By Mustafa Kutlay*
Turkey passed a new threshold with the June 7 general elections. There is now a quasi-consensus that the recent election is one of the crucial turning points in the history of contemporary Turkish politics. The Justice and Development Party (AKP in Turkish acronym), which had ruled the country under single party majority governments for about 13 years, lost its parliamentary majority and therewith the ability to retain its unchallenged power while nonetheless managing to achieve an unequivocal electoral success with more than 40 percent of the total vote. Now, as the parties navigate potential coalition alternatives, the post-election agenda is also becoming clear. In this context, the Turkish economy has emerged as one of the important files to which the new coalition government will devote considerable effort.
The Turkish economy performed quite well in the aftermath of the devastating 2001 economic crisis. Many pundits and market players appreciated the economic expansion in Turkey experienced under the AKP governments. In fact, the economy grew rather impressively during this period, according its own historical standards. As highlighted by a recent World Bank report, “Turkey’s [recent] economic success has become a source of inspiration for a number of developing countries, particularly, but not only, in the Muslim world. The rise of Turkey’s economy is admired, all the more so because it seems to go hand in hand with democratic political institutions and an expanding voice for the poor and lower middle classes.”
During the AKP era, Turkey’s GDP per capita increased three-fold and its trade volume expanded from 114 to 476 billion dollars in current prices. Despite the fact that this transformation is less striking in constant prices, it is still the case that Turkey succeeded in ensuring respectable and, more importantly, uninterrupted growth rates in a single digit inflation environment. As a result, the middle classes prospered and income inequality indicators improved significantly. For instance, Turkey’s Gini coefficient, an indicator that measures income inequality, declined from 0.42 in 2003 to 0.38 in 2013.
The challenges ahead
That being said, the Turkish economy has come to the precipice of a new threshold, namely the middle-income trap, the escape from which necessitates new momentum to ensure high and sustainable growth rates. The first of the urgent problems in this context is declining economic growth in recent years. The annual growth rate realized as 3.2 percent annually from 2008-2014, which was 6.8 percent between 2002 and 2007. Not surprisingly, the sharp decline in growth figures exacerbated Turkey’s recalcitrant unemployment problem. The unemployment rate in the country has now increased to 11.3 percent, according to recent figures.
Second, the current account deficit also became an imminent fragility in the Turkish economy. High current account deficits, hovering around 8 percent in 2013 and 5.8 percent in 2014, make Turkey vulnerable to external shocks in a regional and global environment characterized by intense uncertainty. In a recent Global Turkey in Europe report, I maintained that the root causes of Turkey’s current account deficit are deep-seated and structural. Stated differently, foreign trade deficits stand out as a major factor that feeds current account deficits. Turkey mainly exports consumption goods, while importing investment and intermediary goods. Thus, the structure of Turkish foreign trade leads to a vicious cycle, as Turkey’s exports are heavily dependent on imported intermediate items. The country’s inadequate export performance is closely related to the technological composition of manufactured exports. For instance, the share of high technology accounted for in Turkey’s total manufactured exports is less than 2 percent, well below the world average.
Third, the autonomy of economic institutions has recently become subject to intense political debate. The political ruling elite, especially the president, openly criticized the Central Bank over its interest rates policy. The president’s criticism is considered as an outright intervention at the expense of the independence of the Central Bank and other independent regulatory institutions. This political intervention led to anxiety in the markets regarding the politicization of economic decision-making processes. It is therefore expected that the new coalition government needs to work hard to rebuild the institutional autonomy of the regulatory institutions. In an increasingly instable regional and global environment, the credibility of economic institutions becomes more than important in ensuring positive and sustainable growth rates.
In search of a new paradigm
Having taken this sensitive economic background into consideration, the incoming government needs to work hard on three grounds. First, a new paradigm that will revitalize Turkey’s growth performance is in order. The latest IMF estimates suggest that the Turkish economy will grow 3.1 and 3.6 percent in 2015 and 2016 respectively. In order to increase growth performance, Turkey needs to invest in high-value added production and export sectors. This also relates to the second area that will require increased attention. Turkey’s current account deficit is structural in nature. As I explained previously, for every export item, Turkey heavily depends on imported intermediary products. This high intensity of imported items in the production and export processes leads to the perpetuation of trade deficits. In 2014, for instance, Turkey’s trade deficit reached 84.5 billion dollars. Thus, the new government must develop comprehensive strategies to address structural current account problems. The transition to high-value added production is sine qua non not only to overcome the current account challenge but also to break out of the infamous middle-income trap. Third, the new Turkish government will be expected to consolidate the autonomy and inclusiveness of economic, legal and political institutions to properly manage market expectations and underpin investor confidence.
In the aftermath of the elections, different coalition scenarios are now on the table. Yet regardless of which scenario prevails, the economic agenda for the new government will remain similar, focusing on: The implementation of a comprehensive industrial strategy that addresses the middle-income trap and current account deficits, the creation of a genuinely pluralistic political order that feeds the deepening of democratic practices, the reformation of the education system that promotes free and creative thinking, and the consolidation of a legal system that guarantees political accountability and transparency, all of which in turn, are expected to jointly inform high quality and sustainable economic growth.
*This op-ed is a shortened, revised, and updated version of a working paper published by the Global Turkey in Europe series. See Mustafa Kutlay, ”The Turkish Economy at a Crossroads: Unpacking Turkey’s Current Account Challenge,” Roma: IAI, Global Turkey in Europe Series, Working Paper 10.