Over the past two decades, the Republic of Turkey has undergone a profound economic transformation. Combined with an outward oriented trade policy, the Turkish economy has been pursuing a progressive growth in most sectors. In spite of certain difficulties, the Turkish economy has become more resilient to external and domestic fluctuations.
Turkey experienced two major economic crises in November 2000 and February 2001. The cost of these crises and of the subsequent transformation of the economy was substantial. Public sector’s net debt-to-GNP ratio nearly doubled within a year and the economy experienced its most serious contraction since the World War II. Economic activity dwindled and unemployment rose.
As a result of these developments, a new economic reform program was announced in April 2001, focusing primarily on the banking sector and financial markets. The overall strategy of the program comprises of three measures: Reforming the banking sector, ensuring stability in the money and foreign exchange markets and providing a sustainable growth environment in macro-economic balances.
During the last several years, the Republic of Turkey has been going through a very comprehensive process of economic reform and restructuring. With the strong backing of a single party government, the Turkish economy has gained enormous momentum and endurance especially in the last three years.
The Government places a particular emphasis on structural reform efforts. Starting from the financial sector, and with the accelerated privatization process, sweeping reforms including agriculture and social security, energy and telecommunication sectors have been successfully carried out by the Government. These are focused particularly on the reform of the public sector itself through measures in a number of topics ranging from public financial management to transparency and good governance.
Macro-economic indicators have been following a positive trend. Major objectives of the programme, namely, decreasing the inflation to one digit numbers, providing a higher and more stable economic growth and realizing structural reforms have been achieved.
The current Government’s economic program continues to deal with the root causes of Turkey’s underlying economic problems. The economic program focuses on restructuring the financial sector at large and removing the obstacles for private-sector-led growth.
Thanks to the strict implementation of the program, recovery has now resumed and the Turkish economy has become much more institutionalized. Economic agents are now more conscious of the importance of sustaining the program and the results it can deliver.
To be more precise, after an average growth of only 2,8 percent for ten years from 1993 to 2002, Turkey was able to achieve a growth rate of 5.9% in 2003. Last year’s growth rate was 9.9%, one of the highest in the world.
Interest rates, which are still high in comparison to most European countries, have been swiftly shrinking down to record low levels. It is also worth mentioning that instead of a policy of fiscal expansion and monetary loosening, growth has been driven mainly by private sector.
Productivity growth in private manufacturing sector has been around 10 percent on average during the last three years. This has been very encouraging in terms of sustainable development and competitiveness of the Turkish economy. It is also noteworthy that industrial and durable goods now consist a greater portion of the total production capacity of the Turkish economy.
Monetary policies conducted by the Turkish Central Bank, which is in line with the inflation target, were also crucial in bringing down inflation. There had been double-digits inflation in Turkey for more than three decades. The fact that inflation has been brought down despite a high growth rate is a landmark success. As a result of the strict economic program, inflation was cut down to single-digits last year. For 2004, the year-end target of inflation rate was set at 12%, but realized as 9.32%. Targeting an inflation rate of 8% for this year, the Turkish Government’s ultimate goal is to further reduce it so as to be in line with the rest of Europe.
As a further sign of growing self-confidence, Turkey discarded six zeros from its national currency at the beginning of 2005 and re-introduced low denomination banknotes and coins.
These developments owe much to fiscal policy of recent years. Turkey has been extremely careful with its budget for the last two years. The budget deficit to GNP ratio peaked to 17% in 2001. Turkey is expected to complete this year by a budget deficit of around 4.5 – 5%. Moreover, next year’s budget deficit is planned to be around 2%. Currently Turkey is in the midst of an IMF-led austerity programme that relies primarily on fiscal restraint. In this vein, fiscal discipline was the key policy instrument behind the successful results in the economy during the last two years. With a very strong fiscal policy, net public debt to GNP ratio declined to 63.5% at the end of 2004 from 90.5% in 2001. The composition of the debt stock has also been improved and become more resilient to disturbances in interest and exchange rates.
Despite the widening of current account deficit, which has been driven mainly by the gradual increase of imports, Turkey’s international reserves have continued to increase steadily as well. Jump in portfolio and FDI inflows are the key factors behind the strong reserve position. As of August 2005, the official reserve assets of the Central Bank of the Republic of Turkey have reached almost 43 billion USD, indicating the strength of the Turkish economy to possible turbulences in domestic and global markets.
