Question

In your opinion, what is the most important structural problem of Turkish economy, why? Explain your
answer.

(min 1000 words)

Answer 1

A Comparative Overview: Turkey vis-à-
vis the BRICS and near-BRICS
Many studies appreciate Turkey’s economic performance
between 2002 and 2014.4
As a matter of fact, the
performance of the Turkish economy in this period has
been rather impressive, judging by its own historical
standards. A recent World Bank report highlights that
“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.”
In addition, Turkey’s political and
economic transformation also has further repercussions
for international politics.
The global system is passing through an interregnum
period. The unipolar structure that rests on the primacy
of the US is gradually heading towards multipolarity in
which emerging powers are accumulating more power
in the economic and political governance mechanisms
of the interstate system.
A group of challengers such as
BRICS (Brazil, Russia, India, China, South Africa) and near-
BRICS (South Korea, Mexico, Indonesia, Turkey) build
wealth and power thanks to their stupendous growth
performance. As an emerging regional power in the
Middle East and North Africa with a strong spearhead role
between Eurasia and Europe, Turkey also joined the ranks
of rising powers with important potential to contribute
to the emerging world order in the rest of the century.
Therefore, it would be apt to compare Turkey’s economic
performance vis-à-vis the BRICS and other near-BRICS.
From this point of view, there are intriguing questions
left unanswered, such as just how far Turkey has been
carried by this success inside the international system
and what needs to be done to ensure that the current
economic performance is maintained. Providing answers
to these questions requires one to look at Turkey from a
comparative perspective that brings other peer countries
into the frame, rather than just through an essentialist
approach that continually evaluates Turkey by itself.
The February 2001 crisis represents a real turning point in
Turkish politics and the economy, not only because it was
the deepest crisis in the history of the country but also due
to the structural changes that took place during the post-
crisis period. In the fiscal and financial realms, the crisis
was exploited as an opportunity to initiate substantial
and sustainable reforms that informed the fundamental
restructuring of state-market relations as part of a
comprehensive reform package entitled Strengthening
the Turkish Economy: Turkey’s Transition Program, the
aim of which was to “fundamentally [transform] the
functioning of the state.”
The AKP government, in its
first term in office, implemented the reform program
without any major deviation. Further underpinned by the
extraordinarily favorable global liquidity conditions and
availability of cheap foreign capital until the 2008 global
economic crisis, the Turkish economy expanded rapidly.

