ECONOMIC DEVELOPMENTS IN TURKEY AFTER 2002

By

Hasan BLC

Sinem SONUGR

Merve DOANER

Izmir, DokuzEylul University, December 2013

International Relations
 OUTLINE

Abstract

I. Introduction

a. Significance of the Topic

b. Objective of the Paper

c. Literature Review

II. General Economic Indicators: 2002-2012

a. Growth

b. Employment Trends

c. External Trade

d. FDI

e. External Debt

III. Impacts of 2008 Crisis

a. Impacts of 2008 Economic Crisis in Financial Markets

b. Impacts of 2008 Economic Crisis in Real Economy

IV. Conclusion
ABSTRACT
 I. INTRODUCTION
After Justice and Development Party came to power in 2002, Turkeys

macroeconomic indicators showed better conditions than many other countries

through the implementations policies that fiscal discipline, structural reforms, and

stable privatization. Turkey has sustained its development during global economic

crisis period. Turkey had got over global economic crisis with minimum damage due

to existing structural feature of banking system in Turkey and actors behaviors in

market during economic crisis period.

a. Significance of Topic
We want to examine in this study, did Turkey develop or undevelop during 2002-2012

area.
b. Objective of the Paper

This paper shows how Turkeys development improved after 2002. This paper

examines areas that affected by development and also affected to development.

c. Literature Review

II. General Economic Indicators: 2002-2012

a. Growth

Turkey, between years 1990-2002, had spent time struggling with the low economic

growth, high debt amounts, unfair income distribution and high inflation. After the 2001

economic crisis, the Justice and Development Party came to power, gave importance to

democratic and economic reform program. Within the scope of liberalization of economy,
macro stability began to occur through Turkey gave priority to applications such as EU

membership process, strengthening of the financial sector, supporting private sector and

restructuring of the social security system.1

Declining interest rates in the economy to low levels enabled overcoming the barriers on

the investments. Decline in interest rates have a positive effect on private consumption. In

addition, strengthening the market mechanism efforts have increased, reduction of the state

share in the economy even more increased private sector role, financial sector improved for

meeting the needs of real sector, upgraded the quality of labor and enhanced the efficiency in

public services, prevented resources waste and withdrawn from production in some areas of

the public sector strengthened its regulatory and supervisory role in the market.2

Also expanding liquidity facilities in global markets after the 2001 crisis, combined with

high real interest rates in the economy of Turkey, country's economy became attractive in

terms of world market. And with the impact of the economic crisis in 2001, economy which

contracted by 5.7 percent, recovered in 2002 and realised 6.2 percent growth. Turkeys

economy growth rate ,that increased 5.3 percent in 2003, 9.4 percent in 2004, 8.4 percent in

2005, 6.9 percent in 2006, derived from both performancing in export of goods and services

and also domestic demand.(Figure 1)3

Figure 1: Annual GDP Rate

1 Suat zeren, 2001 Krizi Sonras Ekonomik Byme, stihdamdaki Gelimeler ve Beklentiler, Turkish
Economic Association, No.2012/81, Ankara, 2012, p.3-5.

2 Ibid, p. 3-5.

3 Ibid, p.5-8.

Source : TSI (2012), The Medium Term Program 2013-2015

 Economy gained competitiveness, tight monetary policy depressed on inflation, tight

fiscal policy improved fiscal balances and advanced future expectations, risk premium had

fallen. After implemented tight fiscal policies, public consumption and investment

expenditures contracted, and contributing of the private sector on production had increased in

the economy. During this period, increasing in foreign investment contributed a significant

amount on production. Burden of discharging reduced and this increased investment and

capital accumulation also economic graphics of this period underlied the burden of

discharging that defined by EU.4

The global economic crises in 2008 narrowed to economic growth in 2009 at the rate of

4.8%. With the restructuring and revitalization of the real sector, that all sectors contributed to

economic growth, growth rate in 2010-2011 increased. During this period Turkeys economy

with 8.5 percent growth rate in 2011 become the worlds second fastest growing economy

after China (9.2 percent). The countrys economy performed annual average 5.2 percent real

