Factors Contributing to Turkeys Economic Development - Literature review Example

Turkey’s Economic Development Introduction The International Monetary Fund defines the economy of Turkey as an emerging market economy. This has placed the economy of this nation in relatively stable but fragile foundations. The country which is a large middle income nation whose economy has been in transition and has been trying to embrace other diverse economies sectors apart from agriculture and heavy industrial (Heper & Sayari, 2012). Over the past few decades, Turkey has had a high degree of dependence on agriculture and heavy industrial due to the scarce nature of mineral resources. Sayari (2012) argues that from the early 1970s the country’s economy has suffered a number of economic blows ranging from high to very high inflation for over 30 years. In addition to this, the economy remains open and has embraced modern economy that has led to its service sector (Hoekman & Togan, 2005). Turkey’s economy has been greatly influenced by leadership changes (Aricanli & Rodrik, 1990). For instance, in the 1980s, the economy in Turkey opened up providing luxurious investment opportunities for citizens and foreigners. Critics accredited this to President Turgut Ozal who used his leadership to remove Turkey from having a state-directed economy and introduced it to a globalized economy sector (Aricanli & Rodrik, 1990). Notably, during the 1990s, the economy of this nation failed terribly due to poor economic decisions from several coalition governments that implemented weak economic policies for the country (Abrahamson, 1999). As a result, in the beginning of the new millennium, Turkey’s economy experienced a severe banking and economic crisis which led to the fall of the GNP by 9.5% in 2001 and an increase in unemployment. This was followed by the reign of the Justice Development Party which facilitated the boom of Turkey’s economy through the implementation of new reforms (Adar, 2007). In the recent times, Turkey has witnessed a boost in its economy and has recovered immensely from the economic crisis it had previously experienced (Bugra & Keyder, 2006). The International Monetary Fund in collaboration with the World Bank, have contributed in implementing beneficial monetary and fiscal policies which have led to structural economic reforms in Turkey (International Monetary Fund, 2014). According to Bugra & Keyder (2006) the Central Bank of Turkey is able to operate as an Independent body free from any political interference, thus influencing a steady floating exchange rate system. This has also influenced a significant decrease in the government's deficit budget. Moreover a number of substantial reforms in the financial, energy and telecommunications sectors have been implemented as well as the privatization of a series of large state-owned institutions. These reforms have led to the growth of Turkey’s economy by 7.5% since the year 2002 to 2005, making history as one of the highest sustained rates of growth globally (Heper & Sayari, 2012).. Factors Contributing to Turkey’s Economic Growth The government of Turkey has introduced several regulatory reforms which have an effect on the investment climate in Turkey (Graham et al, 2013). A combination of a number of prudent fiscal policies and strong microeconomic strategy has set the pace in Turkish economy resulting to a remarkable performance in the last decade in addition to incorporating the Turkish economy into the globalized world. According to Daly (2003), the Government of Turkey encourages the growth of foreign direct investments as it views it as an important tool in sustaining the country’s economy, development plans and prosperity. Consequently, Turkey benefits from having one of the most liberal legal regimes for foreign direct investment (FDI) in the OECD. Therefore most sectors that are interested in the Turkish private sector are also guaranteed to take part in foreign markets participation and investments. Nonetheless investors despite their nationality are faced with several challenges. Some the challenges experienced include: excessive bureaucracy, a slow judicial system, high taxes, weaknesses in corporate governance, sometimes unpredictable decisions made at the local government level, and frequent changes in the legal and regulatory environment (World Bank Group International Monetary Fund, 2013). The government of Turkey has formulated and implemented laws and policies whose main objectives include fostering competition and transparency in addition to attracting new foreign investors into the country (Ozel, 2014). Onis and Riedel (2002) argue that the implementation of these policies has supported the Turkish legislation which seeks to promote equity among investors and provide a regulatory system that provides investors equal investment opportunities. The Turkish legislation advocates for competitive bidding process in the public sector. The Public Procurement Board conducts public tenders and ensures that Turkish citizens are able to participate in the minimum bidding thresholds, where foreign companies are banned from taking part in. This strategy is aligned with the Turkish law whereby, domestic bidders, Turkish citizens and legal entities established by them are given first priority. The amendment of these laws has led to the growth of employment opportunities since 2002 up to date (Hoekman & Togan, 2005). With such