Turkish economy depends on political stability

Taksim square protests

Turkey has undergone tremendous economic development over the last 15 years, but protests earlier this year revealed underlying social fractures and areas of political risk. Investment opportunities abound in this emerging market but remain dependent on political stability.

Turkey’s economic growth since 2001 has turned heads in the international community. Initially, the country’s economic growth ran in tandem with its political maturation and by the mid-2000s, Turkey was fast becoming a shining example for other emerging market countries. The ruling Justice and Development Party (AKP) slowly dismantled Turkey’s old authoritarian elite with remarkable dexterity, paving the path for a more democratic future. The election of the AKP not only represented a new democratic opening; it represented an economic opening to a large demographic previously excluded from the state’s political and economic institutions.

The Muslim MÜSİAD business conglomerate, for example, emerged as a strong force under the AKP, as the government sought to level the business playing field. However democratic reform, as well as the equalizing of business opportunities, happened at the time only because AKP survival depended on it. After a poor economic showing between 1999 and 2001, the Turkish economy grew by 5 percent per year on average from 2002 to 2011 before slowing sharply in 2012 to 2.2 percent. While the EU remained mired in an economic crisis, Turkey chugged onward and upward thanks to forward-thinking economic decision-making combined with the country’s reputation as an oasis of stability in a fragile neighborhood.

Investments in education, infrastructure and even sustainable technologies, made in the early years of AKP rule, were intended to yield long-term growth. Confident in Turkey’s economic trajectory, foreign direct investment from the U.S. and the EU continued to pour in.

2012 saw slower economic growth rates, and for the first five months of 2013, FDI decreased by 35 percent from the previous year. One might expect an even further drop in FDI after the outbreak of the summer’s massive political protests, but investors reportedly spent the summer confused, but nonetheless prone to maintain faith in the Turkish market. While stocks sold off and portfolio managers began demanding higher returns to hold or insure Turkish debt on the back of rising political risk, the markets gave way only partially to the protests.

Yet, Turkey still has some way to go before it is praised as a positive example. The government is facing serious issues associated with Turkey’s political and economic development. Businesses, despite the recent efforts to equalise opportunities, remain bound to the state. One alleged reason the MÜSİAD business conglomerate has evolved so successfully since the rise of the AKP has been the transfer of government contracts from rival TÜSİAD, indicating less of a level playing field than a simple redistribution of wealth and opportunity. Turkey, according to the World Bank Doing Business Report, ranks 71st out of 185 in ease of doing business. Political institutions – including the judiciary – are known for acting arbitrarily or with bias.

Then there is the troubled political climate. The protests this summer reflected the growing pains of a relatively new democracy. The AKP eagerly implemented democratic reforms early on, when it offered the opportunity to weaken their political rivals and score brownie points with the EU, but democratic reform slowed down as the AKP became more firmly entrenched. The boiling point hit this summer with a surprisingly vibrant civic movement calling out Prime Minister Erdoğan on his increasingly authoritarian governing style. A meaningful portion of the population responsible for facilitating the AKP’s rise through the 2000s have now reneged their support. One woman’s recent ‘We want the old Erdoğan back’ tweet, reported by Mahir Zeynalov, shows the waning support for Erdoğan and the AKP among prior backers.

Prior to the 2000s, Turkey was viewed favorably by investors counting on autocratic stability to keep the country’s dynamic population in order. Coups throughout Turkey’s young history brought order to a deeply divided society on the brink – or in the midst of – violent conflict. With the crystallization of democratic institutions and the extraction of the military from the mainstream political space, however, Turkey is on its way towards a new – indeed preferable – ‘democratic stability.’

New opportunities in the way of energy investments will yield promising returns only if Turkey can get its democratic ducks in a row. Making headway on the Kurdish issue will shore up energy from the Kurdish ‘supply side’ in northern Iraq while implementing further democratic reforms will facilitate closer relations with the European ‘demand side.’ While the future suddenly looks more uncertain for Prime Minister Erdoğan and the AKP after the recent wave of anti-government protests, this new, strongly democratic declaration may indeed be good news for the Turkish economy in the long-run.

This article by GRI analyst Eli Lovely was first published in the Bonds and Loans October newsletter.

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Categories: Central Asia, Politics

Author:Eli Lovely

Eli Lovely is an Analyst at Kroll Associates. In 2010, he graduated Phi Beta Kappa from Wheaton College (MA) before earning his M.A. with distinction in Democracy and Governance Studies from Georgetown University in 2013. While in graduate school, Eli worked at the National Democratic Institute and the U.S. Department of State. He has spent over a collective year living in Turkey as a Fulbright Fellow and a recipient of the Critical Language Scholarship. He is primarily interested in issues affecting Turkey and the Southern Caucuses. The views expressed on this site are Mr. Lovely’s and do not necessarily represent Kroll’s positions, strategies or opinions.

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