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ISIK OZEL Meeting at the Market: Turkey and the CEECs
1
Meeting at the Market:
Turkey and the Central and Eastern Europe
byIsik Ozel
Sabancı University Orhanlı, Tuzla
34956 Istanbul, Turkey
1.
Introduction
Turkey and the countries of the Central and Eastern European Region (CEECs) were
considered as adversaries that belonged to rival blocs of the Cold War era: the former has
been a member of the NATO which was the military pillar of the alliance between free market
economies of Europe and the USA, whereas the latter were members of the Warsaw Pact that
served as the military arm of an economic dependence/cooperation area formed by socialist
economies under the leadership of the Soviet Union. Despite such difference with respect to
historical trajectores, striking similarities have emerged between Turkey and the CEECs,throughout the process of drastic transitions these countries have gone through since the
1980s and 1990s.
Turkey, in addition to its NATO membership, was a founding or early member of
major multilateral organizations which set the post-war international economic order,
including the OECD, GATT/WTO, the IMF, and the World Bank. Despite its membership in
these international organizations that were created to serve different purposes around the
commonly upheld principle of the supremacy of free enterprise, the Turkish economy had
many structural characteristics that were not, indeed, in line with this principle. Its alliance
with the free market economies of the Western bloc did not stop Turkey from having such
market distorting policies and practices as price controls, a protectionist international trade
regime, and strict barriers to international capital movements, at least until the beginning of
the 1980s. Likewise, state-owned-enterprises (SOEs) had a sizable share in economic activity
prior to the privatization drive which was launched in the 1980s but implemented in the 1990s
and 2000s. To summarize, economic policies and practices the country had adopted prior to
1980 were far from free market principles, and the Turkish development strategy over the
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1930-1980 period was largely built around a curious mix where capitalistic structures were
coupled with heavy state interventionism, usually referred to as ―state-led-capitalism.‖
Yet, since the early 1980s, the country has gradually moved forward towards higher
market orientation and promoted increased openness and integration into global commodity
and capital markets. As a result, Turkish economy has been transformed from a nearly-closed
economy with heavy government intervention to a liberalized market economy highly
integrated into the global markets. Interestingly, some of these drastic changes that Turkey
experienced during its transformation are akin to those post-communist CEECs have gone
through following the end of the Cold War. The CEECs’ transition was certainly more drastic
than Turkey’s and progressed much faster as it was fostered by the support they received from
the international community, particularly the European Union which quickly accepted thesecountries as full members, whereas Turkey has had little support from its Cold War allies in
Europe, although it has been waiting for membership in the EEC/ EU for over five decades.
Turkey has eventually become an official candidate whose accession negotiations started in
2005, and the accession process per se provided a strong anchor for Turkish reforms. A major
difference between the CEECs and Turkey has emerged in the process of negotiations: the
CEECs received significant assistance from the EU throughout the 1990s and this bolstered
the transformation in most CEECs, whereas Turkey has not benefited from such assistanceeven after its official candidacy. Another major difference lies in the Customs Union
membership that Turkey has been the first country which signed the Customs Union
Agreement without a full membership in the EU. This bears assymetrical costs for Turkish
economy which will be discussed in the following sections.
Although Turkey has experienced major transitions since the 1980s, institutional
weaknesses still prevail, constituting a major problem in economic governance. Institutional
deficiencies marked the transition process particularly until the 2000s, populist politicians,
facing fierce political competition, usually bypassed the existing rules and could not establish
proper institutions, while decree-based-ruling prevailed throughout the 1980s and 1990s. One
of the most significant examples of such ruling can be observed in privatization process which
was initiated and conducted in the absence of a legal framework up until the mid-1990s.1
1 Ozel, I. ―Beyond the Orthodox Paradox: The Break -up of State-Business Coalitions in Turkey in the 1980s,‖
Journal of International Affairs, vol.57, no.1, Fall 2003 and Atiyas, I. 2009. ―Recent Privatization Experience in
Turkey, A Reappraisal‖ in Öniş, Z. and F. Şenses, eds.,2009. Turkey and the Global Economy, Neo-liberal Restructuringand Integration in the Post-Crisis Era, London: Routledge, pp.101-122.
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Policies and development strategies have gone through a sea of change and the country has
evolved into a freer market economy with strong links to the global markets, and major
institutional reforms have been implemented since the late 1990s. The establishment of
independent regulatory agencies in various sectors is a central element of these institutional
reforms.2 Nevertheless, economic governance still suffers from weak or ineffective
institutions. Even the recent EU accession process has not cured this problem, because de jure
formation and existence of institutions in order to fulfill the necessary criteria does not
necessarily guarantee their de facto operation.3 The discrepancies between de jure design and
de facto operation of various institutions in Turkey can be easily observed regarding rule of
law, regulatory quality and voice and accountability and Turkey’s governance scores are
generally lower than the average scores of the CEECs.4
The purpose of this chapter is to take a comparative look at respective transformations
of Turkey and CEECs so as to conduct an analytical discussion based on the similarities and
differences regarding the experiences of these countries. The following sections present a
brief account of the transformation that the Turkish economy has gone through, and provide
comparisons with the economies of the CEECs. They also shed light on Turkey’s engagement
in multilateral and regional agreements and organizations, which act as important anchors in
policy-making as well as shifts in development strategies.
2. Turkey and CEECs: Where do They Stand Economically?
Swinging in a pendulum between developing and advanced economies for a long time
period, Turkey is now considered an upper-middle-income country, with a fairly developed
industrial base, similar to major CEECs like Poland, Czech Republic and Hungary. The
Turkish economy has had a striking performance in the first decade of the 21st century,
commonly applauded by international organizations. By attaining an annual growth rate of
7.2% between 2002 and 2007, Turkey’s gross domestic product (GDP) reached $735 billion,
making the 17th largest economy in the world5 and placing it among the G-20 group. Ranking
the sixth largest in Europe, Turkish economy as a whole is significantly larger than the
2 Öniş, Z. and F. Şenses, eds.,2009. 3 Ozel, I. and I. Atiyas, “Regulatory Diffusion in Turkey: A Cross-Sectoral Assessment” in T. Çetin and F.
Oğuz, eds., The Political Economy of Regulation in Turkey, Springer, forthcoming and the ―Turkey 2009Progress Report‖ prepared by the Commission of the European Communities to monitor progress of Turkey inthe context of the requirements maintained by the EU Accession Process:http://ec.europa.eu/enlargement/pdf/key_documents/2009/tr_rapport_2009_en.pdf . 4
Kaufmann, D. A. Kraay and M. Mastruzzi. 2009. Governance Matters VIII: Governance Indicators for 1996-2008. World Bank Policy Research Working Paper, No. 4978.5 World Development Indicators, 2009, World Bank (based on 2008 data).
