In 2002 soaring inflation, rampant corruption and a violently volatile boom/bust cycle saw Turkey labelled the sick man of Europe. But that is the year it all changed. Elected on a wave of discontent at the military’s involvement in government and all the corruption and economic problems it caused, the Turkish people elected the AK Party, which promised socio-economic reform, fiscal reform and responsibility and to reduce the military’s involvement in the governance of Turkey.
Unlike most elected parties the world over, the AK Party has spent the last 10 years delivering on those promises, much to the betterment of Turkey, and as testified by the fact that the party has won a further 2 terms, each with a higher majority than the last.As a result of the AK Party’s leadership Turkey has not only shed the sick man of Europe label, but is one of the strongest economies in the world. Here’s how.
Reforms and Stability
Picture this… In 2002 when the AK Party took over the running of Turkey, it was in the aftermath of one of its frequent downturns. The banking system was at the heart of that crash and so it was one of the first areas to receive the attention of Prime Minister Erdogan. As Mayor of Istanbul, Erdogan had successfully paid down almost all of its municipal debt totalling almost 2 billion. Erdogan increased the foreign exchange reserve threshold and posted an office of the central bank in every private bank in the country taking daily reports.
Those reforms among others, combined with Turkey’s small mortgage market (or rather the small exposure it had to sub-prime mortgages) meant the Turkish banking system was barely affected by the international financial crisis.
Erdogan also kept up his policies of paying down public debt, and even managed to carry off at the grander country scale. When he took over Turkish debt was 74% of GDP, by 2009 it was just 39% of GDP. During the same period debt to the IMF was reduced from $23.5 billion to just $7 billion. By 2011 Turkey owed the IMF just $5.5 billion according to Erdogan. Turkey had ended its standby agreement with the IMF in 2010, just months before Greece was forced to accept emergency aid from the IMF and a year before Ireland and Portugal were forced to do the same, more on this later.
Another great achievement of the AK Party is how it has slashed inflation. The first drop with a huge cut from 45% in 2002 to 25.33% in 2003, and then another big one down to 8.6% in 2004, where it hovered (between 8% and 10%) until 2009 when it fell again to 6.2%. Because of this, when Turkey reduced interest rates as the international financial crisis swept across the world, it was not simply a panic-policy to fend off the effects of said crisis as it was in many countries; it was a measured policy response to consistently falling inflation. As a result investors felt greater confidence that rates would not be hastily pulled back up.
The 2000/01 crash sliced 6.77% off Turkish GDP in 2000 and a further 5.69% in 2001, before returning to growth at 6.16% in 2002. Before 2000 the Turkish economy hadn’t crashed since a way back in 1994, well, 6 years back. But that cycle of boom and bust has been broken by the AK Party.
Between 2002 and 2009 the Turkish economy achieved a GDP growth rate averaging 6% according to the CIA World Factbook. Sure, the growth is broken by recession in 2009, but who can blame the AK Party for the international crisis? And Turkey comes out of that crisis as one of the strongest economies, not only in Europe, but the world.
The recession officially ended with a 6.4% growth in Q4 2009 before soaring into double digit growths of 11.7% and 10.3% respectively in Q1 and Q2 2010. Growth then had a soft landing at around 6% for the next 2 quarters leaving the yearend total a strong 8.2%. Growth then accelerated back into double digits, with 11% in Q1 2011 and 8.8% in Q2, before again slowing in the second half to 8.2% and 5.2% respectively in Q3 and Q4, leaving a yearend total of 8.5%. How many economies can say their growth accelerated from strong to stronger between 2010 and 2011?
Standing out for all the Right Reasons – the Golden Boy of Europe
That’s right. Turkey isn’t the sick man anymore; in fact it has become the golden boy of Europe. While Turkey has grown 8.2% and 8.5% in the last 2 years the EU has gone from slow growth to narrowly avoiding a double dip recession, and that is before we even mention the sovereign debt crisis and with that the possibility of several EU members (including 2 of its biggest) going bankrupt and/or the dissolution of the Euro.
Meanwhile you have Turkey, with a strong stable banking system, high liquidity, a strong and stable economy, an investor friendly environment, soaring exports and FDI, growing employment and a population growing almost as rapidly in affluence is it is in number. While many economies may be capable of matching Turkey’s growth, or even beating it this year as Turkish growth lands softly to around 4% on slowing global growth, but Turkey’s overall package of stability as well as growth easily makes it the golden boy of Europe.