In October 2023, I published a book entitled “Turkey’s Economic Odyssey Since 2000: From Ascent to Turmoil,” ** reviewing economic policies and performance in Turkey since 2000. The book was presented and discussed at a meeting of the Economics Thematic Group Meeting in May 2024 using
slides that can be found here.
Coming out of a severe crisis at the turn of the century and years of coalition governments, Turkey’s economy stabilized and recovered rapidly, buoyed by international capital flows. An IMF-supported stabilization program included structural measures such as eliminating off-budget funds, establishing regulatory frameworks for the energy and telecommunications sectors, cleaning up the public procurement system, reforming the banking sector by removing bankrupt banks, granting full autonomy to the Central Bank, and implementing banking supervision and regulation. However, tax reform was the missing piece. It remains unclear why tax reform was deliberately left out, especially when indirect taxes on energy and telecommunications eroded Turkey’s competitiveness.
As these measures took effect and produced results—evidenced by decelerating inflation, returning economic growth, and employment creation — the coalition government called for early elections. It got voted out, and a newly created splinter party with political Islamist roots and little governing experience won most of the seats in 2002. Initially determined to end the IMF program, the AKP realized that continuing to implement the stabilization program would be to its benefit. Its success secured a more decisive vote in the 2007 elections. Growth during the 2003-2007 period reached 7 percent. Turkey became the poster child of the emerging markets.
By 2008, the AKP government had learned the ropes. Corruption began to widen and grow, with asset stripping of public enterprises being sold as privatization and crippling the judiciary disguised as legal reform. State capture became the AKP’s preferred governance model. By then, the IMF anchor was gone, and the EU anchor disappeared soon after.
The construction sector and consumption growth led the economy in the 2010s. Current account deficits were financed by short-term capital flows attracted by high interest rates and an overvalued currency. This consumption-based and import-dependent growth persisted during the first half of the last decade. However, external debt piled up rapidly. The tide turned after 2011 as the ruling Justice and Development Party became overconfident after several election victories and started undoing structural reforms.
2018 marked a turning point for the economy and the regime when Turkey shifted from the parliamentary system to a one-person rule, adopting an “Erdogan-style” presidential system. Checks and balances effectively disappeared, and the erosion of the rule of law accelerated. Nepotism in senior government positions was openly flaunted, and a single ruler took over economic management. Since then, Turkey has suffered from an insidious decay of institutions and a lack of respect for the rule of law.
Much of the investment was in construction, including private housing and government projects like roads and tunnels. Agriculture was left on its own. Once an exporter of staples, Turkey started importing grains, livestock, and even hay to feed livestock. An overvalued exchange rate and heavy indirect taxes made local manufacturing of raw materials and intermediate goods uncompetitive. Manufacturing and its exports became dependent on imports.
The president’s policy rate cuts exacerbated post-pandemic inflation fueled by a lax monetary policy. Official monthly year-on-year inflation reached 85 percent last October, significantly lower than estimates by independent researchers. The exchange rate depreciated 360 percent over the last three and a half years. Reserves were depleted, and net reserves fell into negative territory, excluding forex swaps with other central banks.
From the outset, the AKP government pursued a social engineering agenda aimed at raising pious and compliant generations. The education system was revamped frequently, with resources being diverted to religion-based education at the expense of secular schools, which also provide essential technical education and vocational training. This shift has deprived future generations of the skills needed for the economy.
Faced with a dramatic decline in living standards—reflected in the outcome of local elections in March—Finance Minister Simsek indicated that economic policies would return to orthodoxy. He appears to be working to instill fiscal discipline with Erdogan’s apparent blessing. It is difficult to categorize Turkey’s current economic policies, but they demonstrate the characteristics of crony capitalism, kleptocracy, state capture, and graft.
However, no matter how stringent and orthodox the economic policy measures are, they will only lead to recovery if the rule of law, separation of powers, institutional autonomy and independence, transparency, and accountability are restored. Achieving this under the current regime is a tall order.
* Tanju Yürükoğlu joined the Bank in 1976 as a Young Professional and retired in 2005. He holds a doctorate in Economics from the University of Istanbul. He served as an economist, lead economist, Country Programs division chief, country manager, and senior advisor in Africa, MENA, ECA regions, Finance Complex, and the Quality Assurance Group (QAG).
** The book is available on Amazon in Kindle and print.
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KEYWORDS Corruption, Economic Crises, macroeconomics, Structural Reforms, Turkey, Turkish Political Economy