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economies of the CEECs. Nevertheless, in terms of GDP per capita ($9,900 in 2009) Turkey
remains within the ranks of ―upper -middle-income countries,‖ due to its vast population (72
million as of 2010).6
The Turkish economy has had a striking performance in the first decade of the 21st
century, commonly applauded by international organizations. By attaining an annual growth
rate of 7.2% between 2002 and 2007, Turkey’s gross domestic product (GDP) reached $735
billion, becoming the 17th largest economy of the world.7 As one of the G20 countries in the
world and the sixth largest economy in Europe, Turkish economy is significantly larger than
the economies of the CEECs. Nevertheless, Turkish GDP per capita ($9,942) only situates
Turkey within the rank of ―upper -middle-income countries,‖ due to its vast population (73
million as of 2010).Before the global financial crisis broke out, Turkish economy was one of the fastest
growing economies in Europe and the Middle East, particularly over the 2002-2006 period.
However, this growth spurt needs to be put into perspective by taking into account the
contribution of the global liquidity boom which boosted the growth rates in many economies
particularly in the middle-income-countries category, Turkey’s peer group, including the
CEECs. In fact, the global liquidity boom helped not just Turkey. Many countries grew at
unusually impressive rates. The Polish GDP per capita, for example, jumped from $4454 in2000 to $13.857 in 2008, while the Hungarian GDP per capita rose up to $20,729 from $5521
in the same time period.8 Thus, favorable global environment along with the performance of
similar countries should be taken into account when evaluating the recent Turkish
performance. Turkish economic growth was only slightly greater in the 2002-2007 period
than that of its counterparts in the CEECs: 6.9% in Turkey and 5.2 in Poland.9 The chart
below displays a basic comparison in terms of GDP per capita between Turkey and the
CEECs including the two new members of the EU: Bulgaria and Romania.
6 http://databank.worldbank.org
7
World Development Indicators, 2009, World Bank (based on 2008 data).8 Ibid.9 http://databank.worldbank.org
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Chart 1. GDP per capita, Turkey and the Selected CEECs, 1990-2008
(Current US dollars)
Source: http://databank.worldbank.org
Within such favorable global environment, Turkish economy experienced some of the
highest rates of growth since the 1960s (as the average real GDP growth was 7.2% in the2002-2006 period). Turkey’s performance in terms of both economic growth and institutional
reforms between 2002 and 2006 is similar to that of some CEECs such as Poland in the 1990s
when a virtuous cycle took place in terms of attaining macroeconomic indicators and
undertaking institutional reforms.10
While the growth spurt in Turkey during 2002-2006 was relatively greater than in the
CEECs, it needs to be evaluated considering the severe economic crisis the Turkish economy
went through in 2000-2001, which caused a drastic downturn in Turkish economy, signified
by 6-7% annual drop in GDP. Hence, this spurt was partially a recovery from the crisis, and
it was facilitated by both sound macroeconomic policies and a favorable environment in
global markets in the early 2000s. Nevertheless, the global financial crisis which emerged in
2007 halted this upward trend, when the Turkish economy was far from ready to take such a
major challenge. It encountered the crisis in a relatively weak position with a high current
10 Öniş and Şenses, 2009.
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account deficit, low savings rate, and already high unemployment along with myriad
institutional flaws particularly with respect to governance.
In spite of the growth spurt in Turkey in the 2000s, Turkish income per capita ($9,942)
is still lower than in CEECs, but higher than in Bulgaria ($6,546) and Romania ($9,300), the
two new members of the EU. The composition of the Turkish GDP is considerably similar to
those in the CEECs along with Bulgaria and Romania: Total value added in industry
constitutes 27.6 % of the GDP, while agriculture makes up 8.6% and Services 63.7% of the
GDP. As can be seen in the Table1 below, the share of agriculture is the highest in Turkey
amongst the selected countries below. Nevertheless, when the share of agriculture in GDP in
these countries is examined before their respective accession dates, a more striking picture
appears: Agriculture constituted a remarkably high percentage in the GDP in most of thesecountries before their accession into the EU. The share of agriculture in GDP was 20.1% in
Poland in 1997; 41.8% in Romania and 25.8% in Bulgaria in 1999. 11 Although agriculture’s
share has also been declining in Turkey, it still strikes as a problem, particularly when the size
of the rural population (27%) and accompanying low productivity in agriculture are
considered. Table 1 below presents a basic comparison of the GDP composition in selected
countries and Turkey.
Table 1. Composition of the GDP in CEECs and Turkey (2008 values)
GDP per
capita*
GDP** Agriculture/
GDP (%)
Industry/
GDP (%)
Services/ GDP
(%)
Turkey 9,881 735 8.6 27.6 63.7
Bulgaria 6,546 27 7.3 20.5 62.2
Romania 9,300 200 7.1 25.2 67.6
Poland 13,857 528 4.5 30.8 64.6
Hungary 15,408 155 4.3 29.4 66.2
CzechRepublic
20,729 216 2.5 37.6 59.9
*Current U.S. dollars; **Billions of current U.S. dollars
In terms of macroeconomic indicators, performance of the Turkish economy compares
favourably to the group of countries we consider in some respects but unfavourably in others.
An area where the Turkish economy’s performance is relatively poor is inflation. Currently,
inflation rate in Turkey is relatively higher than in the CEECs. Although Turkey has had
remarkable success in bringing down the inflation rate from plateaus like 120.3% in 1994 and
68.5% in 2001, it is still high compared to 4.3% in Poland and 6.1% in Hungary.12 Only in
11 http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ 12 Eurostat, European Commission: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
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Bulgaria amongst the countries we consider in this study, the inflation rate is higher than in
Turkey (12.3%). Despite such relatively inferior performance regarding inflation, Turkey has
implemented sound fiscal policies, resulting in diminishing debt/GDP and public expenses/
GDP ratios, comparable to or slightly better than those in the CEECs.
A persistent problem facing the Turkish economy is the current account deficit, that
rose to $41.6 billion in 2008 from $22.1 billion in 2005, representing an increase in its ratio to
the GDP from 0.3% to 5.6% between 2002 and 2008.13 Current account deficit increases
rapidly during fast growth episodes, and falls when the economy slows down. Chart 2 and
Table 2 below display selected indicators including inflation, central government’s debt and
current account deficit.