Turkey has recently begun to extend its economic ties beyond the more familiar terrain of the Balkans, the Middle East, the Caucasus and Central Asia. Turkey’s vision for 21st century is to achieve integration with Europe and become a leading country in its region. Convinced that a liberal international trade system based on the principles of free competition, non-discrimination and elimination of barriers to trade are in the interest of the international community, Turkey’s trade policies since 1980s have been consistent with this principled stand.
Being one of the leading members of the OECD, Turkey also became a founding member of the WTO in 1995 and established a Customs Union with the EU in 1996. Free Trade Agreements have also been signed with various countries. Turkey conducts most of its foreign trade with EU and OECD countries.
With the Customs Union, Turkey has lowered its rate of protection and as a result industrial goods have started to circulate freely between Turkey and the European Union. With respect to imports from the third countries, Turkey applies the Common Customs Tariff.
Membership to the EU is a process, which has its roots back in late 1950s. It has been the main pillar of Turkish foreign policy, and consolidated over the years. Turkey was declared a candidate destined to become a full member in 1999. Since then, Turkey has undergone a very comprehensive reform process geared at meeting the membership criteria as stipulated by the EU. Consequently, based on the recognition by the European Commission and the Council on 17 December last year to have met sufficiently the Copenhagen Criteria, Turkey was given a firm a date (3 October 2005) to start the accession negotiations.
The start of the accession negotiation on 3 October has opened a new page in Turkey – EU relations. Now, Turkey is an accession country.
However, economic integration between Turkey and the EU is even more advanced due to the Customs Union, which has been in force for almost a decade now. Turkey is the only country to have entered into a Customs Union with the EU prior to accession. The EU holds a big share in foreign investment in Turkey. It is also a major trade partner of the country.
The progress in accession process accompanied by significant structural reforms in the Turkish economy will appeal to more foreign investors, which will reflect on the economic relations between Turkey and the EU positively.
Turkey’s economic contribution to the EU will not only be limited to its own economic potential but also encompass the strategic geography it is located in. Turkey is situated on a key location for the increasingly important energy, transportation, and communication networks that link the East to Europe. Aiming for leadership in foreign trade in its geography, Turkey has developed extensive trade relations with the Central Asian, Black Sea Economic Cooperation and the Economic Cooperation Organization countries. Turkey will thus be able to contribute both to the EU’s opening to these markets and to the procurement of raw materials and inputs that are of vital importance for the European economy.
Within the context of globalization, Turkey has been pursuing an outward-oriented development scheme and export-led growth since 1980. By virtue of the comprehensive structural adjustment program, among other measures, restrictions on imports have been lifted, safeguard practices reduced and foreign exchange transactions liberalized. By abandoning import substitution policies, Turkey has experienced major developments in its foreign trade.
On the path of becoming a completely open economy, Turkey has been searching for new markets and networks within a broader spectrum extending from the Far East to Latin America. The external trade volume in 2004 was 160 billion dollars, and GNP was 301 billion dollars. This means that the external trade volume exceeded % 50 percent of the GNP last year.
As a result of the economic reforms carried out during the last two decades, both the volume and composition of the Turkish trade have radically changed. In the process, the volume of Turkish exports has increased almost 22 times. While only 2.9 billion Dollars worth of goods were exported in 1980, this figure has grown constantly and reached the level of 63 billion Dollars in 2004.
This trend seems to be continuing when looked at the following data announced by the State Statistics Institute of the Republic of Turkey: In the first eight months of 2005, Turkey’s exports reached 46 billion USD, whereas the imports moved up to nearly 75 billion USD. These account to a total foreign trade volume of 121 billion USD for the said period.
Moreover, while Turkish exports had mainly been composed of agricultural products in the 1980s, manufactured goods now constitute around 90 percent of Turkish exports, indicating the structural transformation of the Turkish economy. Textiles still being the predominant sector, export products have been diversified to include iron and steel, glass and ceramic ware, leather and leather products, household appliances and vehicles and vehicle spare parts.
The main principles of Turkish import policy are the reduction of bureaucratic procedures, in compliance with GATT94 rules and securing the supply of raw materials and inter-mediary goods at suitable prices and certain quality standards.
When Turkey is taken as a center and a circle of four-hour flight distance is drawn, this circle covers one fourth of the world’s GNP and one fourth of the world’s population. Easy access to these huge markets is also something that makes Turkey an attractive place for foreign investors.
In parallel to the political and economic realignments unfolding in the world, the ongoing privatization program and huge energy and infrastructure projects have rendered Turkey more attractive to foreign investors over the recent years. With its dynamic economy, large internal market, competitive industry and skilled labor force, Turkey offers numerous opportunities for foreign investors.