efforts from the Government of Turkey, inflation and interest rates have shown a relative decrease (Organization for Economic Cooperation and Development, 2010). The Turkish currency is stable, government debts have subsidized and businesses and consumers are now more than ever reassured about the potential economic growth of Turkey. Another publication by the State Planning Organization (2007) affirm that investors are now attracted to the potential growth in Turkey, therefore leading to the booming economy as well as large inflows of portfolio investment which have greatly influenced the growing current account deficit. However Turkey is still vulnerable to foreign investors since some of them argue that the regulatory reforms implemented are to some extent nontransparent. Such arguments puts the economy of Turkey at stake since investor sentiments might shift at any given time leading to a significant fall in the exchange rate. As a result it is vital that the government of Turkey ensures that there is a constant implementation of reforms that include tight fiscal policy, which is a fundamental step to sustain the development and stability of Turkey’s economy (Streeck & Kathleen, 2005). Turkey’s privatization strategy continues to move forward putting its economy on a global platform which allows Turkey to compete favorably with other nations across the world. According to Bocchi and Yildiz (2014) the Government of Turkey has facilitated the privatization of State Economic Enterprises. This has been achieved through the block of sales and public offerings which influenced the rise of foreign direct investment (FDI) in 2005. The Transactions that was successful through the privatization strategy technique generated $9.6billion in foreign direct investment in 2005, $8.1 billion in 2006 and approximately $3.8 in 2007 (Coskun, 2001). Additionally, the stability fostered in Turkey by the EU contributed to a number of large privatizations. The European Union accession negotiations, firm and stable developments, promoted structural changes in the banking, retail and telecommunications sector in Turkey, therefore contributing to the growth of foreign investment (Jeroseiwicz, 2013). Turkey has taken solid steps to improve its economy through the investment arena. The country has strengthened the intellectual property legislation through the process of administrative streamlining thus encouraging a stop to foreign investment screening (Jeroseiwicz, 2013). Notably, Turkey has experienced a number of disputes with foreign investors. This is due to how a number of tax laws that have distorted investment decisions. One of the tax policies include the high taxation on cola products thus discouraging investments in this sector in addition to the imposed gaps within the intellectual property regime that has paralyzed investments in different sectors within the Turkish economy. However Turkey is actively involved in the reformation of several bilateral investment and tax treaties with other countries including the United States. Such bilateral investments eliminate double taxation on foreign investors by providing a guarantee on free repatriation of capital in convertible currencies (Abdulkadir, 2013). Turkey’s remarkable economic changes have enabled it to scale up and progress resulting to a decrease in inflation which has placed the country’s economy in the global market (Candemir, 2015). However the country has not put in enough effort to match up to the low levels prevalent as experienced in other nations across the world. This was witnessed in the data presented on the annual consumer price inflation, from previous years. For instance in the 1990s, consumer price inflation was at an average of 80%, 2000-2003 it was at 50% while in 2004 and 2005 it fell drastically with an average of 9.3% and 7.7% respectively (Candemir, 2014). Long and short term domestic public debts and excessive state spending have been identified as one of the major and persistent economic weaknesses for Turkey. These factors have been handled as challenges for the Turkish economy which has resulted to controlling measures being put in place which have led to a decrease in public and state spending. A good example is the net public debt to GDP during the year 2001 through 2005 whereby it had fallen from 92% to under 60% and has remained steady since then to recent times. On the other hand, Turkey’s consumer-price index went a notch high in 2013, whereby it rose to 9.5% from 9.3% (Candemir, 2014). According to Cavanaugh (2011) the Turkish Treasury has implemented a series of policies over the years in order to reduce the accumulated debt by the nation and avoid in financial implications all together. This has been successful by increasing maturities and consequently reducing the share of foreign exchange dominated debt. The tight fiscal policy that had been prepared as a five year plan for turkey, have contributed towards giving the government the ability to strike a balance in the public sector as well as manage to control it. This way Turkey has attained an overall public sector deficit of 3% less of GDP requirements in the European Union’s Maastricht criteria (Cavanaugh, 2011). The government of Turkey has identified the energy sector as part of the potential growth sectors which will benefit the nation in the long run (Yesevi & TIFTIKCIGIL, 2015). For example in the year 2004 the Installed electricity