Table 2. Selected Macroeconomic Indicators in CEECs and Turkey, 1990-2008
Turkey Czech R. Hungary Poland Bulgaria Romania
Inflation, CPI (annual %) 60,30 n/a 28,90 555,30 23,80 n/a
Government debt (% of GDP) n/a n/a n/a n/a n/a n/a
Cash surplus/deficit (% of GDP) n/a n/a n/a n/a -5 n/a
Cur. account balance (% of GDP) -1,70 n/a 1,10 5,20 -8,20 -8,40
Inflation, CPI (annual %) 88,10 9,10 28,30 28 62 32,20
Government debt (% of GDP) n/a 13,20 91,70 n/a n/a n/a
Cash surplus/deficit (% of GDP) n/a -0,90 -9 n/a -5,10 n/aCur. account balance (% of GDP) -1,30 -2,40 -3,60 0,60 -0,20 -5
Inflation, CPI (annual %) 54,90 3,90 9,70 10 10,30 45,60
Government debt (% of GDP) n/a 13,70 61 n/a n/a n/a
Cash surplus/deficit (% of GDP) n/a -3,60 -2,70 n/a -0,39 n/a
Cur. account balance (% of GDP) -3,70 -4,70 -8,30 -6 -5,58 -3,60
Inflation, CPI (annual %) 8,70 2,90 8 2,40 8,40 4,80
Government debt (% of GDP) 44,30 25 69,30 42,80 n/a n/a
Cash surplus/deficit (% of GDP) 1,40 -1,60 -4,80 -1,80 3,50 -2,30Cur. account balance (% of GDP) -5,80 -3,30 -6,70 -4,70 -25,30 -13,60
Inflation, CPI (annual %) 10,40 6,30 6 4,30 12,30 7,80
Government debt (% of GDP) 44,40 26,50 73,80 44,70 n/a n/a
Cash surplus/deficit (% of GDP) -1,90 -1,50 -3,80 -3,70 -3,10 -4,60
Cur. account balance (% of GDP) -5,70 -0,50 -7 -5 -23,80 -11,80 2 0 0 8
1 9 9 0
1 9 9 5
2 0 0 0
2
0 0 7
Source: World Development Indicators: http://databank.worldbank.org and International Financial Statistics
Accessed on August 25, 2010 and Central Bank of Turkey: www.tcmb.gov.tr/yeni/eng/ Accessed on August 26,2010.13 Central Bank of Turkey: www.tcmb.gov.tr/yeni/eng/ Accessed on August 26, 2010.
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ISIK OZEL Meeting at the Market: Turkey and the CEECs
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3. Turkey’s transformations
Turkish economy has gone through substantial transformations since the early 1980s. The
sections below will examine these transformations in various episodes and draw some
comparisons with the CEECs with respect to the content and pace of the transformation
processes.
3.1. Turkish Economy before 1980
Until the early 1980s, Turkey had a nearly closed economy, mostly oriented toward
the domestic market and subject to heavy state intervention in various domains in the context
of state-led development and import-substitution-industrialization strategy (ISI). Having
swung between the Soviet Russia and the capitalist U.S. for a few decades, Turkey became a
close ally of the U.S. in the late 1940s and 1950s. In the same time period, the country went
through major political and institutional changes: a partial democratization process took place
entailing a transition from single-party-regime (1923-1950) to multi-party regime (1950
onwards with lapses under military rules), a process supported by the U.S. aiming to create a
capitalist democratic regime neighboring Soviet Russia. This was the critical juncture which
separated the Turkish path from those of the CEECs where communist regimes were launchedimposed by the Soviet Russia in the same time period. Nevertheless, the Turkish ―capitalistic‖
path did not necessarily rely on free market principles, but comprised major state intervention.
Although capitalistic development in Turkey was eagerly supported by the Western
Bloc, particularly the U.S., Turkey had already begun its state-led development in the 1930s,
to the extent that the so-called ―etatism‖ was even put into the Turkish constitution in 1937.
State ownership of the means of production was accompanied by heavy protectionism in the
context of the ISI. State-led development in Turkey gave rise to large state investments which
employed more than half of the workforce in the late 1970s.14 The gist was that the state
invested in manufacturing in order to lead the private industrial enterprises, and provided
them with the necessary inputs at cheap costs and cheap credits by the state-owned banks.
Thus, domestic business was created and nurtured by the state, justified by the development
14 Waterbury, John. 1993. Exposed to Innumerable Delusions, Public Enterprise and State Power in Egypt,
India, Mexico and Turkey, New York: Cambridge University Press.
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strategy, resulting in a high level of capital concentration, and the domination of large
conglomerates--with access to multi-sectoral investment and inter-firm proprietary structures-
-as the main corporate structure within big business.
For a business sector that emerged under the auspices of an interventionist state was
highly dependent on it, the ISI regime and its adjoining arrangements (overall an ―ISI pact‖)
were considerably lucrative for several decades. The state’s protectionist tr ade regime,
constituted by high tariff and non-tariff barriers, particularly favoured big business and
created tools for rent-distribution. 15 The conglomerates were encouraged to specialize in
distinct fields, partitioning the production of consumer products, and providing a major
incentive towards monopolization. The insulated market had the additional benefit of a large
population with an inflated purchasing power, as the state — the largest employer — institutedhigh wage policies and subsidized the agricultural sector. The interest and exchange rate
regimes completed the scope of the implicit pact: A repressed financial system, together with
a fixed overvalued exchange rate regime, was an essential component of the ISI regime. The
government deliberately sustained the band between inflation and real interest rates by fixing
real interest rates at negative levels, creating a strong investment incentive particularly for big
business through providing credits at interest rates lower than those of inflation. 16
Concomitant to the ISI strategy’s core principles, exchange rates were also kept at a ―desiredlevel‖ to encourage domestic industrialists to use the aforementioned ―priorities‖ to import.
Throughout the implementation of the ISI until the 1980s, Turkey benefited from
certain exemptions provided by the multilateral and regional organizations the country had
already taken part in, such as generalized system of preferences (GSP) of the GATT and the
Additional Protocol of Ankara Treaty which exempted Turkey from liberalization in various
categories, while EEC members unilaterally abolished its tariffs for manufactured products
originating in Turkey. In fact, like some other mid-income countries with large domestic
markets, Turkey had considerable success with the ISI strategy particularly in the 1960s and
early 1970s, especially with respect to industrial growth, but the economy was hit by severe
crises in the 1970s. As in other countries that had implemented ISI strategy, Turkey also went
15 Krueger, A. 1974. ―The Political Economy of the Rent-Seeking Society,‖ The American Economic Review, 64(3): 291-303.16
For instance, by 1979-80, the rates were as such: 9% interest rates on deposits, 11% on government bonds,
20% interest rates on credits as opposed to 100% inflation. Source: Various interviews with former bureaucrats
and politicians. Also see Birand, Mehmet Ali and Soner Yalcin. 2003. The Ozal, Bir Davanin Oykusu, Istanbul:Milliyet Yayinlari, 6th Edition, p. 131.