A new “Foreign Investment law” was enacted by the Turkish Grand National Assembly on June 5, 2003. This Law grants equal rights to foreign investors and abolishes minimum foreign investment capital requirements, special foreign investment permit requirements, and the prohibition on purchases of Turkish real estate by foreign individuals and firms. For instance, it takes now literally just one day to start a company in Turkey. As a result, there has been a major increase in the amount of foreign direct investments entering Turkey. For instance, during the period 1993–2002, the FDI inflow to Turkey on average was about 1 billion dollars, which is very low compared to Turkish foreign trade or Turkish GNP. In 2003 this figure increased to 1.7 billion, and to 2.6 billion in 2004. It is a striking record that in the first eight months of 2005, the foreign direct investment entering Turkey amounted to 2.9 billion USD. From 2005 to 2007 we are expecting an inflow of an average of 5 billion dollars a year.
As part of the liberal trade and investment policies launched after 1980, a "Free Zones Law" was enacted laying the framework for the establishment of free trade zones in 1985, thus paving the way for acceleration of capital inflow and export-oriented investment. Currently, 20 free trade zones are in operation that have attained a total trade volume of 22.1 billion Dollars in 2004. There is no restriction on transactions conducted in Turkey’s free zones. While entrepreneurs are exempted from all kinds of taxes including income, corporate and value added taxes, revenues can be transferred to any country without prior permission.
Turkish businessmen have been expanding their investments steadily to the neighboring and wider regional countries. For instance, they do not hesitate, even under worst conditions, to do business in such countries as Afghanistan and Iraq. Traditional and strong engagements of our businessmen with their counterparts in most Arabic countries pave the way for easier accession to the Middle East market. Particularly, Turkish contractors have so far successfully completed over 3000 projects at international standards, in 63 countries across four continents. Their total business volume, nearly one third of which is in the Middle East region, reached 64 billion US Dollars by the end of June 2005.
Turkey’s privatization efforts have recently gained a significant momentum. Privatization portfolio includes major state economic enterprises such as Türk Telekom, State Tobacco, Salt and Alcohol Enterprises, Turkish Electricity Distribution Company, Turkish Airlines, iron and steel mills and sugar factories. This process is ongoing.
Privatization in Turkey not only aim to minimize state involvement in economic activities and to relieve the financial burden of state economic enterprises on the national budget, but is also geared towards the development of capital markets and the re-channelling of resources towards new investments.
Turkey has also embarked on grand infrastructure projects both within and outside its territory.
The Southeastern Anatolian Project (GAP) is the most ambitious development project undertaken by Turkey. It comprises 22 dams, 19 hydroelectric power plants, and numerous irrigation networks. The overall project will regulate 28% of Turkey’s water potential, generate 27 billion kw/h of electric energy and irrigate about 17,000 square kilometers of land, thus increasing the total arable land in Turkey by 50%. It is considered one of the 9 mega projects in the world.
Taking advantage of its geopolitical position and as an emerging regional energy terminal, Turkey has also pioneered large-scale energy transportation projects, through which oil and natural gas exports of the Caspian Basin will reach the Western markets. These projects have major long-term implications for both Turkey and Europe. Materialization of these projects will transform Turkey into a hub of energy transportation lines in Euroasia.
Turkey’s biggest asset is its young and well educated human resources. Turkey, at the same time, is the leading country in Europe in sending students to overseas, including the USA for higher education. All over the world it is the fifth in this field. This is expected to contribute considerably to enhance the human capacity not only of Turkey, but also of the whole region. A country of 72 million people, which has a per capita income of USD 4172 as of last year, is a sizeable market for any multinational company. If we adjust it to GNP by purchasing power parity per capita income in Turkey, it is close to 8000 US Dollars.
Turkey’s recent performance suggests that as long as the public sector keeps its house in order, private sector is ready and has the potential to take the lead both in Turkey and all around the globe. Turkey’s strong macro-economic performance has been a reflection of both the dynamism of the region and the unlocking of the high potential of its economy. Turkey has proved that confidence, consistency and continuity in macro-economic policies are the key to produce better macro-economic results.
Turkey was able to attain a significant result in a relatively short time on the economic front. Behind this success rests “confidence” and “stability”. The Turkish Government has been very consistent in the implementation of economic policy. It has also been very transparent and detailed in explaining the essences of the followed economic policies.
Hence, predictability, transparency and delivering on its commitments helped Turkey build a huge confidence not only in the domestic market, but also among foreign business circles. Turkey’s message to the outside world is quite clear: A resolute implementation of the adjustment policies and structural economic measures are the best way to tackle the difficulties and usher in a new period of prosperity with social benefits.
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