MESOP ANALYSIS : Turkey’s Achilles Heel: The Economy

By W. Robert Pearson | Non-Resident Scholar – The Middle East Institute | APR 14, 2015

In Turkey today, as President Recep Tayyip Erdogan and Prime Minister Ahmet Davutoglu wrestle over who governs, the political uncertainty they are creating may be a ground tremor about to generate an earthquake. The earthquake, however, may not only be political in nature; it may also be economic.Turkey’s remarkable economic growth is now in jeopardy. Its economy is drifting, beset by contrary winds of economic policies and political wrangling. There is a clear track forward, but to reach the next level of prosperity, the government must undertake a major new effort.

While turmoil has characterized Turkey’s political scene for the last 15 months, the government has survived. When the December 2013 scandal erupted over widespread corruption in the ruling Justice and Development Party (AKP), many thought it would be the end of then Prime Minister Erdogan’s career. Less than a year later in August, however, Erdogan went on to win the presidential election with over 50 percent of the vote. The economy had a lot to do with that result.

Since 2002, the AKP had crafted a miracle of economic growth for Turkey. Per capita income for Turks exploded from a low of about $3,500 in 2002 to nearly $11,000 in 2013, a 300 percent increase. In that decade, the traditional opposition parties, lashed to their ideological masts, were just trying to survive the AKP typhoon. In 2014, Turkish voters saw no economic plan better than that of the AKP and feared a return to coalition government chaos if the AKP lost. So many in the electorate held their noses and chose economic gain over evident corruption, repression of freedoms, and a rightward shift on governance and religion. Three key decisions by Turks over previous decades had brought Turkey to the level of an upper middle-income country. First, Turgut Ozal in 1980 freed Turkey from stifling state capitalism by focusing on exports, liberal trade, and investment reforms. Second, in 1995 the Turkish-EU Customs Union opened the vast European market to Turkish goods and encouraged investment in Turkey. Bilateral Turkey-EU trade has increased by four times as a result. Third, in 2002, after an economic collapse, Turkey implemented an IMF plan that cleaned up the nation’s banks, whipped inflation, and unleashed the untapped energies of Turkey’s small and mid-sized entrepreneurs. It was this last step that propelled Turkey from low-income to middle-income status.[1]

These were vital and positive steps, but they are not enough to propel Turkey into “high-income” status globally, despite its clear potential to reach this mark. Turkey’s economy is now stuck just below the top tier of global economies. Open conflict over the Central Bank’s independence and interest rate levels has weakened the currency and roiled the AKP. Growing lack of confidence has driven Turkey’s share of emerging market foreign direct investment back to 1988 levels. Steps badly needed to improve the Turkey-EU Customs Union are in suspension. No solid foundation has been laid for Turkey to join the Transatlantic Trade Investment Partnership (TTIP) negotiations between the United States and the EU. Critical failures to undertake institutional reform in government transparency and accountability, rule of law, and judicial integrity, among others, are obstacles to Turkey’s quest for greater prosperity.

If Turkey decides to leap ahead economically, it needs to follow three steps.

First, allow the Central Bank to do its job of protecting the currency and encouraging foreign investment. Interest rates lower than appropriate pump excess money into the economy, spur inflation, and degrade consumer buying power and fuel speculation rather than encourage productive growth. Turkey has made this mistake before with near ruinous results.

Second, work to restore friendly relations with the U.S. Congress. Treating Congress like a Turkish domestic political opponent, as it currently does, will not achieve any good end. Consumers of Turkish exports live across the United States and would be delighted to have Turkey folded into TTIP negotiations. The March 18 letter from 74 U.S. senators to Secretary of State John Kerry expressing deep concerns about Turkish democracy is a fire bell in the night for U.S.-Turkey relations. How will Turkey expect the United States to champion its inclusion in momentous trade talks if it continues to erode all the goodwill Ankara spent decades creating?

Third, make institutional changes that ensure transparent governance, rule of law, and judicial independence and remove the shroud of darkness over the state’s role in ensuring justice and democratic freedoms. Investment confidence and entrepreneurship do not flourish in an atmosphere of intimidation, confusion, and legal uncertainty.Since December 2013, Turkey’s leadership has been focused on an internal power struggle, first between two factions in the government partnership and now among AKP factions themselves. Do the leaders, whose popularity has rested in major part on their economic record, understand what is at stake if their fratricide begins to destroy the economy before it destroys each other?  

A government, even Turkey’s, cannot talk its economy into prospering. Three tough decisions that Turks took—two by liberal traditional governments in 1980 and 1995 and one by the AKP in 2002—have the country poised for a leap ahead. Current political turmoil and economic policy confusion underline the urgency of the crisis and the need to step forward boldly with corrective measures.

[1] A recent excellent World Bank study outlines these steps and their results. See .