Ozel-Meeting at the Market

8/2/2019 Ozel-Meeting at the Market

http://slidepdf.com/reader/full/ozel-meeting-at-the-market 1/26

ISIK OZEL Meeting at the Market: Turkey and the CEECs

1

Meeting at the Market:

Turkey and the Central and Eastern Europe

byIsik Ozel

[[email protected]]

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




2

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.




3

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).

http://ec.europa.eu/enlargement/pdf/key_documents/2009/tr_rapport_2009_en.pdf






4

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

http://databank.worldbank.org/











5

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.












6

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/

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/







7

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.



http://www.tcmb.gov.tr/yeni/eng/
















8

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.




9

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.




10

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).




11

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.




12

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.




13

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.




14

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.




15

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








16

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.

http://www.dtm.gov.tr/dtmweb/index.cfm?action=detay&dil=TR&yayinid=1128&icerikid=1234&from=home











17

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




18

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.




19

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




20

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




21

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




22

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

http://www.unctad.org/en/docs/wir2010_en.pdf







23

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.




24

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).






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.