outside imports). This, coupled with a high amount of subsidies to certain less producing sectors such as agriculture, while not providing as many resources to sectors that could have been better returns of investment. And although Turkey tried to push for liberalization the following decade, troubles for the Turkish economy continued “…in the 1980s… [as] economic growth was plagued by recurrent crises, as a result of inadequate macro-economic policies and financial opening in a weak institutional and regulatory environment” (Macovei, 2016: 2). While Turkey had GDP growth, it was not as high as many Western and European countries (Macovei, 2016). Then, in 2000 and 2001, the Turkish economy seemed to hit a sort of bottom with regards to the ineffectiveness of having the Lira pegged to the United States dollar, and also a decline in overall GDP in 2001 of 5.7 percent (when looking at this in real terms) (Macovei, 2016).

Yet, following 2001, Turkey has not only came out of those economic conditions improved, but more specifically, Turkey has been touted as a great example of a country that has been able to grow its economy within the past decade and a half. Turkey has been able to build its industries, create stability, and expand their exports into the international markets. One of the primary questions asked is: How was Turkey able to grow its economy?

Revamping the Turkish Economy

The bottoming out of Turkey’s economy in 2000 and 2001 led the government to make tough decisions and serious reforms if they wanted a healthy economy moving forward. This is no easy feat. Yet, as we know, the government was able put in place a variety of of initiatives that have resulted in rather great economic success in Turkey. As it has been noted, “The February 2001 crisis represents a real turning point in Turkish politics and the economy, not only because it was the deepest crisis in the history of the country but also due to the structural changes that took place during the post- crisis period. In the fiscal and financial realms, the crisis was exploited as an opportunity to initiate substantial and sustainable reforms that informed the fundamental restructuring of state-market relations as part of a comprehensive reform package” (Kutlay, 2015). The results were quite positive.

Other personal indicators show more positive trends. One great improvement has been on the issue of poverty. For example, “[a]bsolute poverty, measured as the share of people living below the national poverty line declined sharply, from 28.8% in 2003 to 13.3% in 2006, and settled at 1.6% in 2014 according to national sources (Turkstat, 2006 and Turkstat, 2014). However, relative poverty as measured by the poverty rate (share of the population earning less than 50% of the median disposable income) is higher (at 18% in 2012, and, according to national sources, 15% in 2014) than the OECD average (11%) (OECD, 2016).

However, it should be noted that there are economic differences depending on what part of the country one is speaking about. For example, “in Istanbul, where 20% of the population live and where living costs are higher, average household income is nearly three times higher than in south-eastern Anatolia, the highest regional gap among OECD countries. While less than 5% of people in Istanbul live with less than half of the national median income, this share is 50% in some areas of south-eastern Anatolia. Similarly large regional differences are observed with respect to educational attainment, access to broadband connection and life expectancy” (OECD, 2016: 10).

Turkish Exports

Turkey has focused on ensuring that it is working to increase exports to international markets. However, in recent years, the number of exports has not been as high. The reason for this has to do with some geopolitical factors in the countries to which Turkey trades to. For example, Iraq continues to deal with political unrest, and economic challenges in the country. The Russian economy has been in a recession since 2014, and there are many problems with over-expenditures, and drops in monthly wages, which effects Turkish imports into the country. There has also been more weak growth in the Euroepean Union, which has also effected Turkish exports (OECD, 2016).

The Importance of Turkish Imports

Much of the attention to Turkish economic growth has centered on its exports. However, Uğur (2008) argues that imports into Turkey also helped in developing Turkey’s economy. The idea behind looking at imports as a sign of economic growth has to do with the demand for these outside products. This has to do with prices, and also domestic income. So, as Rivera-Batiz (1985) argues (in Uğur, 2008), the more real income as society has, the greater the demand for consumption will be. In his study of Turkey, Uğur found that “there is a unidirectional relationship between GDP and consumption goods import and other goods import” (54). In fact, the growth in the 2015 GDP was a result of higher consumption (OECD, 2016).

With the conversations about accepting refugees in Turkey and elsewhere, one of the benefits of opening borders to refugees is that you may see an even greater demand for consumption. In the case of the Syrian refugees in Turkey, they “also stimulated demand, partly funded from government sources” OECD, 2016).

