economic growth in turkey

Written by Nimra Dawood 11:47 am

The Economic Growth in Turkey Post the 2000-01 Turkish Financial Crisis

Although the two consecutive financial crises of 2000 and 2001 shook Turkey’s economy to the core, they also paved the way for major economic reform. Against that backdrop, the author, Nimra Dawood, reflects on the remarkable economic development witnessed in Turkey shortly after the financial crises.

About the Author(s)

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Nimra Dawood is an undergraduate student, pursuing a degree in international relations from National Defence University, Islamabad. She is interested in current affairs, geopolitical trends, regional political dynamics, and power transition in the international arena. She loves to critically analyze the changing dynamics of the world and the motives of key actors.

Economic Profile

Turkey, a country that occupies a prime and unique position on the globe, with parts lying in two different continents of the world, that is, Asia and Europe, has been a success story of economic growth and development during the early 2000s, witnessing peaks in 2013 by acquiring a GDP worth $950.58 billion.1 This impressive growth has made Turkey an upper-middle-income country.

Today, in 2021, the GDP of Turkey is around $794.5 billion2 which saw an extreme decline in 2020 with an inflation rate of up to 17.5%, unemployment around 12.9%, and poverty about 12%.3 The GDP composition of Turkey consists of agriculture (6.8%), industry (32.3%), and services (60.7%). With a population of 82 million,4 the per capita income of Turkish nationals is $8635.9 with a life expectancy of 77.4 years (2018).

The free-market economy of Turkey is largely driven by industries and the growing servicing sector, but its agricultural sector still makes up 25% of the total employment. The traditional industries of textiles and clothing within Turkey’s export mix were replaced by automotive, petrochemical, electronic, construction, paper, and lumber industries.5

Turkey was the largest exporter of vehicles, machines, oils, raw iron bars, hand-woven rugs, wheat flours, hot-rolled iron bars, marble, travertine, and alabaster in 2019,6 while being the world’s biggest importer of gold, refined petroleum, coal, vehicle parts, and scrap iron.7

This data reveals that Turkey exports worth $180,836 million of products to around 220 trade partners while importing products from 212 countries worth $210343 million, suffering from a negative balance of trade of around $29.52 billion.8 Based on the score of economic freedom (64.0), Turkey is the 76th freest country in the world in 2021. This score has been reduced by 0.4 points both due to the fiscal and political health of the country.9

The Transition of Economy

The reformist ideology of Mustafa Kemal led to the imposition of tariffs on Turkey by the West which was followed by the Great Depression of 1929; these conditions forced Turkey to change its economic policy. The hybrid system between communism and capitalism which is known as etatism was adopted in the mid-1930s.

Later on, in the 1960s, Turkey adopted a model of import-substitution developmental strategy, and the government started putting up Special Economic Enterprise (SEE). However, the economic problems still did not end, so the government announced economic reforms which led to structural adjustment programs with institutional changes making Turkey an export-oriented state in the 1980s.

These reforms are considered to be the changing point in the economy of Turkey. Furthermore, the conditions of the repeated recession were sorted out by adopting complete restructuring plans after the crisis of 2001.10

Development Story

The two consecutive financial crises of 2000 and 2001 in Turkey paved the way for a major reconstruction of the economy and the inclusion of new political actors (such as the AKP party), making Turkey one of the top economic successes of the world. This economic recovery post-2001 crisis was the result of both external factors like IMF, bilateral aid from the US, hopes of accession to the EU as well as a strong medium-term roadmap with clear and bold domestic reforms.

By the means of strong fiscal and monetary policies, macroeconomic stability was achieved. Moreover, it was further complemented by the structural changes incorporated in the form of restructuring and privatization, improved business environment, labor market, trade liberalization, and radical reforms in the banking sector.

These changes proved to be successful as foreign direct investments (FDI) broke all the previous set records, raising the level of employment which encouraged large domestic firms (conglomerates) to overcome the crisis more efficiently with huge profits. During the financial crisis (2000-2001), the real GDP of Turkey dropped by 5.7% which had proven to be the most severe economic recession in the country after WW2.

Simultaneously, the inflation rates were around 69% due to the sharp depreciation of its currency (Turkish lira).11 However, after the reconstruction of 2002/2003, the real GDP again grew at the rate of 6.2% (also reflects the natural rebound after a severe recession). Inflation, which had increased up to 80% during the crisis, significantly fell back to single-digit after the radical policy changes.