generation capacity in Turkey had reached 32,000 megawatts (MW) and has continued to grow over the past few years. Ersoy and Unlu (2013) affirm that currently fossil fuels accounts for 71% of the total installed capacity and hydro, geothermal, whereas wind account for the remaining 28%. However the electricity demand in Turkey has surpassed the total amount of electricity being generated which has placed Turkey in a vulnerable position as a net importer of electricity sine the year 1997. Turkey’s authorities anticipated a significant fall of electricity in 2008 due to the low demand of energy that had occurred in 2001 when Turkey was experiencing an economic crisis (Ersoy & Unlu, 2013). This pushed the government to adopt new facilities that would become operational in sustaining a stable economic growth for Turkey. In addition to this the government undertook liberal steps in sustaining the energy sector and as a result the Electricity Market Law was passed and the Energy Market Regulatory Authority (EMRA) established. Nonetheless, in 2004 it was evident that the government had failed in implementing these plans in liberalizing and privatizing electricity and natural gas sectors. Therefore to promote sustainability in the economy, the High Planning Council advocated for the Electricity Sector Reform Strategy to renew the reform process once again for them to meet the growing demands in this sectors (Altintas & Kum, 2013). The reformation of electricity laws fundamentally maintained an independent body and reduced the role of the government in energy markets (Kama and Kaplan, 2013). This led to the introduction of new market sources into the sector that included foreign investors. A series of new generating and marketing organizations have been introduced into this sector while the transmission grid strictly remains state-owned. Therefore this sector has made it possible for marketing companies and large consumers to participate freely in buying and selling of electricity from providers and onto the market forces (Altintas & Kum, 2013). This makes the energy sector to be liberalized. This is because the electricity sector provides the participants with the will power to choose fuels on commercial grounds. On the other hand, gas markets through the liberalization process, import agreements have been transferred to private companies as in the case of 2009 when the state owned company was divided into a transmission, storage and trading corporations (Kama and Kaplan, 2013). According to Altintas and Kum, (2013) the privatization of the electricity companies resulted in new pricing policies. In addition to this, the overall price of electricity has been marked with slight increases over the years in order to make up for the losses experienced in this sector through illegal connections. Kama and Kaplan (2013) affirm that the new electricity prices and policies have been used previously as a means to evaluate what social area within this sector is possible in order to complement the electricity price liberalization. The electricity prices are viewed as tools to an effective and efficient distribution of resources in Turkey and what social instruments are important in achieving equity goals. Air pollution has been termed as a very serious problem that has continued to affect the performance of its population. The social and economic costs implication of air pollution in Turkey is very high. A recent OECD report about the environmental performance, revealed that the amount of sulphur dioxide emitted in the early 1990s increased the mortality rate by 3000 deaths and led to a decline in the performance of people by about 7 million annually (Ersoy & Unlu, 2013). However there has a dramatic improvement in Istanbul and Ankara, these two cities in Turkey have progressively shown a decrease in air pollution over the past few years. Nonetheless the progress has been very slow and serious environmental challenges continue to face Turkey. Authorities have also been faced with the challenges of deploying effective policies that will make sure that the outcomes reflect minimum costs and maximum benefits (Boluk & Koc, 2013). According to Boluk and Koc (2013) one of the steps the government took to overcome the environmental challenges faced by Turkey included the Ministry of Environment merging efforts with the Forestry Ministry in the year 2003. During these times, Turkey’s main goal to be part of the European Union motivated the country to revise and update its environment legislation for it to match up with the modern environmental concerns (Cavanaugh, 2011). The implementation of environmental policies can be quite difficult considering that the steps taken by the government to overcome these challenges are not fully integrated into public decision making. Therefore Turkey continues to face major backlog arising from environmental issues which calls for increased expenditure in the infrastructure sector. The most outstanding needs in the environmental sector that directly influence the economy include: water treatment plants, wastewater treatment facilities, solid waste management, and conservation of biodiversity. These have led to a number of discoveries whereby several chemical sites were identified in 2006 which pointed out the weaknesses in environmental laws and oversight (Boluk & Koc, 2013). Transportation and textile industry are key sectors within Turkey’s economy which add value