Slowing of the Turkish Economy

While Turkey witnessed mass growth in the early 2000s onwards, this began slowing in recent years (World Bank, 2016), and thus, has led to questions about whether Turkey can maintain the economic growth witnessed in early 2000s and through the decade.

Today, Turkey’s economy is at over 720 billion dollars, and still maintains growth (for example, in 2015, the growth was at four percent). But there are concerns that in 2016 and forward, Turkey may not be witnessing the same amount of economic growth experienced in the years (and the decade) prior. Below, we outline some of the major concerns that experts argue has affected the Turkish economy, and could continue to have an effect for many years. At the same time, we will also discuss the government’s response, and their hope that growth can rise back up to 5 percent by the 2018 year (Solaker & Gumrukcu, 2016).

The Turkish Economy and Terrorism

Turkey began its larger scale campaign against the Islamic State, and also Kurdish forces in Turkey in the summer of 2015. In the year from then until the summer of 2016, the economic effects of terrorism and war in Turkey has been quite high. For example, on July 23rd, 2016, Al Jazeera (2016) pointed out that “Travel and tourism revenues have already seen a decline as a result of the recent bombings, with the future of the industry at a real risk. This comes at a time when the country’s current budget deficit – for example the difference between cost of imports and exports – sits at 4.5 percent and the annual growth of the Turkish economy has slowed down to 3.5 percent only this year. Further to that, the Turkish Lira hit an all-time low in exchange for the US dollar, and US global rating agency Standard & Poor’s changed the country’s outlook to negative as a result of the coup.”

However, there are some who have argued that the Turkish economy remains strong despite the upsurge in attacks. One of the reasons for this has to do with consumption patterns inside the country. Spending patterns in Turkey have not dropped after the terror attacks. Unver (2016) argues that “The main driver of the Turkish economy is the extent of private household consumption, which covers roughly 70% of Turkey’s GDP. Despite the large number of uncertainties and security threats, the resulting internal migration, both from people in Kurdish areas and from Syrian refugees, has had a positive effect on household spending, which increased by 5% in the first quarter of 2016. While it feels counterintuitive, such a large number of migrants creates an economy in and of itself.”

Where the Turkish economy seems to be greatly effected by terror acts seems to have been on the tourism sector of the Turkish economy. The number of terror attacks, in southern Turkey, in Ankara, and in Istanbul have led to a sharp decline in the number of tourists coming into the country. The tourism sector in Turkey has been concerned with these figures, as hotels bookings are down, and there are worries that this trend will continue, since terror activities have continued.

Now, there are arguments that one act of terror may not have long term effects on an economy. According to the World Travel and Tourism Council  (Kim, 2016, in Unver, 2016), the time it takes to recover from an act of terrorism with regards to one’s economy is roughly 13 months. The reason is because, in most cases, there are no major service interruptions or logistical repairs that need to be made that will lengthen the time (Unver, 2016). However, in the case of Turkey, there have been multiple terror attacks, which seem to be occurring much more frequently, which is leading to uncertainty in the minds of many tourists who thought about traveling to Turkey. This, coupled with the failed coup, and the post-coup crackdown seems to only further heighten safety concerns. Speaking about the Ataturk airport bombing, Unver (2016) noted that “Turkey’s tourism economy is poised to recover from the recent airport attack. But that could certainly change if similar terrorist attacks continue.”

The Turkish Economy and the Attempted Coup

On July 14th, 2016, members of the Turkish military attempted to overthrown Erdogan, taking over key parts of Istanbul and Ankara. However, the attempt failed, and since then, Erdogan has cracked down on those he suspects of being behind the military coup attempt, which include Fethullah Gulen and his supports. For this article, we are interested in discussing the economic effects of the coup attempt in Turkey. This is a bit difficult, only because all the while that the post-coup government actions against Gulen supporters and others is transpiring, Turkey is also facing political unrest with its war in southern Turkey, and also its military involvement in the fight in Syria.

This is a very important point to keep in mind. We may be able to get more information on the specific effects of the coup attempt on the Turkish economy. However, despite not yet knowing what the post-coup has done to Turkey’s economy, the Turkish government has said that it will not change the economic strategies of the state. Turkish leaders such as Mehmet Simsek, who formerly held the position of the Minister of Finance, and now is the Deputy Prime Minister of Turkey, have argued that the coup-attempt will not shift what Turkey has been doing, saying that “Ordinary life, business life, will continue as usual.” He went on to say that “”The commitment is that we will maintain sound, rational macroeconomic policies. We will stick to market economy. There has never been, and will never be, consideration of any other model,” he continues. “Why? Because that model served Turkey well. It has done phenomenally well in the past and the Turkish economy has proved itself to be fairly resilient in the face of various shocks”” (Al Jazeera, 2016).