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through the ―inherent crisis‖ of the ISI’s second phase, aggravated by the oil crises. Oil crises
bolstered a devastating inflationary cycle and accompanying recession, particularly towards
the end of the decade. When the second oil crisis hit in 1979, Turkey’s economy was already
deep in a foreign exchange crisis, hobbling its import capacity and causing widespread
shortages, resulting in a triple-digit inflation rate (rising from 20% in 1977 to 100% in
1980).17 Political crisis accompanied the economic crisis, resulting in an impasse in the
parliament that gridlocked the presidential elections in 1979-80.18 Socio – political tension was
substantial: the country was highly polarized, armed groups from the extreme left and right
engaged in assaults, assassinations; clashes between extremist groups and the state’s security
forces intensified. Hence, such severe tensions paralyzed governments’ attempts at
stabilization in the late 1970s.19
3.2. Process of Transformation, Episode I: 1980-89
In the midst of such crises, Turkey launched a thorough market reform program in
1980 under the auspices international actors.20 This major change in development strategy
was accompanied by the change of the political regime, as the armed forces intervened in
politics, yet again in 1980. After having implemented ISI strategy for about five decades with
occasional attempts to open up, in the 1980s Turkey became one of the forerunners of the
market reform process amongst developing countries. Until the late 1980s, it was the poster
child of international financial institutions (IFIs) for its pioneering role and the speed of the
reform processes it implemented. The market transitions were initiated under the auspices of
the IFIs, and resulting hefty IFI loans in different time periods.
17 For further analyses of the crises and the mechanisms through which their intensity increased, see Kazgan,
Gulten. 2004. Tanzimat’tan 21. Yuzyila Turkiye Ekonomisi, Istanbul: Bilgi Universitesi and Rodrik, D. 1991.
―Premature Liberalization, Incomplete Stabilization: The Ozal Debate in Turkey,‖ in Bruno et al. eds, Lessons of
Economic Stabilization and Its Aftermath, Cambridge: The MIT Press.
18 Bianchi, R. 1984. Interest Groups and Political Development in Turkey. Princeton, N.J.. Princeton University
Press.
19 Krueger, Anne. 1995. ―Partial Adjustment and Growth in the 1980s in Turkey,‖ in Dornbush, Rudiger and
Sebastian Edwards eds., Reform, Recovery and Growth, Latin America and Middle East , Chicago and London:
University of Chicago Press.
20
Several adjustment programs had been implemented since the 1950s, but many of them were left incomplete.See Nas, Tevfik F. and Mehmet Odekon, 1988. Liberalization and the Turkish Economy, New York, Westportand London: Greenwood Press and Kazgan (2004).
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Simultaneity of the Turkey’s severe crisis and its increasing geo-strategic importance
before the end of the Cold War intensified the interaction between Turkey and those
international actors, while easing the terms of the loans.21 The milestone of this new era was
the reform program popularly known as ―January 24 decisions‖ which aimed for ―opening-
up‖ of the Turkish economy. This comprehensive policy bundle included a wide range of
liberalization in the areas of financial markets; foreign trade; capital markets; and
privatization of public enterprises. However, the realization of these ambitious goals not only
took a long time (some of which, like privatization, have not been completed as of 2010), but
their application diverged from initial orthodox rhetoric, since it has ended up with a mish-
mash of government intervention and populism.
Therefore, the beginning of Turkish transformation had preceded the end of the ColdWar which brought about drastic transition processes in the CEECs. Although the transition
of the CEECs started after that of Turkey, theirs took a much steadier and quicker path than
Turkey’s. The EU’s support for the transitions in the CEECs along with the concrete
prospects for accession to the Union played an important role in the CEECs’ transitions. Such
international and regional support was mostly backed up by the domestic actors who had been
alienated by the communist regimes in the preceding decades. In the Turkish case, however,
the domestic coalitions for transitions were not as strong as in the CEECs either, as strongdomestic actors with intensified preferences had vested interestst in the previous development
strategies where they had access to sizeable rents in the context of state-led development
strategy and accompanying protectionist regime.
The Turkish experience with market reforms throughout the 1980s and 1990s was
remote from a steady pattern, but mostly followed an unsteady path mostly entailing
liberalization without stabilization, except for the period 1980-84, when stabilization was
relatively achieved. After the transition to democracy in 1983, populist measures were used
extensively, impairing the stabilization efforts, a trend exacerbating in the 1990s during the
coalition governments.22 Despite its status as one of the pillars of the program, import
liberalization stalled until 1984 and only accelerated after 1989. Although the 1980 package
had announced the opening of the Turkish economy to the world, the implementation of trade
liberalization in its initial phases emphasized export promotion rather than overall
21 International creditors were mainly OECD, European Community, Paris Club, IMF and the World Bank in
1970s’ Turkish political economy. See Rodrik (1991).22 Öniş, Z. 1998. The Political Economy of Turkey in Comparative Perspective, Istanbul: Bogazici UniversityPress.
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liberalization, turning de jure Washington Consensus into a de facto mercantilism in the
initial phases of liberalization.23 Import liberalization gained a new momentum with the
initiation of the Customs Union preparation process in 1989.
3.3. Process of Transformation, Episode II: 1989-2000
Although not as turbulent as in the CEECs, 1989 was also a turning point in the
Turkish transition process. While the free elections were held in Czech Republic, Hungary,
Poland, and Rumania, initiating a new era as the Cold War was unfolding, Turkish transition
accelerated further. However, the transitions in the CEECs would take a much faster path
despite their initiation for about a decade later than Turkey’s. The material and institutional
support provided by the EU for the CEECs considerably reinforced the transition process,
whereas Turkey did not benefit from a similar support in that time period.
The critical changes in Turkey in this time period were launching the Customs Union
process and implementation of the capital account liberalization in the midst of severe
instabilities. Capital account liberalization, usually referred to as ―premature,‖ increased the
vulnerability and instability of the economy.24 It enabled arbitrage-seeking short-term capital
inflows (hot money) and made high interest rates sticky, triggering a process between
governments (borrowing through GDIs at high interest rates); commercial banks (client of
GDIs and host of short-term foreign capital inflows); and individual investors (lend to
commercial banks at extremely high overnight interest rates). Governments caused and
exacerbated a disastrous vicious cycle not only by increasing indebtedness, but also by their
choice of borrowing instruments, whose functioning was possible due to capital account
liberalization. By the same token, high interest rates persisted in the 1990s, since they were
instrumental for attracting hot money. On the other side, high interest rates hindered
investment because of the skyrocketed cost of credits for the real sector. In sum, governments
used capital account liberalization and resulting inflows for their own political purposes, to
finance their expansionary fiscal policies and debt.