The economic boom helped to fill the gap between developed industrial cities in the West and relatively weaker areas called “Anatolian Tigers” including Konya, Kayseri, and Gaziantep. It is important to note here that the economy of Turkey always swings at extremes. There are days when foreign actors praise the overnight establishment of institutions and the adoption of reforms that grant liberties and equality to the masses only to be taken away the next day.12

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The Governmental Policies

After the crisis of 2000, talks between the Turkish authority and the foreign baking sectors started, to complement the calming effects of IMF, but this commitment also ended after the outbreak of another crisis in 2001. The government had to take decisive steps immediately after the crisis in the form of radical reforms and restructuring.

Therefore, in 2001, the Banking and Supervision Agency initiated a comprehensive restructuring program for the management of the banking sector.13  The four pillars of the program include:

  1. Restructuring the state banks
  2. Promote resolution of the TMSF banks
  3. Strengthening the private banks  
  4. Strengthening the regulatory and the supervisory framework

To strengthen the capital structure, a total of $22bn was given by the TMSF by the year 2001. Similarly, the “duty losses” were abolished and state banks were reinforced and privatized. Banks were also liquidated or transferred to other banks for management purposes. An additional amount of $28bn was given to the banks to strengthen their capital structure.

Importantly, the budget of TMSF was provided by the Turkish government – costing 31% of the total GDP. This was also increasing the public debt at the rate of 74%. Similarly, the policies given by Kemal Derviş were very vibrant and important after the crisis. The AKP party was elected for the economic goals presented in their election campaign.14 Therefore, they took several steps to improve the business environment of the country.

New laws on FDI reduced the role of bureaucracy which caused an increased flow of capital into the country. Also, a reduction in profit tax and simplification of tax regulations was made. Due to the privatization of state enterprises, the political position of the ruling party was strengthened. It is said that the economic growth of Turkey was assisted to a great degree by the reforms introduced by the AKP party.

Role of the Political Elite

Kemal Derviş, a Turkish economist, politician, and the former head of UNDP, took office as the Minister of State of Economic Affairs during the term of Prime Minister Bulent Ecevit. He put forth the successful three-year “Economic Stabilization Programme” backed by $32 billion from the World Bank and the IMF.15 The aim was to stabilize the Turkish Lira, reduce inflation to restructure the poorly regulated banking sector, and lift the economy.  

He urged citizens to accept the sacrifices and called for privatization, banking reforms, and cuts in government spending. In that critical position, Derviş not only focused on macroeconomic stabilization through the use of new fiscal and monetary policies but also incorporated a new regulatory framework for setting new rules for the market players.

In less than a year, 19 crucial laws were passed in a relatively divided legislature. These laws included controversial independence of Central Bank, public debt management, reduction in subsidies, restructuring the public banks, transparency of public procurement, and the establishment of regulatory and supervisory agencies in several sectors.

These laws resulted in nine independent regulatory agencies (IRAs) ranging from energy, banking, telecommunication to sugar (either reformed or established after the crisis of 2001). These reforms limited the executive discretion which was revolutionary in the Turkish economic governance and was a challenging task to add independent regulatory agencies in the bureaucratic apparatus of the country’s highly centralized administrative system.

Initially, the AKP party owned and helped these IRAs to expand their scope by appointing more capable members of the parliament like Economic Minister Ali Babacan, but after 2005, Recep Tayyib Erdogan became frustrated by the level of authority over financial resources given, especially to the Central Bank. The structural factors (2008 financial crisis) also encouraged Erdogan to adopt nationalist economic policies, disregarding the autonomy given through legal mandate.

Degree of Liberalization

The major problem Turkey faced after the premature transition to full capital account openness (from an import-substitution model) in the 1980s was the lack of parallel transition and institutional adaptation from an inward-oriented developmental state to an outward-oriented competition state.16

The fact that Turkey was exposed to financial globalization with macroeconomic instability and weak regulatory framework resulted in a fragile and lop-sided pattern of development which was immensely dependent on inflows of high speculation and reversible flows of short-term capital.

The promise of full membership status by the EU, the 2000-01 financial crisis along with the Customs Union Agreement (CUA) with the EU in 1995 dramatically increased the momentum of the trade liberalization process, exposing the domestic markets to external competition and initiatives for regulatory reforms.

The structural environment in which Turkey found itself in the post-crisis period with the heavy debt burden, geostrategic position in the context of post 9/11 world, close relationship with the US, and hopes of gaining the membership of EU, restrained it from adopting radically heterodox policies, as they were against the wishes of the international community.