Accordingly, in current prices, GDP increased from 233
billion dollars in 2002 to 820 billion in 2013. Turkey’s total
trade also skyrocketed from 114 to 476 billion dollars
in the same period. As a result, the GDP per capita rose
to 10,782 dollars in 2013, a threefold increase in current
prices. Despite the fact that in constant prices, a more
proper way of calculation, real GDP “rose by 64 percent
during 2002-2012, and real GDP per capita by 43 percent,”9
it is still considered a remarkable record of growth.
From 2002-2007, Turkey was one of the highest-growing
countries with 6.8 percent real annual growth (see Table
1 in the Annex). However, Turkey’s economic growth
was subjected to ups and downs during post-2007. The
economy shrank by 4.8 percent in 2009 due to the global
financial crisis, which was followed by a spectacular 8.85
percent in 2010-2011. Starting from 2012, lower growth
rates became the “new normal” in the Turkish economy.
The economy demonstrated meager growth performance
during 2012-2013 with 2.1 and 4.1 percent real growth
rates, respectively. Although Turkey’s 10th National
Development Plan targets an average growth rate of 5.5
percent per annum between 2013 and 2018,10 the recent
projections point to a lower growth performance.
The economic growth from 2002-2013 contributed
to the overall welfare of the country and had, in a low
inflation environment, “significant trickle-down effects.”11
According to major indicators, income inequality was
improved. The Gini co-efficient, which measures the
income inequality in a country, improved from 0.42 in
2003 to 0.38 in 2013. Similarly, individuals living below
4.30 dollars per day declined from 23.75 to 2.06 percent
of the population.12 According to a recent World Bank
study, “Turkey’s middle class, while still a minority at
just over 40 percent of the population, has more than
doubled since 1993.”13 These indicators suggest that the
spillover effects of the economic growth contributed to
the expansion of a middle class in Turkey even if one takes
into consideration that there are measurement errors
related to official statistics.
From a comparative perspective, however, Turkey’s
growth performance is neither a story of outstanding
success nor a failure. The comparative analysis suggests
that Turkey’s economic success in this period did not
lead to substantial improvement of its relative economic
power in the hierarchy of international state system.
For instance, the share of the Turkish economy was 0.8
percent of the total world GDP in 2003, which reached
1.1 percent in 2006 and remained stagnant afterwards at
this level (see Table 3 in the Annex). The relative export
performance also paints a similar picture. Turkey’s share
in world exports increased from 0.7 percent of world
total to just 0.9 percent in the period in question.14 The
comparison with developed countries also shed fresh
light on Turkey’s relative development performance.
While a medium-income Turkish citizen was five times
poorer than a medium-income American citizen in 1960,
there has been no significant change in the intervening
half century. This is because according to the data for 2010,
a medium-income Turkish citizen is still four times poorer
than his US counterpart. South Korea, on the other hand,
tells a complete success story. For instance, a medium-
income person in South Korea in 1960 was on average
ten times poorer than his US counterpart. But by 2010,
this had fallen to 1.7 times. Consequently it could be said
that in the medium- and long-term perspective, Turkey
had shown a definite improvement, but comparatively
speaking it is still a country that has maintained its status.
In the last decade, however, Turkey has appeared to be
stirring, as there has been a 4 percent improvement
relative to the US.15
In summary, the AKP governments have made certain
achievements in the economic realm, especially in
comparison to Turkey’s own historical standards.
The uninterrupted and relatively inclusive growth
performance of the economy positively informed the
overall welfare of the population.16 However, Turkey is
not an outlier in comparison to BRICS and other near-
BRICS peers as it paints a mediocre picture, seeing only
a modest improvement in Turkey’s share in total world
GDP and exports. Furthermore, as I will try to demonstrate
below, Turkish economy suffered from certain structural
weaknesses and encountered mounting challenges, the
most challenging of which is the current account deficit.