GDP between the period 2002-2012.5

4 Erdal Tanas Karagl, AKP Dnemi Trkiye Ekonomisi, 2013, Ankara, p.27-29.

5 Ibid, p. 27-29.
 Figure 2: Annual Average Real GDP Growth Rates, 2002-2011 (%)

Figure 3: Selected in 2011-2017 Term, OECD Countries, Annual Average Real GDP Growth

Source: IMF World Economic Outlook Report, April 2012, Turkey Statistical Institute (TSI)

Source: OECD Economic Outlook 3

Due to the ongoing debt crisis in EU countries, constriction in the global economy,

current account deficit in 2011, Turkey's 2012 economic growth target has been relatively low

compared to 2011. First three quarters period of 2012, soft landing process started in the

economy for keeping current account deficit under control and for providing balance in

domestic and external demand improved alternative markets and exports rate slightly

increased. According to OECD estimations, Turkey will be the fastest growing country among

OECD countries with Turkey's annually growth rate 6.7 percent in the period 2011-2017.

(Figure 3)6

b. Employment Trends
While calculating the unemployment rate, the International Labour

Organization (ILO) standards are used in calculation methods. To calculate the

unemployment rate: Unemployment rate (%) = (amount of unemployed / total labor

force) x 100.7

6Ibid, p.29-30

7 smet Demirkol, Trkiyede sizlik Sorunu , 2013.

 Rising unemployment rates with 2001 crisis revealed that, Turkeys growth

structure did not have create employment. Thus, despite sustaining economic growth

occurred since the 2001, same stability could not be attained in reducing

unemployment. Low level of agricultural sector share in employment area , every year

participation of approximately 800.000 people to labor force, emerging current

account deficit due to the growing character that based on import, affected

unemployment and unemployment rate average between 2002-2007 has been around

10 percent. Justice and Development Party, in this sense, for reducing unemployment

or drop it to a certain level put a long-term goals. In the direction of implemented

incentive system begun to creation of new business areas and increasing employment .

In 2009, due to the global economic crisis, the unemployment rate increased to 14.8

percent. (Figure 4)8

Figure 4: Turkey Unemployment Rates (%)

With

the

number of applications, such as; reducing labor costs and

insurance premiums to employers, tax reductions to sectors that affected

Source: TSI (Labor Statistics)

by the crisis, improvement was achieved in 2010.9

8 Erdal Tanas Karagl, AKP Dnemi Trkiye Ekonomisi, 2013, Ankara, p.52.

9 Ibid, p.53
 In 2011 declined to 9.8 percent and in the first 9 months of 2012 declined to 9.1

percent. During this period, increasing export rates had played important role on one of the

main sources of this decline. Finally, when we examine the Turkeys unemployment and

growth increase / decrease rates between 2002-2012, during this period, increasing in the

unemployment rate is more than growth rate, unemployment and growth rate gap reached

minimum level in 2004 and reached maximum level in 2009 and when the growth rate below

5 percent; large increasing occured in unemployment rate and also determined that the last ten

years unemployment rate did not drop below 9.5 percent.10

c. External Trade

2001 economic crisis affected the economy significantly. When Justice and Development

Part came to power, Turkeys export performance manifested itself in the continuous surge in

total export volume which reached at 36 billion dollar in 2002; around 43.7 billion dollar in

2003; 63.2 billion dollar in 2004; 73.5 billion dollar in 2006. During the period of 2004-2006,

government undertook the Exports Strategic Plan which was a roadmap for Turkeys new

export orientation as well as by the end of 2006 while it was exceeded by more than 10

billion. Export witnessed robust growth rates by 25.3percent in 2007 and 23.1 percent in

2008. Total volume therefore reached at 107.2 billion dollar and 132 billion dollar in 2007

and 2008, consecutively. Due to the financial crisis erupted in 2008 however, Turkeys main

affected so total export volume decreased by a significant 22.6 percent, down to 102.1 billion

dollar in 2009. (Figure 5)11

10 Ibid, p.53-54.

11 sinem
 Figure 5: Annual Export Rate

Source: Turkish Exporter Assembly

In the world, the balances have changed with the affects of global economic crisis. Less

developed emerging markets was demanded. Turkey foreign policy decisions, accordance

with economy, started to be implemented. Because of the government expansion to the

