CIAO DATE: 02/2014
A publication of:
SETA Foundation for Political, Economic and Social Research
During the 1990s, political uncertainties in Turkey had negative effects that left the economy vulnerable to public and foreign debt due to high inflation, high budget deficit and high current account deficit. Coalition governments failed to address these problems. Following its rise to power in 2002, the AK Party developed a new perspective for the economy, politics and foreign policy collectively referred as the New Turkey. The government emphasized fiscal discipline, structural transformation and privatization. During this period, Turkey rapidly recovered from the negative effects of the 2001 financial crisis and reached a steady growth rate. The country also survived the 2008 global crisis with minimum damage. The government seeks to meet its targets for the centennial of the Republic’s establishment.
For many years, political failures cast a shadow over the Turkish economy causing it to perform below its full potential. High levels of political uncertainty throughout the 1990s had a negative effect on a number of areas, including the economy. During this period, high inflation, accumulation of foreign debt, high budget deficit and high current account deficit left the economy vulnerable to domestic and international shocks. A series of coalition governments failed to take necessary precautions and to adopt appropriate policies. It was under these circumstances that Turkey experienced one of the most severe economic crises in its history in 2001. In the immediate aftermath of the financial crisis, the 2002 parliamentary elections caused several political parties to fail to secure representation in the national legislature and as such opened a new chapter in the country’s political history. The Justice and Development Party (the AK Party) won a landslide victory in the 2002 elections and embarked on a series of reforms in politics, the economy, foreign policy and other key areas that are collectively referred to as the New Turkey. The elections marked the end of a succession of coalition governments that crippled the country for eleven years. Having risen to power in late 2002, the AK Party took steps to establish economic and political stability. During this period, the government introduced new regulations for the banking system, opted for fiscal discipline and privatized state enterprises. Government policies initiated a period of uninterrupted growth. Meanwhile, the AK Party took measures to strengthen public finance, increase public enterprises’ effectiveness and avoid the debt trap. Over the AK Party’s decade-long tenure, three successive governments comprehensively reformed the Turkish economy that currently outperforms a number of crisis-struck Eurozone countries in terms of various macroeconomic indicators. This study offers an analysis of Turkey’s economy over the past decade with reference to macroeconomic indicators, the transformation of public finances, novel social policies, improved relations with international organizations and changes in world economy following the global financial crisis in 2008. Finally, the study suggests measures to improve the economy’s current standing and elaborates on Turkey’s priorities vis-a-vis its 2023 targets. Political Success and Economic Growth Global markets’ expansion and the availability of cheap credits following the 2001 financial crisis resulted in a significant increase in the flow of capital from financial markets to developing economies. During this period, wide availability of liquidity in world markets, combined with high real interest rates in Turkey, made the country an attractive destination.1 It was therefore that the economy recorded a 6.2 percent growth in 2002 to recover from a 5.7 percent contraction the previous year. Similarly, the country grew by 5.3 percent in 2003, 9.4 percent in 2004, 8.4 percent in 2005 and 6.9 percent in 2006. During this period, economic growth was not only due to an increasing volume of goods and services exported but also a revival of domestic demand. Meanwhile, a rising amount of foreign direct investments contributed to domestic production. It was due to all these reasons, as well as various precautions and post-crisis economic austerity program, that the Turkish economy gained resilience against external shocks and recorded one of the most rapid growth periods since 1950 between the years 2002 and 2007. (See Figure 1) The 2008 global financial crisis affected the Turkish economy mainly through trade relations to some degree and resulted in a 4.8 percent stagnation in 2009. As a consequence of this stagnation period, Turkey embarked on a quest to reach out to new markets in the hopes of creating alternatives to the European Union, a trade bloc that comprises the vast majority of the country’s foreign trade volume. The establishment of trade connections with new markets, in addition to increasing domestic demand and export volumes, contributed to the Turkish economy’s recovery.