This was the reason why not only large conglomerates but also small and medium-sized enterprises (SMEs) were also demanding the economic and political reforms proposed by the EU and IMF. In addition to this, there was an increased number of Turkish conglomerates enjoying expanded operations in neighboring countries like Romania, Bulgaria, and Russia. This transnationalization of major Turkish firms resulted in huge profits with lesser dependence on the national space.17

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Therefore, the post-2001 era is also known as a new phase in Turkey’s economic globalization with its political and economic ramifications. The level of trade liberalization was also increasing due to the increased confidence in the credibility of the government’s commitment to stabilization and reforms which was reflected by the increased level of real GDP, fall in interest rates, and increased trust of the investor.

The strong recovery process in the post-crisis era was facilitated the most by the surge of private investments which increased manifolds during the rule of the AKP party because of reforms of 2003.  

Role of International Cooperation

The reconstruction of Turkey’s economy was possible due to some external factors including assistance of IMF, involvement of the US, and impact of accession to the EU on the domestic environment of the country. On February 4, 2002, the executive board of the IMF approved a three-year loan of $16 bill to support the government’s economic program of 2002-2004. The plan enabled Turkey to immediately draw an amount of $9 bill from the IMF to initiate the plans of economic recovery.

However, even before the crisis, Turkey had concluded a standby agreement with the IMF in 1999.18 However, even this program did not prove to be beneficial mainly due to the lack of political influence of IMF to impose institutional reforms when the economy was not in an explicit crisis and also because of the coalition government consisting of the “losers” of the neo-liberal restructuring process.

The role of the IMF in the economic recovery of Turkey must be analyzed keeping in view the objectives of the US foreign policy. The US was trying to take advantage of the geo-strategic location of Turkey due to the increasing threat of terrorism from the Muslim world. Some scholars have argued that the post-crisis restructuring of Turkey must be analyzed through the US-IMF-EU trinity.

It was the US that promoted the cause of Turkey’s membership into the EU to save it from the radical religious sentiments that were common in the Muslim world.19 The EU appeared as an important anchor for enabling the economic reforms in the country. The policymakers opined that the growing confidence of both the domestic and the international actors could meet the economic and political component of the Copenhagen criteria.

Many legislations directed towards human rights and domain of civil liberties were because of the pressure on Turkey to meet the European standard. In this context, the EU had become the source of long-term institutional anchor which was needed to promote stability and break the resistance faced in adopting reforms within the domestic arena of Turkey. Also, the hopes of Turkey’s accession attracted large amounts of FDI with large-scale privatization.

We can conclude that the element of EU accession not only caused a boom in the economy but also the democratization process helped masses at large, attaining civil liberties and rights; the best part of which was the CUA (1995).20 However, the “anchor-credibility dilemma” is still researched upon as the “cyclical” nature of the accession has further eroded the prospects for sustained reforms.

Trade Specialization

The reforms of 2002 witnessed an immense flow of FDI into the country. Much of the amount of this FDI was going into the servicing sectors, according to one estimate, 82% of the service sector accounted for the largest share in the FDI (2005), including the banking and financial intermediate industry ($28 bill), transport, storage and telecommunication industry ($11 bill), and the wholesale and retail trade industry ($3.4 bill).

Although the manufacturing sector attracted an amount of $10 bill during 2005 in foreign investment even in the times of global financial crisis of 2008, the figures associated with the sector accounted for $3.2 bill suggesting that this sector did better as compared to the other sectors. It is also interesting to note here that the automotive sector of Turkey which later on became the leading export sector did not earn much of the attention of foreign investors during the early 2000s.21  

The competitive advantage gained by Turkish consumer electronics and home appliances can be analyzed by the fact that during the year 2006, Turkey’s Vestel Company became the largest TV producer of the entire European continent.22 While in the year 2005, Vestel and Beko (rival Turkish industry) accounted for more than half of all the TV sets manufactured in Europe.

Similarly, another Turkish electronics producer, Profilo Telra was ranked as the third most utilized TV producer of the continent. All this became possible due to the Customs Union Agreement signed between Turkey and the EU that incorporated the increased market share of Turkish firms in the EU market of color TVs, digital devices, and white goods.

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In the automotive industry, Turkey ranks at the 14th position in the world, producing more than 1.3 million vehicles annually according to a study of 2015.2 Global car manufacturers like Fiat, Hyundai, Oyak-Renault, Toyota, Honda, and Ford have their production plants in Turkey. Also, Turkish automotive industries like TEMSA, Otokar, and BMC are among the largest producers of vans, buses, and trucks.

Another sector for which Turkey is famous is the armaments industry, the annual exports of this sector are around $1.6 billion (2014).24 Turkey was made a level 3 partner of the F-35 JSF developmental program, and TAI has built aircrafts such as the F-16 Fighting Falcon for the Turkish Air Force.

