High inflation rates and the shortage of hard currency in the early 80s were among the priorities that Turkish economy had to tackle by implementing a stability programme approved by IMF in 1980. The stability programme was also aimed at reducing the role of state in the economy and letting demand and supply forces determine the price of goods, production factors and foreign currency. In order to obtain hard currency, import substitution polices were replaced by export-oriented industrialization programmes with promotion of exports and reduction of restrictions on imports. By the end of 1987, the programme proved to be successful in curbing the inflation; annual inflation rate was 38% on average between the years 1982-1987, falling from 101 % in 1980. Also, the economy grew at 6% on average over the same period, peaking at 9% in 1987.
Inflation triggered by widening public deficit following the election in 1987 was not on a downward trajectory anymore and again dominated the scene of Turkish economy. Inflation rates shooting record high with 73% and 70 % in 1988 and 1992 respectively resulted in increasing demand for foreign currencies and depreciation of Turkish currency around 66 and 65 in nominal terms for these years. In line with exchange rates, national income recorded also sharp falls and increases between 1988 and 1992. Due to the rises in salaries and wages in 1990, which increased private consumption, the economy scored a 9% growth in this year. However, average growth over this period realised around 3.5%, reflecting the stagflation effect on national income in 1987 and 1988.
The failure of the government to deal with the huge public deficit paved the way for the economic crisis in 1994, which required another economic stability programme to seek external funds from IMF. In order to finance public deficit, domestic borrowing were largely used in early 90s, which in turn leaded to higher interest rates. The hike in domestic interest rates attracted short term external flow into the economy, hence Turkish currency appreciated over 23% between 1988 and 1993 in real terms. The deterioration in current account balance was a leading factor to a record devaluation of Turkish currency in history by 169% in nominal terms in 1994. Also, Turkish economy experienced an unprecedented level of 106% inflation. Although the economy was shaken by crisis in 1994, national income rebounded from 4.6% contraction in 1994 to a 7% expansion in 1995 and kept the same level of growth in 1996 and 1997, achieving 5 % increase on average between 1992 and 1997.
The opening up the Turkish economy to international financial markets through convertibility of Turkish currency approved by IMF in 1989 brought the chance to obtain external capital flows that the country needed to finance its growth. However, the deepening interdependence of the national economies through globalisation made developing countries with weak economic structure more prone to the negative effects of financial crisis around the world. For instance, the financial crisis broke out in Asia in 1997 lessened the appetite for the risk for the assets of emerging countries. Especially, the huge outflow of capital from Russia also sparked similar movements in other emerging economies. This financial crisis also took its toll on the Turkish economy and 6 billions of portfolio investment fled the country in 1998 (CBT, 2007). The growth of national income plunged from 7.6% in 1997 to 2.3 in 1998, while the year 1999 saw a negative growth of 3.3%. In 1999, IMF came to the aid of Turkey again with a stand-by agreement involving disinflation programme and crawling pegged exchange rate regime. In this new system, the exchange rate was allowed to float within a band and used as an anchor to control the rate of depreciation of Turkish currency against a basket of dollar and euro to bring down inflation. The positive effect of the stabilization programme on the national income was rather short-term. Although the economy achieved a 6.7% growth level in the following year, the liquidity squeeze in 2001 crippled the economy. Crawling pegged was replaced by floating exchange regime and IMF stepped in again with another bailout worth of 19 of US$. Following the adoption of floating exchange rate, overvalued domestic currency depreciated against US$ nearly by 100% in nominal terms. This financial crisis brought a 5.6% decline in the size of economy and reduced the average growth of this 5 year period to 1.2%.
Turkey entered the twenty-first century with the reforms engineered to deal with chronic inflation, sustain economic growth and restructure its banking system. High interest rates with low exchange rate were used to tame the chronic inflation. By the end of 2007, the annual inflation was again in a single digit after 38 years. [1] The role of IMF support to the stability programme functioned as an anchor to restore confidence internationally. With an annual growth of 6.8% on average, the size of economy reached 372 billion of US$. As a part of restructuring banking sector plan, three banks owned by the state were privatised.
