Wednesday
Feb272013

The Political Economy of Turkey  

In previous posts (here, here, here and here), we have discussed the history of political conflict and institutions in Turkey. The natural question for a political economist is how all of this impacts the Turkish economy. This is particularly relevant for understanding how the Turkish economy has had a fairly good run in terms of its macroeconomic performance over the last decade — essentially since the Turkish financial and economic crisis in 2001, and perhaps not coincidentally more or less since the AKP (the Justice and Development Party or Adalet ve Kalkınma Partisi), came to power in November 2002..

This chart, courtesy of Turkish Data Monitor, shows the evolution of Turkish GDP over the last two decades. (The chart shows GDP in US dollars using the market exchange rate; in PPP, the increase in the Turkish GDP since 2002 is less pronounced but still in stark contrast to the performance of the Turkish economy in the 1990s).

So what explains the turnaround?

Though standard macroeconomic factors, such as the interest rate policy, government spending, confidence, and export performance, are undoubtedly important, we suspect economic institutions and the shadow of politics have been equally defining for the Turkish economy since the beginning of the 21st century.

As we have argued here, Atatürk and his party, the CHP (the Republican People’s Party or Cumhuriyet Halk Partisi) engineered a state building project, modernizing the economy and strengthening the control of the state over the economy and society. But this did not involve building inclusive political or economic institutions. Though, as part of this effort common with many other examples of state building and extractive growth, the CHP did encourage industrialization and improved certain aspects of the Turkish economic institutions, the state played a major role in the economy and was certainly more than an equal partner with private business. For business, connections with the CHP, which could grant extensive subsidies and protection, were often as important as entrepreneurial innovation. As seems common with other episodes of ‘state capitalism’ (as we have argued elsewhere), the motivation for state control was not just ideological but was dictated in part by the desire of the CHP elites to keep control over the economy and society. 

A major turning point was the 1950 election of the DP (the Democratic Party or Demokrat Parti) which not only started the political ascendancy of the ‘Black Turks’, but also loosened state control and encouraged and supported the Anatolian entrepreneurs. The result was a major economic boom during the first term of the DP. 

But it would be wrong to see the DP as the harbinger of economic inclusivity. Though it did level the playing field in business, several other factors meant that the extent of this was rather limited. First, the DP had no intention of challenging the monopoly of a few established companies. Second, the DP found it politically expedient to turn connections with the conservative Anatolian businesses and landowners into a clientelistic patronage network, which was then perfected by its follower, the AP (the Justice Party or Adalet Partisi). Third, seeing itself as embattled and harassed by the CHP, military and bureaucratic elites, it had no intention of creating independent state institutions, preferring instead, to the extent possible, to take control of them. Fourth, once electorally challenged, the DP did not hesitate to pursue unsustainable macroeconomic policies, with significant costs on the Turkish economy. 

The DP episode highlights a host of parallels with the later attempts to loosen state control over the economy and society, pursued, albeit often half-heartedly, by the AP in the 1960s and the 70s; the ANAP (the Motherland Party or Anavatan Partisi, in the 1980s); and by the AKP in the 2000s. First, it was these parties, with roots in conservative circles in Anatolia, that often spoke for the ‘Black Turks’. Second, it was these parties that brought some more economic inclusivity — even if this was often just for business. But third, this was always limited and came woefully short, often getting mired in clientelism and sometimes just creating another group of highly connected businessmen making money thanks to state support. 

An epochal change for the Turkish economy came under Turgut Özal’s first ANAP government, which liberalized the economy more than its predecessors, lifted a whole range of restrictions on business creation, made the Turkish lira convertible, and encouraged export growth. Between 1983 and 1987, Turkish economic growth picked up rapidly, fueled in part by exports. But this rising tide did not lift all or even most boats and did not translate into a broad-based improvement in standards of living. This period also witnessed rapidly increasing inequality; there were no actions to break the hold of domestic monopolies, and connections continued to be the main currency in the economy. In fact, during Özal’s reign there was an explosion in corruption.

One hypothesis — which of course needs to be investigated more systematically — is that the beginning of the AKP government saw an opening of economic opportunities to ‘Anatolian tigers,’ Anatolian entrepreneurs and would-be entrepreneurs, unparalleled at least since the DP’s first term. This is best exemplified by the rise of several business organizations representing small and medium-sized entrepreneurs, often with conservative, Anatolian (and strongly Muslim) backgrounds, such as MÜSİAD, the Independent Industrialists’ and Business Persons’ Association and TUSKON, the Turkish Industrialists’ and Business Persons’ Confederation. MÜSİAD, for example, in name, in rhetoric and in reality opposed TÜSİAD, the powerful big business association that had played an important role in the Turkish economy and politics for several decades. MÜSİAD, founded in 1990, expanded and became a political and economic force to be reckoned with under AKP. It is natural to expect that this leveling of the business playing field, which broadened both the geographical and social basis of entrepreneurship, contributed to the robust economic performance over the last decade, though again, to the best of our knowledge, there is no systematic evidence on this. (The main competing hypothesis, which needs to be investigated, is that the rise of MÜSİAD and TUSKON was at the expense of other businesses, for example, just shifting government contracts from one to another group of businesses, thus a much more of a ‘zero-sum’ affair). 

Other factors probably also contributed to economic growth in the 2000s. Particularly important was the continuation of the major macroeconomic reforms that had started under the previous coalition government (in particular led by the then finance minister Kemal Derviş), mostly in response to the deep financial and economic crisis in 2001. These reforms brought public finances, the government budget deficit and the chronic almost triple digit inflation under control, and the AKP stuck with them. More broadly, AKP administration pursued sound, orthodox policies. In fact, in some areas, it appeared fairly surefooted, for example shielding Turkish businesses from the full impact of the global recession by sharply reducing (or pushing the Turkish Central Bank to reduce) interest rates and expanding domestic demand. The stable macroeconomic environment, together with the expansion of credit to consumers, fueled consumption growth, particularly by the growing Turkish middle class.

The greater stability of the majority government under AKP, as compared with a series of weak and ineffective coalition governments before 2002, might have also contributed to consumer and business confidence. 

But one should not exaggerate the prospects of the Turkish economy. It has experienced sizable current account deficits over the last several years and there are also other signs that it will not be able to sustain the growth rates of the 2000s, and growth already slowed down considerably in 2012. 

In fact, there is no evidence that Turkey has broken out of what some like to call “the middle income trap,” and does not seem poised to achieve East Asian-type growth rates that would be necessary to close the gap with European Union economies. 

We believe this is just a reflection of the fact that Turkish economic and political institutions are still far from being fully inclusive. Even though the AKP has gone some way towards leveling the playing field, particularly making economic opportunities more widely available to Anatolian small and medium-sized businesses, the problems in politics we identified in our first post in this series are looming large. Associated with this, businesses are still greatly beholden to the state. Even if the state is now controlled by the AKP rather than the usual ‘White Turkish’ elite, the implications are similar: the government or the state can still pick winners or in the last moment cancel contracts (as was witnessed just last week). It can even bring huge tax bills against businesses it does not get along with (e.g., against the Doğan newspaper group). 

Major structural problems also continue to dog the Turkish economy. According to the World Bank Doing Business report, Turkey is still pretty bad place to do business or to have to go to court. The judiciary is highly inefficient, arbitrary and even worse, biased. These challenges to economic growth are still waiting for reform — as they have been for a long while.

Turkey still has a long way to travel to inclusive institutions. This necessarily undercuts its growth potential.

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