23 ―Washington Consensus‖ refers to a set of specific policy reforms that entail a thorough liberalization andstabilization of previously closed economies. It was originally developed in 1989 by John Williamson at theInstitute of International Economics and particularly suggested for Latin American countries which had gonethrough severe economic crises in the 1980s. For Williamson’s own account on the Washington Consensus andits various interpretations, see http://www.iie.com/publications/papers/williamson0204.pdf 24
Rodrik, D. 1991. ―Premature Liberalization, Incomplete Stabilization: The Ozal Debate in Turkey,‖ in Brunoet al. eds, Lessons of Economic Stabilization and Its Aftermath , Cambridge: The MIT Press.
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1990s are usually considered as the ―lost decade‖ for the Turkish economy, resonating
that of Latin America in the 1980s. Credibility of governments’ policies diminished in this
period, as political competition and resulting increased populism prevailed in economic
policy-making. Macroeconomic indicators worsened throughout the 1990s, stabilization
efforts stumbled, as expansionary fiscal policies shaped economic policy-making. The
Turkish economy got into a spiral of high levels of debt, interest rates, and inflation along
with a new debt crisis where domestic debt mostly replaced the foreign debt. Public sector’s
increased financial demands, accompanied by financial liberalization, triggered an
inflationary spiral. As the public sector borrowing requirement (PSBR)25 increased, the public
sector’s share in the financial markets increased by means of government debt instruments
(GDIs). High interest rates and inflation impaired investment; public-private competition in
the financial markets (and the former’s virtual hegemony in those markets) diminished the
availability of credits.26
Drowning in the lure of hot money, the Turkish economy was trapped in a vicious
cycle of debt and sticky rates of interest and inflation, leading to severe crises in 1994 and
2001. The culprit behind the disastrous spiral was not only the government, but business also
contributed to this vicious cycle by transferring its resources to the GDIs as well as other
securities, partially facilitating a ―rentier -economy.‖
27
The state used GDIs as ―buffer instruments‖, helping industrialists and banks making big profits, while it compensated its
deficits with further borrowing, based on an implicit agreement between industrialists and the
state. Such spiral gave rise to three major financial crises emerged in 1994, 2000 and 2001,
the latest being the worst in the history of modern Turkey.
3.4. Process of Transformation, Episode III: Post-2001
The 2000-2001 crisis in Turkey became a major milestone with respect to
transformation of the Turkish economy, entailing substantial stabilization accompanied by
major institutional reforms. In accordance with the ―post-Washington Consensus‖ which
25 Conventionally used as an indicator of public account balance. Akcay et al. (1997) suggests that PSBR is abetter indicator of fiscal deficits and inflation compared to consolidated budget deficits. Akcay C. O., C. E. Alperand S. Ozmucur, Budget Deficit, Inflation and Debt Sustainability: Evidence from Turkey (1970-2000). 26
Between 1989 and 2000, fixed private investment increased only 5.2% on the average, while changes in
private stock (contribution to growth) averaged 0.17% (based on 1988 prices). Source: Treasury Statistics, 1980-2003. The Undersecretariat of Treasury, General Directorate of Economic Research, Ankara: 2004, p.5.
27 Kose, A. H. and E. Yeldan. 1998. “Disa Acilma Surecinde Turkiye Ekonomisinin Dinamikleri: 1980-1997,” Toplum ve Bilim,
77, pp. 45-68.
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emerged in the aftermath of the Asian Crisis in 1997, Turkish economy has gone through
major institution-building and reforming, a process eagerly fostered by international and
regional actors, such as the IMF and the EU, in accordance with the newly emerging belief in
―good governance.‖ As regulatory governance was considered central in the post-2001
transformation, regulatory frameworks were created and independent regulatory agencies
were established in various sectors, the most important of which is finance. In this process,
external anchors, multilateral and regional alike, have played critical roles through both their
conditionalities and transnational policy networks they have led.28 Amongst those anchors,
IMF and the EU have been the most prominent in terms of their influences in the recent
reform process. The declaration of Turkey’s official candidacy to the EU in 1999 and the
beginning of the accession negotiations in 2005 have been critical turning points, pushing
Turkey to implement policies towards fulfilling the Helsinki criteria. Despite such strong
anchor provided by the EU, Turkey has not had access to the funds which the CEECs had
benefited from in the 1990s before their accession to the Union, and this consitutes a
significant difference between Turkey and the CEECs.
Geopolitical considerations also mattered in terms of increasing funding for the
recovery of the Turkish economy from the crisis. Turkey’s 2001 crisis nearly coincided with
9/11 attacks in the U.S., giving rise to a restructuring of U.S.’ foreign policy, which, entailedincreasing importance of Turkey in the Middle East. Accordingly, this translated into
enhanced endorsement by the U.S. for the IMF funds flowing into Turkey. Thus, Turkey has
re-acquired its geostrategic importance which it had lost since the end of the Cold War.
In the midst of the political turmoil that emerged in the aftermath of the 2001 crisis,
another major change has taken place in Turkey, a new political party, Justice and
Development Party (JDP), with roots in the Islamist movement came to power in 2002,
landing in a strictly secularist state establishment of Turkey. Despite the prevalent enigma
about the JDP, which was able to form a one-party government following successive coalition
governments between 1991 and 2002, one can easily assert that JDP-government has been the
most committed government regarding institutional and policy reforms, along with Turkey’s
accession process to the EU. Such commitment was more striking in the first term of JDP in
government (2002-2007) when major institutional reforms were carried out, and stabilization
was achieved, as depicted in Table 2. The Turkish economy grew at an average rate of 7.2%
28Öniş, Z. and F. Şenses, eds.,2009.
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between 2002 and 2006, when the global liquidity also prepared a suitable ground for fast
growth for several countries including Turkey. It should also be underlined that the ―success‖
of the JDP in terms of recovery form the severe crisis was mainly based on the programs
(particularly the ―Strong Economy Program‖) designed and implemented by the previous
coalition government, that appointed transnational technocrats such as Kemal Dervis to
crucial posts like the Minister in charge of the Economy. Yet, presence of a strong base for
recovery cannot undermine the commitment, and resulting performance of the JDP
governments for furthering reforms, and stabilizing the economy. Some of the indicators of
stabilization were the decline in inflation rate (from 35% in 2002 to 6.5% in 2009).29 Since
2002, FDI flows increased to an unprecedented level, partially facilitated by effective
privatization of state owned assets-as explained in Section VI below. Despite these positive
developments particularly between 2002 and 2007, macroeconomic indicators began to
worsen in the second term of the JDP government (2007- ), which coincided with the global
financial crisis. Turkish economy encountered the crisis without stabilization and strong
governance.