Middle East and Africa, the trade relations have developed with these countries.Turkeys

vibrant economy and democratic reforms have increased its soft power in the region and made

it particularly attractive for reformers. The argument around the so-called axis shift might

seem to be well fitting into Turkeys changing foreign trade scheme as the number of new

export destinations and the significant rises in Turkeys bilateral trade volume with Latin

American, African and Mid-Eastern countries as well as China could display such a case.12

Turkey succeed the eliminate the effects of the economic crisis and tend toward the way of
searching of an alternative export markets. So, the disadvantage status which caused by crisis
turned to in favor of Turkey. Whereby, the effects of economic crisis reduced to minimum.
Especially, the Middle East and North Africa countries (MENA) become an alternative export
market for Turkey. Since 2010, Turkey made trade with MENA countries in various sectors.

12 sinem
 In recent years, Turkey has increased the social, cultural, economic relations with African

countries. In 2011-2012 of Turkey, despite the debt crisis in the European Union, has a

positive momentum in export due to expand the market share. In 2011, the period which

economic growth tend to slowing down, due to a contraction of domestic demand producers

tend to external demand and has been an increase in the amount of export. The depreciation in

TL affects the gain competitiveness in world markets and the increase in the export.All during

the year of 2012, export become the source of growth in Turkish economy.After 2002, the

export quantity has contiuous increased except the global economic crisis term. While in 2002

the export quantity was 36 billion dollar, it reached 152.6 billion dollar in 2012.13

Turkeys imports continuous increase year by year, biggest portion in imports have mineral
fuels and oils in 2007 and rest of imports as follows respectively; machineries, mechanical
appliances and boilers, iron and steel, electrical machinery and equipment and vehicles were
main imports for Turkey. Import rate was 54.5 billion dollar in 2000. But after the 2001
economic crisis, import reduced to 43.13 billion dollar. After 2002, import has began
increased. The most important uptick in the import become 69.3 billion dollar and 97.3 billion
dollar in 2003 and 2004. In 2005, import rate reached 110 billion dollar. In 2009, Turkeys
imports decreased by 30 percent due to global crises. In 2010, Turkeys imports have raised to
185.5 billion dollar.14

Foreign Direct Investment

There was an extreme rise of freign direct investment in Turkey after 2002. The
reason for this increment was the reform made in economy and stable
preferences continue according to economy. In Turkey, the performance of
increase in economy and successive budgets have shown the increase of
competitive industry. These increasements have shown the importance of Turkey
and brought it up to the level if records. The reforms made in economic financial
sectors have opened ways as revolution in the process of European Union
membership. The reforms have saved the government from sum of their works
and increase the financial sector. The most important performance in economic
and financial sector is to keep contiunity of the success. Fort his reason, it is
important to make stanbul the center of finance in order to stable and express

13 ssinem

14
the economic success.stanbul plays a big role to become international financial
center.15

The strategy of foreign direct investment must pull foreign investments.Turkish

economy has markets and wide telecommunication network due to being internal
market and possession advantageous geographical position. . Creating new

employment areas and increasing capital stock based on advanced technology,

FDI can

also make significant contributions to economic growth. As FDI requires technology and

technological know-how, it can have a two-dimensional effect on the economy; both

directly, and indirectly. As it also includes direct ownership control, it may affect growth

through R&D activities, direct technology transfer, enhancement of opportunities for

human resources, and productivity. These are remarkable for the sustaining development and
high-tech manufacturing because of lack of domestic saving in Turkey.16

Before 2001, Turkey cannot be adequate for attract foreign capital.After 2002, reconstruction
started in the economy especially banking sector. There was high growth in foreign direct
investment. In 2007, Turkey has highest foreign investment as 22 billion dollar. Turkey has
been less affected in global economic crisis but there has beendecline in foeign direct rate. In
2009, foreign direct investment increased with financial infrastructure and resistant structure
of economy. Turkey has 110 billion dollar foreign investment in the last 10 years and Turkey
achieved the most attractive 13th country of world. (Figure 6)17