Others within the Turkish government noted a similar message. For example, Nilufer Sezgin, chief economist at IS Asset Management was quoted as saying that “”Even during the Lehman Brothers crisis that hit entire global credit markets, the Turkish economy did not experience a long-lasting decline in external debt generation or roll-over ratios, so to speak,” says Sezgin. “Going forward, we will monitor whether further rating institutions will keep downgrading Turkey or whether they are going to wait and see the actions to be taken and then act accordingly”” (Al Jazeera, 2016).

Other Factors to the Turkish Economy

Along with questions about safety, there are other factors that might affect (positive, or negatively) the continued growth of the Turkish economy. For example, for right now, it is argued that the Turkish government continues to be rather strong on the side of business, encouraging capital investment in the country. For example, “Ankara favors easing foreign investment in Turkey, including making necessary legal reforms to ensure investment security” (Unver, 2016). It has been argued that the risks to businesses are if they get involved in the local politics, whereas if one chooses to not get involved in such matters, then they may find positive conditions. Foreign direct investment grew greatly in 2015, with a 32 percent increase.

Unemployment and Domestic Savings in Turkey

There does continue to be some challenges to continuing economic growth in Turkey. For example, Turkish unemployment has hovered between 9 and 11 percent in 2016 (Bloomberg, 2016), which can be a concern, especially if the numbers continue to rise. Thus, there have been calls for improving employment, which in turn can increase a home’s living standards. It is therefore important to create jobs that are high productivity. This is important because “[u]pgrading existing firms to higher productivity and quality levels, and enabling the more successful firms to expand faster are the most promising avenues to improve the material foundations of well-being and increase economic participation of vulnerable groups” (11). In addition, The OECD (2016) also recommends the increase in formal jobs with regards to earning wages, as opposed to more self-employment.

In addition, there are also concerns that changes in the domestic savings rate, a rise in the cost of labor, as well as any ends to productivity could have a great impact on the overall health of the Turkish economy (Unver, 2016). The Turkey government has tried to minimize the possibility of these things from happening. For example, take the issue of savings. Worried about foreign capital leaving Turkey, the Turkish government has discussed the possibility of making it mandatory that employees are enrolled in what is a private pension so that they will be able increase their savings, but also help protect the economy from this capital flight. With the ratio of savings to GDP at 15.6 percent the prior year, the goals of the government was to raise this to 17.8 percent in 2016 (Hacaoglu & Courcoulas, 2016). This is a major concern for the health of the Turkish economy, since “Turkey has one of the lowest levels of household savings among the Group of 20 most industrialized nations, according to the International Monetary Fund” (Hacaoglu & Courcoulas, 2016). In addition, the Turkish government as also offered a 25 match on one’s retirement contributions beginning in the early part of 2013.

Thus, it has been argued that “any additional boost to savings could help workers direct cash toward longer-term assets such as bonds from short-term savings-account deposits favored by most households. The government has started pilot work on automatic inclusion in the pension system and capped fees from private pension savings to make the system more attractive” (Hacaoglu & Courcoulas, 2016). The OCED (2016) has said as much, noting that a rise in domestic savings will be one strategy in growing the economy.

Inflation in Turkey

One of the ongoing concerns by economists and the Turkish government has been the rise of inflation in the country. For example, in an October 4th report, the government viewed inflation to be 7.5 percent by the end of 2016, and 6.5 percent the following year. This was an increase from expectations of inflation being at 6 percent for 2017. Turkish Prime Minister Binali Yildirim stated that the Turkish government was trying to reduce inflation, and that the goal was for it to be at 5 percent for both 2018 and 2019 (Butler, 2016). The inflation number was as high as 8.05 percent in August of 2016. The decline during the late summer and early fall can be attributed in part to falling prices in food and also in the clothing industry (Gonultas, 2016).