4. International Trade and the Level of Trade Openness
The Turkish market has increasingly opened up since the 1980s, with a ratio of tradeopenness around 60-65%.30 The increase in this ratio strikes as significant when the ratios in
pre-1980s are considered, but the level of openness is still lower than in some CEECs and
other middle income countries (130.9% in the Czech Republic, 136.4% in Hungary and
71.6% in Poland).31 Nevertheless, the limitations of the conventional definition and measures
of trade openness along with relative importance of the trade volume realized in a particular
country in the global trade volume ought to be taken into consideration with respect to the
differences in these ratios.32
Since its entry into the Customs Union in 1995, Turkey has harmonized its tariffs with the
Common Externall Tariff of the EU: Turkey's weighted protection for imports of industrial
products has zeroed down (dropping from 5.9%) for products originating in the EU and
EFTA, while diminishing from 10.8% to 6% for products originating in third countries. '
29 Central Bank of Turkey. http://www.tcmb.gov.tr/yeni/eng/ Accessed on August 26, 2010.30 Here, the conventional measure of trade openness, which is the overall trade volume as a percentage of theGDP) is being used. Although this is the most commonly used measure of openness, there are certaindisagreements about it31
World Development Indicators, World Bank, 2009.32 For the new approaches about the measures of trade openness, see Squalli, J. And K. Wilson. 2006. ―A NewApproach to Measuring Trade Openness,‖ http://www.business.curtin.edu.au/files/squalli_wilson.pdf
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Although Turkey has also reduced its non-tariff barriers, they are still used in various forms
such as antidumping and safeguard measures which have been subject to disputes before the
WTO and the EU.33 When the increase in Turkish exports is analyzed, successive
devaluations most drastic of which were carried out in 1980, 1994 and 2001, following the
severe crises, strike as a major drive. Contracting demand as a result of the domestic crises
also provided an impetus for expanding exports. For instance, in 2001 alone, exports volume
rose by 13% reaching up to 31,3 billion dollars. In 2007, this volume went up to 107.2 billion
dollars, surpassing the 100 billion dollar ―phychological threshold.‖ Such positive trend was
expectedly interrupted by the emergence of the global crisis, and the Turkish exports declined
by 22.6% in 2009, while the rate of decline in the same year was 26.1% in the US, 35.7% in
Rumania and 33.5% in Greece — in current values.34
In addition to the expansion of overall trade volume, another positive trend is increasing
diversification of export markets.35 Currently, the EU is the largest market for Turkish exports
by constituting around 55-60% of overall Turkish exports. In terms of countries of origin for
Turkish imports, EU also has a share over 40-45%.36 Turkey’s dependence on the EU for
export markets strikes as a problem, particularly in the context of the global crisis through
which the demand in European markets has contracted drastically.37
33 See the ―Turkey 2009 Progress Report‖ prepared by the Commission of the European Communities to monitor progress of Turkey in the context of the requirements maintained by the EU Accession Process:http://ec.europa.eu/enlargement/pdf/key_documents/2009/tr_rapport_2009_en.pdf 34 ―The Development of Turkey’s Exports,‖ 2010 Report of Turkish Undersecretary of Trade.35 http://www.dtm.gov.tr/dtmweb/index.cfm?action=detay&dil=TR&yayinid=1128&icerikid=1234&from=home Accessed on August 30, 2010.36
http://ec.europa.eu/enlargement/candidate-countries/turkey/eu_turkey_relations_en.htm37 Eurostat, European Commission. http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Accessed on August 25, 2010.
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Table 3. INTERNATIONAL TRADE of TURKEY, 1923-2009
(Million US dollar)
Year Exports Imports Trade
Balance
Volume
1923 51 87 -36 138
1930 71 70 1 141
1950 263 286 -22 549
1970 588 948 -359 1.536
1980 2.910 7.909 -4.999 10.819
1990 12.959 22.302 -9.343 35.261
2000 27.775 54.503 -26.728 82.278
2005 73.476 116.774 -43.298 190.251
2008 132.027 201.964 -69.936 333.991
2009 102.139 140.869 -38.730 243.008
Source: Turkish Statistical Institute (TUIK)
Trade agreements with the EU, EFTA, and other regional organizations
Turkey has been a member of twelve regional organizations and agreements the most
important of which is the Customs Union which covers all industrial goods but does not
address agriculture (except processed agricultural products), services or public procurement.
Besides establishing a common external tariff for the products covered, the Customs Union
aims Turkey’s alignment with the acquis communautaire in various internal market areas.
Turkey has been the first country which signed the Customs Union Agreement without
a full membership in the EU and this causes major concerns for Turkish economy. By signing
the Customs Union Agreement in 1995, Turkey not only conformed with the External Tariffs
of the EU, but it has also become obliged to adopt all preferential and free trade agreements
(PTAs/ FTAs) that the EU signs with the third countries. Hence, Turkey is required to provide
EFTA countries, GSP beneficiaries, and all other countries the EU has PTAs with, with
various tariff preferences without being incorporated into the process of advisory mechanismsprescribed in the 1/95 Decision of the Association Council. Such automatic requirement
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imposed by the Customs Union has been highly problematic since it only includes goods
originating from the EU member states while excluding those originating from Turkey.
Although there has been a recent practice of the EU to include a ―Turkey clause‖ in its PTAs,
this usually is subject to third parties’ reluctance due to the similarity in these parties’ e xport
products with those of Turkey’s. Overall, Turkey has an ambiguous and asymmetrical
position in the Customs Union Agreement, since it has no say on the EU agreements with the
third countries. Hence, what Turkey has done to alleviate the cost of such assymetry is to sign
FTAs invidividually with the third countries. So far, it has signed FTAs with many countries
and blocs including EFTA, Israel, the former Yugoslav Republic of Macedonia, Croatia,
Bosnia-Herzegovina, Tunisia, Morocco, the Palestinian Authority, Syria, Egypt and Albania.
Turkey has also become a member of the Euro-Mediterranean partnership and in the process
of concluding FTAs with all other Mediterranean partners through the prospects of Euro-
Mediterranean free trade area.
Ambiguities about Turkey’s CU membership are not limited to the FTAs with third
countries, and do not only originate from the EU, but also caused by Turkey. Although
Turkey is generally considered to have gone through ―a high level of alignment with the
Customs Union,‖ it is deemed to have undertaken limited progress in complying with
common commercial policy and the most important issue in this domain is the vessels andaircrafts originating from Cyprus, a current member of the EU. Other pending issues are duty
relief legislation, free zones, duty relief, transit, fight against counterfeit goods, etc. 38
The Customs Union membership exposed Turkish firms to fierce competition, which
initially caused severe reactions from certain sectors like automotives and pharmaceuticals,
based on the acclaimed concerns that ―domestic producers would go bankrupt.‖39 Despite this
initial reaction, particularly large Turkish firms in these sectors have shown that their
adjustment capabilities were, indeed, fairly high, to the extent that they started exporting to
the European markets at significant volumes — particularly automotives and consumer
durables.