15

16 frn

17 njyuyu
The share of energy and automotive sectors investments in the international direct investment
increased. The cheap labor, access to markets become effective fort he determination of
investment. The incentive systems, the arrangements in the tax and custim areas, and
structural factors has been remarkable for foreign investments. New incentive law began to
implemented in 2012. Within this law, due to increasing peace and security, foreign direct
investment also will increased. 18

External Debt

In Turkeys economy the problem of external debt has continued for many years. The increas
in the amount of debt prevented the foreign investors to invest because of the higher tax. It
caused the reduction of investment, and decrease the capacity of the debt repayment of
country and reduction of foreign capital inflow. On the other hand, real interest rates and
exchange rates increased significantly. Due to this increases, the payment of the debt burden
of country has increased for many years. During these years; bribery, corruption, and misuse
of privatization policies and misuse of economic measures become widespread with political
instability and management crisis. This situation caused the reduction of capital inflow. The
debt burden increased with the existing crises.19

Justice and Development Party succeed the reduction of the external debt rate in the GDP, and
provided the repayment of debt. This policies implemented since 2002. While external debt
was 130 billion dollar in 2002, it reached 340 billion dollar this year. In the Justice and
Development Party term, 210 billion dollar of new foreign loans have been taken; foreign
debt has increased by 162 percent. One-third of the foreign debt, that is 10 billion dollar,
belongs to the state and the Central Bank. Thanks to the system of indirect taxes and
unlimited privatizations, the public debts remained at 103 billion dollar. Public debt stock,
including domestic debt, is 40 percent of the national imcome. The some rates in the EU, in
the eurozone, reach 70 to 80 percent. External debt of private sector increased from 43.1
billion dollar to 226 billion dollar in Justice and Development Party term.20

In 2002, Turkish gross domestic product (GDP) stood at $230 billion with the local and
external debt/GDP ratio at 75 percent. This figure declined to 36 percent in 2012 when GDP
was $786.3 billion.Turkey ended its Internal Monetary Fund debt last year by paying its last

18 ftyrbnjh

19 sinem

20 sinem
installment. Turkey is one of the countries which contribute financially to the IMF with a 5
billion dollar contribution.21

III. Impacts of 2008 Crisis

Global economic crisis began in USA mortgage market in mid 2007. Global economic

crisis affected the entire financial sector, spread throughout the world in a short time and

affected every country.22

Although 2008 economic crisis started in USA on August mid 2007, Turkey was

affected by global economic crisis on October 2008. 2008 economic crisis affected Turkey

indirectly. The effects of global economic crisis in Turkey distinguished itself in financial

markets and real economy.23

a. Impacts of 2008 Economic Crisis in Financial Markets

Effects of global economic crisis were seen firstly in financial markets.24

21 sinem

22Sreyya Yldrm, 2008 Yl Kresel Ekonomik Krizinin Dnya ve Trkiye Ekonomisine Etkileri, KM
Sosyal ve Ekonomik Aratrmalar Dergisi,No.12, Balkesir, 2010, p.47.

23Ibid, p.47.

24 Ibid, p.49.
 Although 2008 economic crisis started in USA on August mid 2007, stock exchange

had rose until December 2007 in Turkey. After January 2008, stock exchange had downed

because of global economic crisis began fell its impact.25

Turkish currency had appreciated more than in second half of 2008 to second half of

2007. Turkish currency had depreciated after October 2008 because of global economic

crisis.26

Consumer Price Index had increased more than 2008 to 2007. Consumer Price Index

occured 10.6 percent on first half of 2008. Consumer Price Index had declined and it occured

10.1 percent on November 2008. As a result, Consumer Price Index had declined and it

occured 5.9 percent at the end of May 2009 because of the global economic crisis an

especially decline price of crude oil and basis goods.(Figure 8)27

25 Ibid, p.49.

26 Zafer Ykseler, Trkiyede Kriz Dnemlerinde Ekonomik Gelimeler ve demeler Dengesi

Uyumu, 2009, p.20.