Productivity in Turkey

The OECD (2016) along with others, have argued for the importance of increased productivity if Turkey wants its economy to grow. While certain sectors of the Turkish economy have done very well (such as manufacturing), there is still much more that can be done. As the OECD (2016) explains, “a core of well- performing firms is still hindered by shortcomings in the policy framework. A second category of firms sustain competition and deliver jobs, but have fallen behind in productivity. A large, third group of firms employ many low-skilled workers, but have low productivity and survive in an “informality trap” due to ineffective enforcement of rules and regulations. Improving this situation requires a comprehensive upgrading of the business environment to boost productivity and allow the most promising firms to grow faster” (2). Thus, for growth, it seems that Turkey will need to find ways to put in place state policies that will lead to more manufacturing, and also that there will need to be ways to ensure that productivity output is at its maximum levels. It is imperative that businesses have an equal chance to compete is essential (OECD, 2016).

Minimum Wage in Turkey

The Turkish economy has experienced higher minimum wages for workers in recent years. For example, in 2016, “the minimum wage was increased by 30%, to about 90% of the estimated median wage” (OECD, 2016: 12). Now, it needs to be remembered that the Turkish government helps with regards to wages by offering subsidies from 25 to as high as 40 percent of any increase. While this takes place for one year, there are many people who benefit from this program, as at least 25 percent of those in the work force fit in this category (OECD, 2016).

Turkish Economy References

Al-Jazeera (2016). Turkey’s economy after the coup. Al-Jazeera. 23 July 2016. Available Online: http://www.aljazeera.com/programmes/countingthecost/2016/07/turkey-economy-coup-160723082548100.html

Altug, S., Filiztekin, A., & Pamuk, S.E. (2008). European Review of Economic History, Vol. 12, No. 393-430.

Bloomberg (2016). Turkey Unemployment Rate Monthly Analysis–TUUNR. Bloomberg Markets. 6/30/2016. Available Online: http://www.bloomberg.com/quote/TUUNR:IND

Butler, D. (2016). Turkey end-2017 inflation seen at 6.5 percent-PM Yildirim. Reuters. October 4th, 2016.Available Online: http://www.reuters.com/article/turkey-economy-inflation-idUSI7N1BL01Q

Gonultas, B. (2016). Turkey: Annual inflation eases as food prices slow down. Anadolu Post. October 3, 2016. Available Online: http://aa.com.tr/en/economy/turkey-annual-inflation-eases-as-food-prices-slow-down/657126

Hacaoglu, S. & Courcoulas, C. (2016). Turkey Encourages Domestic Savings Amid Foreign Capital Flight. Bloomberg. January 19, 2016. Available Online: http://www.bloomberg.com/news/articles/2016-01-19/turkey-encourages-domestic-savings-amid-foreign-capital-flight

Kim, S. (2015). 13 months: how long it will take Paris to recover. The Telegraph. 2 December 2015. Available Online: http://www.telegraph.co.uk/travel/destinations/europe/france/paris/articles/13-months-how-long-it-will-take-Paris-to-recover/

Macovei, M. (2009). Growth and economic crisis in Turkey: leaving behind a turbulent past? European Commission. Economic and Financial Affairs. Available Online: http://ec.europa.eu/economy_finance/publications/publication16004_en.pdf

OECD (2016). OECD Economic Surveys. Turkey. July 2016. Available Online: http://www.oecd.org/eco/surveys/turkey-2016-OECD-economic-survey-overview.pdf

Solaker, G. & Gumrukcu, T. (2016). Turkey just slashed its growth outlook to the ‘most negative’ scenario. Business Insider. October 4th, 2016. Available Online: http://www.businessinsider.com/turkey-cuts-growth-forecasts-2016-10

Uğur, A. (2008). Import and Economic Growth in Turkey: Evidence from Multivariate VAR Analysis. East-West Journal of Economics and Business, Vol. XI – 2008, No 1 & No 2, pages 54-75. Available Online: https://www.u-picardie.fr/eastwest/fichiers/art68.pdf

Unver, H.A. (2016). The Real Challenge to Turkey’s Economy Isn’t Terrorism. Harvard Business Review. July 8, 2016. Available Online: https://hbr.org/2016/07/the-real-challenge-to-turkeys-economy-isnt-terrorism

World Bank (2016). Turkey Overview. World Bank. October 5, 2016. Available Online: http://www.worldbank.org/en/country/turkey/overview