"Made in Turkey" - but for how long?

During a flight from Istanbul to Europe, this observer had the great fortune to strike up a conversation with a gentleman named Mehmet. Mehmet and his wife, along with half of the economy section of the plane, were on their way to a two week tour of South America. All of the tour participants were of retirement age or older, wore gold watches and jewelery, and lived in some of the nicer residential areas of Istanbul. They collectively represent a sort of golden generation of Turks, who were born toward the beginning of the Turkish Republic. Ataturk's reforms have influenced the entirety of their personal and professional development. They are accordingly some of the staunchest defenders of secular and westernized Turkey, since it is they who largely realized Ataturk's vision and have been its greatest beneficiaries.

Mehmet began his career in the navy as a cadet at Turkey's naval academy and ultimately served as a electronics technician. He spoke with great pride about the technical training he received from the US Navy and also boasted that his daughter completed a masters in electrical engineering from a major American university. When Mehmet left the Turkish Navy, he started a manufacturing business with the technical expertise, which he had acquired during his career. His factory, which is located on the Asian side of Istanbul, has a vibrant business producing electronic components used in televisions made by Turkey's largest household electronic goods manufacturer, Vestel.

Mehmet's manufacturing business serves as a microcosm of Turkey's economic renaissance, which has particularly bloomed during the past few years of the AKP leadership. No longer dominated by state-owned businesses, agriculture and textiles, Turkey's economy emerged from a politically tumultuous period in the 1990s with an aggressive approach and strong support from foreign investors. According to the president of the Turkish Confederation of Businessmen and Industrialists, Rızanur Meral, 60% of Turkey's exports are purchased by European Union members. Turkey's historically weak currency, lower wage levels, emerging domestic economy, long-time NATO membership and proximity to Europe have made it a logical location for manufacturing growth.

While the lure of these conditions continues to prevail for the most part, Mehmet's forecast for the future of his business would appear to have great relevance to the prospects of the Turkish economy in general. "In three years I will have to close my production line," Mehmet predicted. In order to compete with Chinese manufacturers vying for Vestel's supply contracts, Mehmet's business has been forced to cut the price of its electronic components. These cuts will eventually render his domestic production operations completely unprofitable - a phenomenon that is relevant to many of the world's emerging market economies including Turkey.

Mehmet's story exposes one of the many vulnerabilities of the Turkish economy, which this observer views as an increasingly visible theme for 2008. While Turkey's labor costs may be low compared to Western Europe or even most of Eastern Europe, it offers little advantage when compared to India or China. Moreover, raw material costs in India and China benefit from substantial state subsidization. Due to Turkey's considerable trade with Europe, local Turkish suppliers of raw materials have raised their prices to European levels and the Turkish market furthermore does not feature nearly the same level of raw material subsidization.

Throughout 2007 the great strength of the Turkish lira, buoyed by record levels of foreign investment covering Turkey's growing deficit as well as by substantial foreign exchange trading, kept pace with the rising price of oil. Unlike in the US economy, which has felt the effects of higher energy costs, the Turkish economy was relatively buffered. Despite this situation, the following analysis from a Bloomberg article references a chronic fault in Turkey's manufacturing system.

“The essential problem for Turkey is the fact that manufacturers rely on imported goods to make products,” said Şengül Dağdeviren, economist for Oyak Bank in Istanbul. “Whenever exports increase, imports go up accordingly.” Exports rose 30 percent to $11.3 billion in November, a record for a single month, the statistics agency said Monday. Imports increased 29 percent to $16.6 billion in November from the year-earlier period, the agency said.

The Turkish government has responded to this situation by calling for Turkish manufacturers to pursue more value-added products. However, this observer wonders how moving up the value chain for manufactured products will alleviate Turkey's troublesome import-export cycle. Value-added products will make the country's exports worth more, but they will still require Turkey to import the necessary inputs - perhaps even at greater levels of cost.

The Turkish economy thrives on political stability and it appears unlikely that the magicians in the AKP will be able to ensure such conditions for 2008. The political calendar in 2008 will be marked by the inevitably heated battle over the series of constitutional reforms desired by the AKP. In addition, Prime Minister Erdoğan has demonstrated considerable resolve to overhaul the country's social security system, which is a key sticking point for Turkey's relationship with the IMF and with the European Union to a certain extent. At the moment, roughly 8m Turks directly receive social security payments and "90 percent of the Turkish population is directly or indirectly a part of the social security system" according to this article in Today's Zaman.