Turkey’s effort to become a member of the EU/ EEC has almost a six-decade-long
history, which had begun in 1959 when Turkey applied for associate membership of the
38
Turkey 2009 Progress Report prepared by the Commission of European Communities. Seehttp://www.euractiv.com.tr/fileadmin/Documents/TR_Rapport_to_press_13_10.pdf 39 Interviews with industrialists, Istanbul July 25, 2004.
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European Economic Community (EEC). Then, in 1963, the Ankara Agreement was signed,
foreseeing Turkey’s membership in three phases, followed by the Additional Protocol of 1970
which had put forward that Turkey’s full integration to the CU would take place within 22
years. Although the Turkish state perceived the CU membership as a natural step toward full
membership in the EU, the accession route has proved rather thorny, as the accession
negotiations began in 2005.
In addition to the Customs Union, Turkey has also taken part in several regional
agreements and organizations such as the Economic Cooperation Organization (ECO) with
Iran along with several other countries in the region, Organization of the Black Sea Economic
Cooperation (BSEC), Organization of the Islamic Conference and the D-8 Group, mostly
composed of Muslim countries. The prolonged process of the EU accession and the perceived
reluctance of the EU to integrate Turkey lead the Turkish state to disperse its focus onto other
regional agreements, besides its commitment in the Customs Union. Recent developments in
Turkish politics, particularly the rise and incumbency of the Justice and Development Party
(AKP), which has Islamist leanings, bolstered the increasing emphasis in cooperation with
neighbouring regions, particularly Muslim countries, a process interpreted as the shift in
Turkish foreign policy.
5. Cooperation with multilateral agreements and organizations
Turkey has taken part in nearly all multilateral agreements and has been a member of
multilateral organizations since their inception in the post-war period. It has been member of
the UN since its establishment, and one of the non-permanent members of the UN-Security
Council, a post it will hold until December 2010.
Becoming a member of the so-called ―Bretton Woods-Trio,‖ namely, the IMF, IBRD /World Bank, GATT/ WTO, signified Turkey’s alliance with the ―Western Bloc‖ during the
Cold War. It also became a recipient of the Marshall Plan what was accompanied by transfer
of funds: one of the two main drivers (together with Greece) of the well-known Truman
doctrine, and a NATO member since 1949. Turkey is also a founding member of the OECD
that had evolved from the Organisation for European Economic Cooperation, of which
Turkey was also a founding member since 1948. Having been incorporated into these
organizations in the context of the bipolar politics of the postwar era, Turkey has mostly
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struck as an outlier in these groups particularly with respect to the level of both economic and
political development.
Although Turkey made commitments for the GATT regarding the liberalization of its
international trade regime, it has been exempted by means of the GSP (generalized system of
preferences) clause, paving the way for sustaining its protectionist trade regime until the
1980s. Since the 1980s, the IMF and the World Bank have been the leading agents that
pushed Turkish economy’s transformation through their conditionalities attached to the funds.
Turkey has been one of the ―champions‖ amongst the recipients of IMF funds since the
1950s, as it has signed many stand-by agreements with the IMF. Although the main emphasis
of IMF coditionalities was on liberalization and stabilization in the 1980s and 1990s, such
emphasis started including fundamental institutional reforms in the late 1990s, influenced by
the so-called ―post-Washington Consensus‖ emerged after the Asian Crisis. Turkey’s
membership in the WTO coincided with the Customs Union Agreement signed in the same
year with the EU. Thus, the WTO and the EU became the main anchors in shaping Turkey’ s
trade policy.
6. Foreign Direct Investment
One of the most remarkable changes in Turkish economy is the increase in FDI
inflows since the 2000s fostered by the EU accession process along with stabilization of the
Turkish economyIt also required monetary and fiscal stability. Turkey went through an
extremely sluggish path regarding the FDI inflows and it was identified as a country with low
FDI attractiveness throughout the the 1990s. It received consirerably limited inflows
compared to the CEECs along with other middle-income countries in Latin America and Asia.
For instance, in 1999, Turkey received around one-tenth of overall FDI inflows into Poland(783 vs. 7270 million dollars). Nevertheless, there has been a remarkable upward trend in
terms of FDI inflows into Turkish economy: FDI went up to $10 billion in 2005 and nearly
$30 billion in 2006, while the volume has been declining since the beginning of the global
financial crisis, despite a gradual recovery in 2010.40 The chart below shows the changes in
FDI inflows in Poland and Turkey in the last decade:
40 World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf
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Chart 3. FDI Inflows into Turkey and Poland, 1999-20009
(billion US dollars)
Source: World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf
The global credit bubble of the early 2000s played an important role in the substantial
increase in FDI inflows in both Poland and Turkey. Although Turkey made a big jump in the
2000s and began to attract similar amounts of FDI on an annual basis — to those in the
CEECs — it is still far from catching up with the CEECs in terms of the FDI stock: $249
billion in Hungary and $183 billion in Poland, $116 billion in the Czech Republic, while only
$78 billion in Turkey. Such major difference in FDI stocks is caused by Turkey’s sluggish
performance in the 1990s with respect to attracting FDI inflows.41 Turkey’s economic and
political instabilities in the 1990s, when the CEECs and their peer group received substantial
FDI inflows, impaired Turkey’s FDI attractiveness. As explained in the preceding sections,
Turkish economy suffered from high inflation and interest rates, along with high public debtin the 1990s. In a business environment where the state crowded out the market by becoming
the rival of the corporate sector in the financial markets, foreign capital hesitated to invest in
Turkey. Economic reforms took an erratic pattern, oscillating between anti-reform and pro-
reform stances even in the course of the same government, brought about by political
instabilities. Such a protracted history of start-stop reforms due to weak commitments of the
incumbents and skepticism towards foreign capital fed by populist policy-making curtailed
41
World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf
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potential FDI inflows to Turkey. An insolvent and indebted state, chronic inflation, credit
difficulties, insider credit transactions, along with various other problems in the Turkish
market accumulated and triggered the 2001 crisis, which provided another backlash against
the FDI inflows.
