The Turkish economy during the justice and development party decade.

• Author: Karagol, Erdal Tanas
• Position: Essay

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.

Turkey's restructuring and revival of its real sector ensured that all sectors could contribute to economic growth and allowed the economy to perform extremely well in 2010 and 2011. During this period, the Turkish economy recorded an 8.5 percent annual growth to become the world's second most rapidly growing economy--only second to China which grew by 9.2 percent in 2011. Moreover, the economy continued its growth pattern thanks to the government's commitment to fiscal discipline and consistent economic policy at a time when Eurozone countries were severely effected by the global financial crisis. Although the Turkish economy recorded a humble 2.2 percent growth in 2012 and failed to meet expectations, this performance nonetheless showcased a variety of different economic activities in Turkey and demonstrated the relative dynamism of the country's economic structures.

In the aftermath of the 2001 financial crisis and the subsequent period of recession, the Turkish economy consistently recorded high annual growth until the 2008 global financial crisis. Over the decade between 2002 and 2011, the economy grew by 6.5 percent on average--a strong performance compared to an average 4.7 percent over the past thirty years. According to OECD estimates, Turkey will record an annual 6.7 percent growth between 2011 and 2017 to become the most rapidly growing OECD country. (2)

The country's strong performance in annual growth between 2002 and 2012 also exerted a positive effect on GDP per capita levels during the same period. In 2012, GDP per capita rose to $10,504 compared to $3,492 in 2002. Meanwhile, Turkey boosted its profile among developing countries with help from 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 its economic growth. This development, however, made it an absolute necessity for the country to promote the production of high-added value products, to accumulate greater domestic savings to allow further growth and to concentrate its efforts on competitive business sectors in order to avoid the middle-income trap, a common problem for developing economies. Keeping in mind that the World Bank's country classifications define countries whose GDP per capita remains below $1,105 as "low-income," countries with GDP per capita between $3,976 and $12,275 as "middle-income" and countries with GDP per capita over $12,276 as "high income," Turkey's Middle-Term Plan for 2013-2015 aimed to increase GDP per capita to $12,859 by 2015 and thereby become a high-income country according to the World Bank's criteria.

In addition to aforementioned improvements in economic growth, the AK Party government also took certain long-term measures to tackle high inflation, a traditional element of the Turkish economy. During the 1990s, a serious lack of economic stability caused short-term interest rates to skyrocket as the Turkish Lira's weakening and excessive public spending during election seasons significantly added to high inflation. During this period, domestic savings diminished and domestic demand grew, leading the government to create funds through foreign debt. Moreover, the government made price and salary updates based on the inflation rates of previous years and therefore failed to tackle a structural obstacle before a much-needed decrease in inflation rates. The Turkish Lira's rapid weakening over the course of the 1994 economic crisis similarly increased costs, while the government postponed public...