High growth of population growth gives a competitive edge to Turkey vis-a-vis OECD countries in terms of labour force (Dervis et al., 2004). Also, this dynamic population has often been pronounced as an advantage of Turkey to attract more FDI and a bargaining power in negotiations with the EU over membership. By the same token, the abundance of labour also manifested itself in low labour costs in Turkey. According to the recent statistics (exchange rate adjusted) by OECD (2008), labour costs in Turkey are even lower than the latest members of the EU in 2007, Romania and Bulgaria. Figure 3.4 presents the trends in labour costs of Turkey relative to the OECDG. Relative labour cost of Turkey constitutes only 65% of the OECDG on average by the end of 2007. The steep increase between 1988 and 1990 exhibits the effects of considerable rise on wages and salaries in 1990 and gradual appreciation of Turkish currency. Steep falls in 1994 and 2001 reflects the depreciation of Turkish currency and the cost of economic crises on the share of employees.
Change of political parties through various coalition governments in power nearly every year in late 70s was an obstacle in implementing the policies planned by the parties that were unable to get majority of votes (Tokgoz, 1999). By the same token, the lack of willingness to collaborate on the major issues among political parties in parliament along with right-wing and left-wing armed conflicts eventually brought the country on the brink of a civil war in 1980. Therefore, the government was ousted from power in a military coup and the generals took the matters in hand to stop the dissolution of the social cohesion at the expense of freedoms and the political parties were banned in the autumn of 1980. The interference of army into political life and restrictions on freedoms were not welcomed by European Economic Community (EC). The relations between Turkey and EC, which had started following the association agreement of Ankara [3] signed in 1963, were postponed by EC in 1982.
Conversely, Greece with a less than 0.1% outward FDI share in developed countries has 12% share in Turkey among developed countries. This reflects the involvement of Greek Banks in Turkey through Mergers and Acquisition (M&A) in 2006 and 2007 as a part of enlargement process in neighbouring countries and in Balkans (UNCTAD, 2008). [6] The USA and Netherlands also increased their commitments in FDI through M&A in financial sector. [7] Consequently, Financial Intermediation takes the second biggest share of service sector with 27%. Of service sectors Transports, Storage and Communication subsector holds 29 per cent of total stocks due to Mergers and Acquisitions (M&A) that involves the Swedish firm Sonia with Turkcell and the UK firm Vodafone with Telsim in communication sector (UNCTAD, 2008). These activities in M&A jointly contributed to the rise in the share of service sector in inward FDI stocks in Turkey in 2007 (WIR, 2007). By the end of 2007, the service sector brings about 73% of FDI inward stock of total FDI inward stock in 2007 (CBT, 2009), reflecting the structural change towards service sector in the world (WIR, 2007) as Figure 2.8 reveals. In line with the trends in the world, primary sector holds only 2% of total FDI in Turkey (WIR, 2007).
Manufacturing sector has one fourth of total inward FDI in Turkey and food products and motor vehicles present heavy inward FDI presence in comparison with other subsectors as Figure 2.9 presents. It seems that investors show interests towards the sectors that are associated with high capital commitments as in motor vehicles and chemical products and brand names and local presence as in food products. Chemical products and electricity, gas and water subsectors nearly doubled the amount of their amount of stocks from 2006 and 2007, taking 14% from the total inward FDI each in 2007. Remaining sectors receive relatively smaller shares around 7% as Figure 3.9 presents.
It is often argued that based on FDI trends experienced by the accession countries prior to full membership that the integration of Turkey into the EU will increase the attractiveness of Turkey to the foreign investors from the EU and non-EU countries. Disappearing tariff-related trade and non-trade barriers in the aftermath of acceding to EU, EU based companies may move the production plants to Turkey in order to take the advantage of cheap labour and large host-market and supply home country or third countries with the exports from Turkey. In a similar vein, non-EU companies with no base in Europe may use Turkey for their labour intensive operations and export platform.