Conclusion

The economic development of Turkey by quick reforms after the crisis of 2001 and increased flow of FDI is still studied by others as an example. This era has made Turkey a competitive market of electronics and automotive, facilitated by the political and economic actors. However, the hollow economy of Turkey which is largely dependent on foreign investment has shown a disaster in the Covid-19 scenario, raising the level of balance of trade deficit of the country and is headed towards another recession.


Endnotes

1 “Turkey GDP,” Trading Economics, accessed September 1, 2021, https://tradingeconomics.com/turkey/gdp.

2 “Turkey GDP,” https://tradingeconomics.com/turkey/gdp.

3 Aysu Bicer, “Turkey’s unemployment rate at 12.9% in Q1,” Anadolu Agency, May 18, 2021, https://www.aa.com.tr/en/economy/turkeys-unemployment-rate-at-129-in-q1/2245399.

4 “Turkey Population,” Worldometer, accessed June 23, 2021, https://www.worldometers.info/world-population/turkey-population/.

5 “Turkey,” CIA, last modified September 7, 2021, https://www.cia.gov/the-world-factbook/countries/turkey/.

6 “Turkey,” https://www.cia.gov/the-world-factbook/countries/turkey/.

7 “Turkey,” https://www.cia.gov/the-world-factbook/countries/turkey/.

8 “Turkey Trade | WITS Data,” World Integrated Trade Solution (WITS) accessed June 23, 2021, https://wits.worldbank.org/countrysnapshot/en/TUR

9 “Turkey Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption,” The Heritage Foundation, accessed June 23, 2021, https://www.heritage.org/index/country/turkey.

10 “Turkey’s Trade Liberalization and It’s Accession to the European Union Customs Union,” GRIN – Buy Academic Papers and Publish Yours for Free, accessed July 8, 2021, https://www.grin.com/document/116113.

11 “An Overview of the Turkish Economy: Outlook and Current Perspectives,” Middle East Institute, accessed July 8, 2021, https://mei.edu/publications/overview-turkish-economy-outlook-and-current-perspectives.

12 İzmen, Ümit; Yilmaz, Kamil Koç University – TÜSİAD Economic Research Forum, Istanbul, “Turkey’s recent trade and foreign direct investment performance,” EconStor, last modified 2009, https://www.econstor.eu/dspace/bitstream/10419/45435/1/599164409.pdf

13 “The Turkish 2000-01 Banking Crisis,” RaboResearch – Economic Research, accessed July 8, 2021, https://economics.rabobank.com/publications/2013/september/the-turkish-2000-01-banking-crisis/.

[14] Ibid.

[15] “(PDF) Foreign Direct Investment in Turkey: Historical Constraints and the AKP Success Story.” ResearchGate. Last modified January 1, 2008. https://www.researchgate.net/publication/232999486_Foreign_Direct_Investment_in_Turkey_Historical_Constraints_and_the_AKP_Success_Story.

[16] Ibid

[17] “An Overview of the Turkish Economy: Outlook and Current Perspectives,” Middle East Institute, accessed July 8, 2021, https://mei.edu/publications/overview-turkish-economy-outlook-and-current-perspectives.

[18] IMF, “Press Release: IMF Approves Augmentation of Turkey’s Stand-By Credit to US$19 Billion,” PRESS RELEASE NO. 01/23, last modified 2001, https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr0123

[19] https://www.worldbank.org/en/country/turkey/overview

[20] “Turkey,” European Neighbourhood Policy And Enlargement Negotiations – European Commission, last modified January 12, 2021, https://web.archive.org/web/20210820002905/https://ec.europa.eu/neighbourhood-enlargement/countries/detailed-country-information/turkey_en.

[21] “Foreign Direct Investment, Net Inflows (% of GDP) – Turkey,” World Bank Open Data | Data, accessed July 8, 2021, https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=TR.

[22] “Bloomberg.” Bloomberg – Are You a Robot?. Accessed July 8, 2021. https://www.bloomberg.com/businessweek/globalbiz/content/jun2006/gb20060609_371863.htm.

[23] “Production Statistics | Www.oica.net,” Www.oica.net, accessed July 8, 2021, https://www.oica.net/category/production-statistics/.

[24] Milliyet.com.tr, “SAVUNMA SANAYİ İHRACAT ARTIŞI, TÜRKİYE ORTALAMASININ DÖRT KATINDAN FAZLA OLDU,” Milliyet, last modified February 27, 2015, https://www.milliyet.com.tr/yerel-haberler/istanbul/savunma-sanayi-ihracat-artisi-turkiye-ortalamasinin-dort-katindan-fazla-oldu-10644220.

Bibliography

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