27 Ibid, p.20.
 Figure 8: Global Crisis: Consumer Price Index (Annual %)

Source: www.tcmb.gov.tr
Avarage Government Debt Securities compound interest rates had declined more than

in first half of 2008 to first half of 2007. They occured 18.1 percent. However, they had

increased after March 2008 and they occured 20 percent on June 2008. Government Debt

Securities compound interest rates had continued to rise and it occured 21.5 percent on

October 2008 because of global economic crisis. Interest rates were showed a falling tendency

and interest rates occured 13 percent on May 2009.In 2008 economic crisis period, interest

rates had shown increase in a short term unlike other crisis periods.(Figure 9)28

Figure 9: Global Crisis: Government Debt Securities Compound Interest Rates (Annual %)

b. Impacts of 2008 Economic Crisis in Real Economy

Global economic crisis took effect in real economy.29
Especially global economic crisis affected sectoral growth rate and GDP. When GDP

28 Ibid, p.22-23.

Source: www.tcmb.gov.tr
 had increased at

the rate of 6.9

percent in 2006,

GDP showed

decrease and it

had increased at

the rate of 4.6

percent in 2007.

The growth rate in GDP had continued to decline and it had increased at the rate of 0.9

percent at the end of 2008. When growth rate in agricultural sector occured at the rate of 1.4

percent in 2006, growth rate in agricultural sector had declined at the rate of 6.9 percent in

2007. For this reason, share of agricultural sectorin GDP had declined. Growth rate in

industry sector occured 8.3 percent in 2006. Growth rate in industry sector occured 5.8

percent and it occured 1.1 percent in 2008 because of global economic crisis. In

manufacturing industry which is significant indicator of industry sector, growth rate occured

8.4 percent in 2006. It occured 5.6 percent in 2007 and it occured 0.8 percent in 2008 because

of global economic crisis. That situation demonstrated that incestment and production and

production rate had declined because of negative developments of industry sector. Growth

rate in service sector occured 7.2 percent in 2006. It occured 6 percent in 2007 and 0.4 percent

in 2008 because of global economic crisis.(Figure 10) 30

Figure 10: Growth Rate

29 Sreyya Yldrm, 2008 Yl Kresel Ekonomik Krizinin Dnya ve Trkiye Ekonomisine Etkileri, KM
Sosyal ve Ekonomik Aratrmalar Dergisi,No.12, Balkesir, 2010, p.50.

30 Ibid, p.50-51.

... : Some datas which are in original source are not written.
Source: TSI
 Capacity usage rate of manufacturing industry and changes in capacity usage rates

affect real economy. 2007-2008 capacity usage rates of manufacturing industry had declined

more than May 2008 to May 2007. When capacity usage rate occured 82.6 percent on

November 2007, capacity usage rate occured 72.9 percent on November 2008.(Figure 11)31

31 Ibid, p.51.
 Figure 11: Capacity Usage Rate

Source: TSI
Number of stores which are opened and closed affects real economy. According to

Table, 4126 companies were established on October 2007 and 3026 companies were

estabished on October 2008. In other words, number of companies which were established

had declined at the rate of 26.7 percent.32

Although number of employed person was increased more than August 2008 to August

2007, number of unemployment person did not decrease. On the contrary, number of

unemployment person increased by 207.000. Number of unemployment person was 2.232.000

on August 2007. Number of unemployment person had increased and it was 2.439.000 on

August 2008. In other words, unemployment rate was 9.2 percent on August 2007 and it was

9.8 percent on August 2008.33

Confidence index was 101.2 on November 2007. It decreased and it was 54.6 on
November 2008. This situation showed that panic in business.34
Turkey had got over global economic crisis with minimum demage due to the

structural reform.35

32 Ibid, p.51-52.

33 Ibid, p.52.

34 Ibid, p.52-53.

35 http://www.internethaber.com/turkiye-krizi-nasil-atlatti-231014h.htm (it was reached on

15.12.13)