The economy has become one of the hotly debated topics in Turkey prior to the general elections on June 7. There is now a quasi-consensus that the upcoming election is one of the crucial turning points in the history of contemporary Turkish politics. The Justice and Development Party (AKP in the Turkish acronym), which has been ruling the country with single-party majority governments for about 13 years, aims to gain enough seats again to replace the current parliamentary system with a presidential one. The opposition parties, on the other hand, struggle to increase their popularity in the eyes of the electorate. In this setting, the economy constitutes the single most important variable determining the fortunes of the political parties.
The Turkish economy performed quite well in the aftermath of the devastating 2001 economic crisis. Many pundits and market players appreciated the economic expansion during the AKP governments. In fact, the economy grew rather impressively in this period, judging by its own historical standards. As highlighted by a recent World Bank report, “Turkey’s [recent] economic success has become a source of inspiration for a number of developing countries, particularly, but not only, in the Muslim world. The rise of Turkey’s economy is admired, all the more so because it seems to go hand in hand with democratic political institutions and an expanding voice for the poor and lower middle classes”.
During the AKP era, per capita GDP increased three-fold and trade volume expanded from 114 to 476 billion dollars in current prices. Although the transformation is less striking in constant prices, it is still the case that Turkey succeeded in ensuring respectable and, more importantly, uninterrupted growth rates in a single digit inflation environment. As a result, the middle classes prospered and income inequality indicators were improved significantly. For instance, the Gini coefficient, an indicator to measure income inequality, declined from 0.42 in 2003 to 0.38 in 2013.
In search of a new paradigm
That being said, the Turkish economy has reached a new threshold, namely the middle-income trap, which necessitates a new momentum to ensure high and sustainable growth rates. One of the urgent problems in this context is declining economic growth in recent years. The annual growth rate realized as 3.2 percent annually during 2008-2014, which was 6.8 percent between 2002 and 2007. Not surprisingly, the sharp decline in growth figures exacerbated Turkey’s recalcitrant unemployment problem. Accordingly, the unemployment rate increased to 11.3 percent, according to recent figures. Second, the current account deficit became an imminent fragility in the Turkish economy. High current account deficits, hovering around 8 percent in 2013 and 5.8 percent in 2014, make Turkey vulnerable to external shocks in a regional and global environment characterized by intense uncertainty. Third, the autonomy of economic institutions has recently become subject to intense political debate. The political ruling elite, especially the president, openly criticized the Central Bank over its interest rates policy. The president’s criticism is considered an outright intervention to the independence of the Central Bank and other independent regulatory institutions. This political intervention led to anxiety in the markets regarding the politicization of economic decision-making processes.
Having taken this sensitive economic background into consideration, the incoming government needs to work hard on three grounds. First, a new paradigm is needed to revitalize Turkey’s growth performance. The latest IMF estimates suggest that the Turkish economy will grow by 3.1 and 3.6 percent in 2015-2016. In order to increase growth performance Turkey needs to invest in high-value added production and export sectors. This also relates to the second problem. Turkey’s current account deficit is structural in nature. For every export item, Turkey heavily depends on imported intermediary items. Stated somewhat differently, the high intensity of imported items in the production and export processes leads to the perpetuation of trade deficits. In 2014, for instance, the trade deficit reached 84.5 billion dollars. Thus the new government must develop comprehensive strategies to address the structural current account problem. Transition to high-value added production is the sine qua non to overcome the current account challenge. Third, the new Turkish government is expected to consolidate the autonomy and inclusiveness of economic, legal and political institutions to manage market expectations properly and underpin investors’ confidence.
As Turkey is heading to the ballot boxes, different post-election scenarios are on the table. Whichever scenario prevails, however, the economic agenda for the new government will remain similar: the creation of a genuinely pluralistic political order to feed the deepening of democratic practices, the reformation of the education system to promote free and creative thinking, and the consolidation of a legal system that guarantees political accountability and transparency, which, in turn, are expected to jointly inform high quality and sustainable economic growth.
Mustafa Kutlay, Assistant Professor of International Political Economy, TOBB University of Economics and Technology, Department of International Relations, Ankara.