However, the fast recovery after the 2001 crisis led to a spurt of FDI inflows into
Turkey. Recent improvements in public finances which helped economic stabilization,
faciliated yielding positive signals to the investors, leading to the inflows of considerable
amount of FDI. A recent privatization programme (effectively privatizing many SOEs unlike
the previous programmes in the 1980s and 1990s) was also instrumental in attracting FDI
inflows. The ongoing EU accession process has become a major pull factor for FDI, by
bolstering Turkey’s creditworthiness. Recent improvements in legal and regulatoryframework are also significant for positive signaling to the investors. Establishment of the
Advisory Council, abolishing Treasury’s authority in providing permits, easing the process of
starting business are all noteworthy developments. The dominant skepticism toward foreign
investment is disappearing, as the AKP governments since 2002 have been influential in
changing the prevalent discourse against foreign capital inflows. Thus, a combination of
domestic, international and supranational factors triggered increasing FDI inflows in Turkey
between 2001 and 2007. Parallel to the global trend in declining FDI inflows, FDI inflows toTurkey showed a substantial decline after the emergence of the global financial crisis in 2008,
dropping from 18 billion dollars in 2008 to 8 billion dollars in 2009. FDI outflows from
Turkey also followed a similar trend: they declined from 3 billion dollars in 2008 to 2 billion
dollars in 2009.42
6.1. FDI Flows in CEECs
The positive impact of FDI on export booms and competitiveness can be observed in
all CEECs. FDI inflows accelerated towards CEECs long before their actual accession to the
EU, paralleling with rising credibility in the respective markets. Since the early 1990s, CEECs
received substantial amounts of investment particularly originating from EU-based companies
and, resultingly, FDI inflows constituted about 20% of total investment and nearly 5% of
overall GDP (Barysch 2006: 5). Hungary, Poland and the Czech Republic provide good
42
Source: World Investment Report, 2010, UNCTAD, P.43. http://www.unctad.org/en/docs/wir2010_en.pdf
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examples for high volumes of FDI inflows and their spillovers regarding growth and
competitiveness. The table below shows annual FDI inflows into major CEECs and Turkey
between 1999 and 20009.
Table 4. FDI Inflows to Turkey and Selected CEECs, 1999-2009
(Millions of dollars)
1999 2002 2007 2009
Turkey 783 1037 22023 7611
Bulgaria 819 479 12388 4467
Rumania 1041 1106 9921 6329
Hungary 1977 854 71485 -5575
Czech Republic 6310 9319 10444 2725
Poland 7270 4119 23561 11395
Source: World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf
6.2. Rivalry amongst the countries to attract FDI
The rivalry over attracting FDIs is pervasive in today’s economy. Global FDI flows
grew by 29% in 2004, but the lion’s share is again acquired by developed nations, which
experienced almost 40% increase only in 2004. FDI inflows to the EU-15 had even a higher
surge: 76% increase in 2004. Although at a more mediocre level, the flows into the EU-10
also increased considerably: 36% in 2004, reaching a record level of US$ 38 billion. FDI into
developing countries overall was up 41% in 2004, and 13% in 2005, achieving the highest
levels of the FDI inflows in this category. For instance, China itself received about $95
billion, while Russian Federation received $75 billion in 2009.43 Thus, compared to such
levels of FDI attracted by other countries, FDI inflows in Turkey are still at modest levels.
Currently, the competition for FDI inflows is not only limited to pulling higher
amounts, but also higher quality. Some CEECs have been able to pull high-tech and R&D
investment. Czech Republic and Hungary are good examples for such upgraded FDI.
Upgrading the FDI gives a considerable competitive niche to certain countries.44 A significant
pulling factor with respect to such high quality FDI is the investment in human capital. In
general, CEECs have significant advantages regarding human capital brought about by higher
enrollment rates in schools, science education, etc. Turkey can also achieve a lucrative niche
in terms of high-tech FDI, as it has its own leverage in terms of human capital. Turkish
43 Source: UNCTAD 2009: http://www.unctad.org/wir Accessed on August 26, 2010.44 Barysch, K. 2006. ―Is Enlargement Doomed?” Public Policy Research, 13 (2): 78-85.
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workforce, in general, falls into a remarkably competitive category in the world. 45
Nevertheless, the most striking problem in Turkish labor market stems from is its dual quality:
juxtaposed to a relatively larger pool of hi-skill workforce including engineers, senior
managers, etc., there is a much larger pool of low-skill or no-skill labor. Thus, more
investment in education is essential for Turkey’s competitiveness.
Turkey’s leverage in comparison with its counterparts can be its well-established
coporate structure and culture, as the country has had a longer experience with
entrepreneurship; well-developed supplier-buyer chains and distribution channels;
sophisticated company operations and strategies. Another advantage might be demographic:
with a vast market of seventy-two million population, which is much younger on the average
than that in Europe, Turkish market can be appealing for foreign investors.
7. Governance
Governance has been a central issue in Turkey as the country has suffered from
institutional deficiencies throughout its transition process in the last three decades. A critical
turning point in terms of goverance has been the 2000-2001 financial crisis which created a
significant exogenous shock giving rise to a series of new instituions. 46 Although major
institutional reforms have been undertaken in Turkey since 2001 and these reforms have
improved governance, such improvement has not yet put Turkey into the ranks of its peers
like the CEECs. Turkey’s governance scores with respect to various indicators such as the
rule of law, regulatory quality and voice and accountability are generally lower than the
average scores of the CEECs.47
In the context of institutional reforms, Turkey has established independent regulatory
agencies in several sectors. As a result of a ―regulatory inflation‖ carried out in the late 1990s
and the early 2000s, regulatory agencies were not only established in key network sectors,
where market failures necessitate regulatory intervention, but also in unusual sectors such as
agriculture (specifically for tobacco and sugar markets) which did not necessarily suffer from
usual dynamics of market failures.48 Initially, the major demand for regulation mostly arose
45 ―World Competitiveness Yearbook, 2010‖, IMD.46 Öniş, Z. and F. Şenses, eds.,2009.47 See Kaufmann et al. 2009.48
Currently, there are nine NRAs in Turkey: Capital Markets Board (date of establishment: 1982), The Higher Board for
Radio and TV (1994), Competition Agency (1994 and 1999), Banking Regulation and Supervision Agency (1999),
Telecommunications Agency (2000), Energy Markets Regulatory Agency (2001), Sugar Agency (2001), Tobacco and Alcohol
Market Regulatory Agency (2002), and Public Procurement Agency (2002).
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The chapter underlined that despite the good performance of the Turkish economy in the
2000s, the governance performance has been relatively low, particularly compared to that in
the CEECs. Although major institutional reforms have been undertaken in Turkey since 2001,
fostered by the IMF and the EU, Turkey’s governance scores have not arisen adequately.
Additionally, the relatively ―better‖ economic performance particularly before and during the
current crisis cannot undermine the importance of protracted problems of the Turkish
economy such as heavy reliance on short-term capital inflows to finance current account
deficits; external indebtedness; high levels of unemployment; and pervasive inequalities in the
Turkish society.