Magazine article Foreign Affairs

Turkey: How Erdogan Did It-And Could Blow It

Magazine article Foreign Affairs

Turkey: How Erdogan Did It-And Could Blow It

Article excerpt

For much of last year, Turkey's economy seemed almost on top of the world. In May, as huge construction projects moved ahead, Ankara paid off its remaining debt to the International Monetary Fund, ending what seemed to many Turks a long history of humiliation. The country received an encouraging investment- grade rating, and foreign funds poured in like never before.

In a flurry of appearances that month, Prime Minister Recep Tayyip Erdogan feted record-low interest rates, a slide in the unemployment rate from 15 percent to nine percent since 2009, and, above all, the growth that Turkey has enjoyed "due to reforms carried out over the past ten years." He underlined his point-and his driving ambition-on an exuberant visit to Washington. Addressing the U.S. Chamber of Commerce, he noted that when his Islamist-rooted Justice and Development Party (akp) came to power in 2002, at least 20 other economies were bigger than Turkey's in terms of dollar output. "Now, we are 17th," he exulted, "and in due course, we are going to be among the ten largest economies."

The Turkish economy has indeed come a long way during Erdogan's decade in office, propelling Ankara's ascent to greater global prominence. In the late 1990s, Turkey was running 90 percent inflation and attract- ing almost no foreign investment. As recently as 2002, Turkey was using up almost 90 percent of its tax revenues to pay the interest on its debt. Today, these problems have all but disappeared.

But the optimism of May has since faded. Turkey, like many other developing countries, has found itself facing skittish markets, volatile exchange rates, political unrest, and an uncertain outlook. The picture of Turkey today is less flattering but more revealing than before, display- ing both the promise and the perils of being an $800 billion emerging economy.

Turkey is still on track to grow faster than much of the industrialized world in the coming years. In October, Jim Yong Kim, the president of the World Bank, hailed the country as "an inspiration to many developing countries." But the fact remains that Turkey's success could yet unravel. To live up to its economic potential, Turkey will have to overcome two main challenges: its reliance on fickle foreign funds and the intrusion of heavy- handed politics into its economic life.


The seeds of Turkey's success this century lie in the failure of the period that immediately preceded it. After the liberalizing reforms of Turgut Ozal, the visionary prime minister of the 1980s, who opened up what had been a perennially closed economy, the 1990s were a wretched decade, punctuated by economic crisis, brutal episodes in the country's Kurdish conflict, a de facto coup, and a devastating earthquake. This was a time when the lack of foreign funds, often the result of spikes in U.S. Treasury yields, could cause economies to seize up, and Turkey was hardly alone in its misery. During these years, macroeconomic shocks also hit Mexico, Russia, and Southeast Asia.

For Turkey, this sorry period came to an end just after a 2001 banking crisis, when Finance Minister Kemal Dervis, with the cooperation of the International Monetary Fund, laid the groundwork for success. Ankara pruned back its spending, brought inflation under control, intro- duced a floating exchange rate, restruc- tured the country's banks, and granted more independence to the central bank and regulators. When the akp took over in 2002, it stuck to this template, which paid off as Turkey's discussions with the European Union progressed. The prospect of eu membership-negotiations started in 2005-opened the floodgates for foreign direct investment.

A boom in infrastructure development and construction added to the good times. Since the outset of Erdogan's tenure, the country's highway network has been expanded by more than 10,000 miles. The number of airports has doubled, to 50, and Turkish Airlines now flies to more than 100 countries, more than any other carrier in the world. …

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