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Fragile or Favored? Prospects for Turkey’s Economy in 2015

Friday, March 13, 2015

Turkey is often touted as an economic success story. One impressive statistic, commonly cited by its government, is that Turkey has managed to triple its per capita gross domestic product (GDP), a measure of economic performance, in the last 13 years. Visitors to Turkey, whether Ankara or Istanbul, cannot help but notice an ever-changing and expanding skyline that suggests a dynamic and flourishing country. It is on the back of such progress and economic growth that the ruling party—the Justice and Development Party (AKP), which first won power in 2002—has been returned to power in three consecutive elections, in 2007, 2011, and 2014.

Yet, some argue the economic picture is less extraordinary than the official narrative. The opposition maintains that Turkey’s current growth, rather than an unusual and remarkable achievement, is largely in keeping with its very average performance in decades past. In fact, economists have long warned that Turkey is too dependent on foreign investments, causing Morgan Stanley to list Turkey in 2013 as one of the “Fragile Five” emerging countries most at risk of a downturn.

Knowing which of these perspectives is right—whether Turkey is indeed booming, just getting by, or on the verge of going bust—is essential to understanding the country’s political trajectory and, by extension, its relationship with the United States. With parliamentary elections slated for June 2015, and the AKP certain to make its economic record a central campaign issue, Turkey’s short-term economic performance will shape its political landscape and leadership for the next several years. The government’s reliance on the narrative of a booming economy for continued electoral success will also likely drive policy decisions that could have longer-lasting implications.

Turkey’s politics and economics mix on the world stage as well. To fuel its growth, Ankara looked to the Middle East to find new trading partners. So far, Turkey’s relative prosperity has insulated it from much of the region’s turmoil and allowed it to generously provide aid to more than a million Syrian refugees. But many of those trade routes have now been cut off, reducing Turkish exports. If Turkey’s economy were to weaken, it could not only risk social inquietude at home, but amplify the region’s worst dynamics. Without the example of Turkey as a successful Muslim majority free-market democracy, other countries will have little reason to undertake difficult, but necessary, political and economic reforms. Without Turkey’s generosity, a major source of assistance for those displaced by the Syrian conflict will dry up, worsening an already horrendous refugee crisis. And were Turkey to be preoccupied by internal problems, the United States would be left without a regional partner that could help it defeat the terrorist group known as the Islamic State and contain the sectarian conflict spreading from Syria to Iraq to, most recently, Yemen.

Unfortunately, this paper finds that Turkey’s economic prospects are increasingly shaky—with rising inflation, fiscal expenditures, and overall debt. The most proximate causes of Turkey’s economic success have largely been external, allowing the government to focus on promoting short-term benefits, while putting off structural reforms needed for longer-term development, for more than a decade. That approach now appears ready to backfire.

KEYWORDS: AKP, IRAQ, ISIS, SYRIA, TAYYIP ERDOGAN, TURKEY, YEMEN

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Middle East