Structural Challenges: Unpacking the
Current Account Deficit
High current account deficits have become one of the most
important structural weaknesses of the Turkish economy
in the post-2000 period. Turkey’s current account deficit
gradually increased from 2.5 percent of GDP in 2003 to 7.9 percent in 2013, with ups and downs in the meantime.
In 2011, it skyrocketed to almost 10 percent, which is an
alarmingly high ratio by any international standards.17 In
absolute terms, Turkey’s current account deficit was 436.7 billion dollars in total during 2004-2014. Current account deficit has always been an integral aspect of Turkey’s
economic problems and has played a role in all the
economic crises that Turkey has experienced over the last
50 years.18 However, it became a much more pronounced
problem over the last decade in comparison to other
sub-periods. For instance, studies show that the average
current account deficit to GDP ratio was 0.73 percent in
the 1990-2002 and 5.09 percent in the 2003-2011.19 A
comparative analysis also suggests that Turkey has the
highest deficit among BRICS and other BRICS countries
(see Table 4 in the Annex). Except South Africa, all other
economies in the BRICS and near-BRICS category have
better current account performance than Turkey.
The root causes of Turkey’s current account deficit are
deep-seated and structural, necessitating an in-depth
analysis. First and foremost, many pundits agree that the
structure of foreign trade is at the root of current account
deficits in Turkey.20 Stated differently, foreign trade
deficits stand out as a major factor that feeds current
account deficits. Starting from the liberalization of the
Turkish economy after 1980, Turkey gradually integrated
with the rest of the world via foreign trade. As a result,
trade’s share in GDP increased from 15 percent to more
than 50 percent over the last 35 years. One of the major
characteristics of this period, however, was a gradually
widening gap between exports and imports. For instance,
the trade deficit in 1990 was around 9.3 billion dollars,
which reached to 84.5 billion dollars in 2014. During this
period, the export-over-import ratio remained below 65
percent, except in crisis years. The asymmetric nature of
Turkish foreign trade emerges, therefore, as the leading
factor in the negative current account balance.
Trade figures suggest that the production structure of the
Turkish economy refers to a sub-optimal balance: Turkey
exports mainly consumption goods, while importing
investment and intermediary goods. According to İnsel
and Kayıkçı, “[f ]or the last two decades, 7 percent of exports was made up by investment goods, 44 percent was
made up by intermediate goods, and 48 percent was
made up by consumption goods […In the same period]
19 percent of imports was made up by investment goods,
70 percent was made up by intermediate goods, and 10
percent was made up by consumption goods.”21 Thus the
structure of Turkish foreign trade leads to a vicious cycle
since Turkey’s exports are heavily dependent on imported
intermediate goods.22 In other words, imports move
closely with overall economic performance due to high
intensity of imported items in the production and export
processes, which in turn pave the way for the perpetuation
of trade and current account deficits. According to a
study conducted by the Central Bank of Turkey, which
surveyed 145 major manufacturing companies, imports
in total inputs account for 87 percent in petrochemicals,
83.4 percent in electronics, 83 percent in transportation
vehicles, more than 80 percent in electronics and metals,
and 59 percent in the automotive sectors.23
The inadequate export performance is closely related
to the technological composition of manufactured
exports. In order to break up Turkey’s export dependence
on imported goods, a structural change is necessary.
The share of high technology exports in Turkey’s total
manufactured exports is less than 2 percent, well below
the world average. Turkey is also the worst-performing
country among peer economies in terms of high-
technology production (see Table 5 in the Annex).
Although non-negligible improvements have also been
achieved during the liberalization period, Turkey’s export
structure still relies on low- and medium-technology
products. For instance, while the share of goods based
on natural resources and low-technology in total exports
was 63 percent in 2002, this ratio declined to 56 percent
in 2010. Additionally, the share of mid-tech manufactured goods rose to 44 percent, a number that in 2002 was
only 37 percent. The share of high-tech exports, however,
remained stagnant at around 1.8 percent from 2002-
2012.24
Turkey’s discouraging performance in high-technology
exports partially emanates from the inadequate quality of
the country’s education system that leads to the poorly
equipped human resources. It is repeatedly emphasized
in the relevant literature that “a well-designed and high
quality education system improves human capital,
facilitates and promotes research and development, and
supports diffusion of frontier technologies.”25 According
to these standards, Turkey’s education system has
certain deficiencies regarding the quantity and quality of
schooling. The average Turkish citizen over the age of 25
has completed only 7.6 years of schooling, four years lower
than the OECD averages.26 In terms of PISA test results
Turkey is usually the worst performer in mathematics,
reading, and science among OECD countries.27 It is not
a coincidence that the economic success of South
Korea over the last half-century is closely related to
the improvement in its education system promoting
innovation and creative thinking. South Korea currently
outperforms all other OECD countries in PISA tests. In
contrast, the poor quality of the Turkish education system
hampers feedback mechanisms between universities
and the industry, leading to shortages in qualified human
resources – which is considered sine qua non for the
production of high value-added goods. The education
system in Turkey fails to train the kind of human capital
that the domestic economy needs to create innovation-
led high technology production.
The second root cause of Turkey’s growing current
account deficit, following the structure of foreign trade, is
Turkey’s energy dependence. Turkey imports more than
90 percent of the energy it consumes. As energy prices
soared worldwide in the post-2003 that coincided with
Turkey’s high growth period, the cost of energy imports
also increased significantly. According to calculations,
energy imports cost approximately 6 percent of GDP in
a year.28 The higher growth rates boosted the demand
for energy, and the skyrocketing energy prices, in turn,
further amplified Turkey’s current account deficit. Figure
2 (see Annex) demonstrates the important role of energy
in Turkey’s current account performance.
The government has developed certain strategies to
reduce Turkey’s dependence on energy imports in the
medium-term. Accordingly, the Ministry of Energy and
Natural Resources adopted a recent strategy document
for 2015-2019 that set the aims of diversifying Turkey’s
energy supply routes and source countries, increasing the
share of renewables, achieving the inclusion of nuclear
energy in the energy mix, and improving energy security.29
Furthermore, as part of its energy self-sufficiency strategy,
the government plans to build three nuclear power plants.
In April 2015, Turkey launched the construction of its first
nuclear power plant in Akkuyu, located in the southern
province of Mersin. The power plant, an approximately 20
billion dollars project, is to be built by Russia’s Rosatom.30
If implemented properly, the diversification strategies
and nuclear investments are expected to help mitigate
Turkey’s current account problem.