to its economy (Candemir, 20150. The Turkish government has introduced measures which give first priority to the most important infrastructure projects in the country. Candemir (2015) argues that this has been quite successful especially in the transport industry, whereby the government is aimed at introducing a number of new airports and highways. The amended public investment budget has increased significantly thus supporting these projects. The government main objective is to successfully achieve these projects by making use of the build-operate-transfer (BOT) model (Jarosiewicz, 2013). The textile industry on the other hand is one of part of Turkey’s largest manufacturing industry in addition to being its largest export sector. Nevertheless, the Turkish textile industry has faced numerous challenges arising from foreign competition. For instance the global phase-out of textile quotas in 2005 greatly impacted the Turkish textile sector by making it possible for foreign competitors to acquire some of the Turkish textile companies’ market share both domestically and internationally (Bocchi & Yildiz, 2014). This has threatened the textile industry in Turkey, and requires the relevant authorities to intervene and save the market situation for textile products in Turkey. Factor contributing to Turkeys poor Economy Turkey’s rapid recent growth witnessed between the years 2002-2012, have come with disadvantages that have put its economy at a vulnerable state. This is evident in the country’s failure to have comprehensive reform policies in the education sector therefore contributing to the less qualified workforce within Turkey’s population (Jarosiewicz, 2013). A similar case is the government poor efforts to salvage Turkey’s labor markets making it have low levels of inclusiveness. For example in the year 2011 the level of women participation in the labor sector was 28% for women while men participation was at 50%. As a result of the increased demographic pressures in Turkey, the rate of employment opportunities is lower as opposed to the rate at which new workers penetrate the labour market (Streeck & Kathleen, 2005). In addition to this, the minimum wage in Turkey has not been adjusted to reflect the significant variances in the cost of living. For instance, in July 2014 the minimum wage was set at an average of €400. The minimum wage remains rather high while the tax system remains inefficient. This has contributed to the low levels in the added value of exports despite the number of improvements registered in the structure of Turkish exports. For example, in 2001 through to 2010, the share of medium technology products in the number of total exports increased from 25% to 40% (Jarosiewicz, 2013). Jarosiewicz (2013) further argues that the Turkish economy has continued to suffer due to the country’s high corruption levels and the increased politicized judicial system. Although there have been a number of reforms to discuss this issue, the judiciary system in Turkey is yet to be declared an independent body. The necessary structural changes required for Turkey’s economy, are in need of progress and further reforms. Some of the outcomes expected from further progressive reforms include: 1) An increase in the quality and volume of Turkish exports, stimulating economic growth through exports rather than through domestic consumption a report by the World Bank added to this arguing that, “In 2012, final consumption expenditure accounted for 84.4% of Turkey’s GDP; exports of goods and services - 26.4%. By comparison, in 2001 these figures stood at 80.8%, 27% and 15%, respectively. This suggests that over the past decade the structure of the Turkish econo­my has not changed considerably.” 2) Gross capital formation - 20.28% improving the skills of the work­force, 3) Raising the number of economically active people as well as increasing the productivity and 4) Competitiveness of the Turkish economy. The 2013-024 index report, ranked Turkey at position 44which was down by one position as compared to the previous report of 2012-2013 (Global Competitiveness index). The index report by Global Competitiveness, argued that high taxes, inadequate skilled work force, red tape and bureaucracy, in addition to regulations on foreign currency exchange and tax regulations as the main factors directly affecting the Turkish economy (World Bank Group International Monetary Fund, 2013). Additionally, the growing structural deficit in Turkey’s economy has been identified as a major risk to its socio-economic status. Nonetheless the country is left vulnerable due to its over-reliance nature on foreign financial aid that is depended on to support Turkey’s economy (Daly, 2003). The introduction of economic cooling policies into Turkey in 2012 enabled the state to reduce its deficit from $77.2 billion down to $48.9 billion leading to the growth on GDP by at least 2.2% in that year alone. Moreover lending was also reduced as well as domestic consumption following these reforms. The country’s economy is also reliant on domestic political stability within the state as well as the dynamic geopolitical event occurrences in the region and across nations that Turkey conducts businesses with (World Bank Group International Monetary Fund, 2013). There are also the added fears that investors might eventually pullout of Turkey since they view it as an emerging market. Accordingly, Washington’s ultimate advisory which includes adopting a strict monetary policy could further prompt investors to avoid riskier markets which could include investors abandoning Turkey as one of the major risky markets (Graham et al, 2013). Turkey’s high levels of imports have contributed to the state’s deficit. The high levels of imports are accredited to the Country’s over reliance on imported energy carriers in addition to the high proportions of imported raw materials that are used in the manufacturing of the final product. For instance, in the 2012, the cost of energy imports reached an average of 25% of the total value of imports. The deficit is also as a result of Turkey’s high domestic consumption levels. This is due to the growth in industrial production increases in imports which results to an increase in the available consumer credit. Notably the low deposits in banks by Turkey’s growing population have forced the local banks to raise their capitals abroad (Graham et al 2013). To salvage the Turkish economy through the reduction of the current account deficit, economists argue that it is vital for the country to grow its exports and reduce its high dependence on imported energy. The high rates of share in imported raw materials in export of goods within Turkey’s economy continue to pose major threat for the economy. 70% of this share, increase in exports and domestic consumption in Turkey all had a direct correlation when it comes to the increases in imports (The International Monetary Fund, 2014). In 2012, the share of imported raw materials reached an average of 48% while the share of capital goods was at 14%. The decrease was due to the active campaigns that advocated for higher proportions of low-processed goods in exports. In addition to rescuing the Turkish economy, the AKP government has worked hard in implementing policies that look forward to promoting Turkish products abroad as well as modernizing the export structure (World Bank Group International Monetary Fund, 2013). Conclusion and Summary The Turkish economy has benefitted immensely from certain objective conditions. Factors such as its geographical location and its proximity to the EU markets, have contributed to the economic boom experienced in Turkey in the years 2002-2012 until recent years. Turkey’s economy has undergone a number of changes which have been due to the success of well implemented reforms as well as poor strategic policies. Economic development in Turkey has been viewed as a contributing factor to the socio-political stability within the country. In maintaining a high and sustainable economic status the Justice and Development Party (AKP), came into power and implemented a number of policies as discussed above including an ambitious foreign policy agenda that was pursued by the AKP. The AKP government, implemented policies that led to the privatization of state-owned enterprises, especially those that was making losses at the time. This led to the unprecedented inflow of foreign direct investments. In addition to this the implementation of reforms in the banking system by this government boosted Turkey’s economy by protecting it against major fallout during the global financial crisis. Nevertheless, Turkey’s economy is at risk due to the number of unresolved economic issues that the government has failed to address. They include: the country’s current account deficit, its over-reliance on short-term external financing, and unfinished reforms as is evidenced in the education sector. This has left Turkey at a vulnerable state in terms of the economy. Turkish economy faces an immediate threat arising from the inflow of speculative capital and the risks related to the banking sector which includes: low levels of saving powers in the local banks as compared to the rate of borrowings, in addition to the heavy reliance of Turkey on foreign banks for financial aid. Turkey’s economy has been boosted by the policy making reforms that were adopted in the year 2001. The country’s economy has registered remarkable growth rates with an average of 3-3.5%. This is reflected in the GDP per citizen, and its huge population which offers a big domestic market as well as high foreign investments leading to globalization. Turkey’s location is another selling point for its economy. Its strategic position has placed it at a rather remarkable position that allows it to conduct business activities with the east and west. The implementation of new reforms and the support from the International Monetary Fund, Turkey has been able to adopt floating exchange rates, has established free trading zones for foreigners, decreased dependence on foreign financial aid and increased independence of the central bank. In addition to this the country has tightened fiscal discipline and stabilized inflation. With the pace set by the AKP government, Turkey needs to align their implementation strategy to be contingent on maintaining current trends in economic development. Maintaining a positive socio-political environment in Turkey is vital in order to ensure that there is a positive image of Turkey in the eye of foreign investors. Therefore it is important that the country maintains a stable political situation in the country if the economy is to be salvaged. References Abdulkadir, K. Determinants of Foreign Portfolio Investment in Turkey; Istanbul Stock Exchange Review. (2013). Adar, Sinem. 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