The legacy of last year's drought, the potential for military activity related to the PKK and interruptions in energy cooperation with Iran and Russia could also contribute to the brewing storm, which will hamper Turkey's economy in 2008. With slower levels of growth predicted for the coming year, Turkey and its AKP-led government must be extremely sensitive to the social and ethnic tensions that will most likely rise as the general climate of economic prosperity dissipates. It is this potential for unrest in Turkish society, which ultimately represents the greatest threat to the near-term progress of the Turkish economy, in addition to the nation at large.

Considering the Turkish Economy and the Conditions of its Success

The Turkish economy is currently moving at full throttle. Not since the privatization reforms of the venerable Turgut Özal has there been such a sustained stretch of economic progress. While the average Turk will point to the fact that unemployment, which probably unofficially hovers at 14-16%, remains a sizable dampener to overall well-being, a considerable cross-section of Turkish society would nonetheless agree that the country's economy is enjoying unprecedented prosperity.

Taxi drivers in Istanbul and even the heads of conglomerates will tend to point to the same rationale for this long period of positive growth: the political stability experienced under the AK Party. There is little dispute that Turkey's current period of economic success correlates nicely with the starting date of the AKP's leadership of the Turkish political system. In a country that is accustomed to military coups, hyperinflation and dramatic terrorist attacks, the AKP's tenure has been quite serene by Turkish standards. This point was not lost on the AKP during the July parliamentary election and Abdullah Gül's subsequent successful bid for president. Many Turks voted for the AKP simply due to economic issues and not as a result of the party's much ballyhooed portfolio of social views.

These calm conditions have given foreign investors cause to increasingly reward Turkey with much needed sources of investment. Foreign capital inflows have been quite often directed toward the very large number of government assets, which the AKP has aggressively sought to privatize. The growth of exports have also played a prominent role in the country's economic resurgence. According to the head of the Turkish Congress of Exporters (TIM), Turkey's exports exceeded $100bln during the past 12 months for the first time in the country's history. Exports of automobiles took the lead, followed by clothing and textiles and steel-iron in a distance third.

The numbers would indeed seem to indicate that AK Party is doing something correct. However, "the numbers" only tell a small sliver of the entire story as is often the case. In addition to the AKP's adept management and calming presence, one must also consider certain other factors that have equally contributed to the situation.

There has been a great prevalence of "petrodollars" in the Middle East looking for "shariah-compliant" homes for investment. Under the unprecedented political auspices of the religiously conservative AKP, Turkey emerged as a much more viable option for this capital. In this regard, the Turkish economy of the AKP era has been a direct beneficiary of the oil-crazed world and its oil market. Second, the availability of inexpensive products from China has also had a great influence on the Turkish economy. In addition to increasing the buying power of the Turkish consumer, cheap Chinese products have so far been a benefit to the non-textile sectors of the Turkish economy. This has particularly been the case for the outsourcing of component parts, which are used for goods manufactured in Turkey.

All of this should be reconsidered in the increasingly gloomy shadows cast by the foreign trade deficit, which Turkey currently maintains. In addition to considerable spending in the public sector, Turkey's great affinity for imports is strongly driven by its energy consumption needs. While this situation is more palatable during periods of reliable foreign investment, the continued strength of such inflows is certainly ephemeral.

In the opinion of this observer, it is time for the AKP to stop riding on its somewhat false laurels concerning economic management. The AKP must instead use its strong political mandate to take the types of tough measures, which are necessary to cushion the Turkish economy's inevitable descent into more turbulent economic waters. If the AKP chooses not to take such steps, it will eventually find itself in equally hostile circumstances.

Turkey's Future in Central Asia

Discussions with Turkish citizens concerning topics related to the ethnic diversity of their country, such as the infamous "Kurdish problem", tend to return to the same idea: Turks and Kurds came from lands in Central Asia and settled in Anatolia along side ethnic Armenians, Greeks and Arabs. Due to manner in which it is depicted in their school books, ethnic Turks in Turkey have a rather romantic impression of their Central Asian Oğuz ancestry.

While ancestry plays an important role in anchoring Turkish interest in Central Asia, more contemporary interests related to economic and political influence have developed this relationship further. Until the fall of the Soviet Union, Turkey's connection to its Turkic cousins in Central Asia was considerably limited due to the Soviet Union's suzerainty in these areas. When the fall of the Soviet Union opened the Turkic countries of Central Asia to outside influences, Turkey considered itself in a prime position to augment its influence in Eurasia.



Turkey's contemporary attempts to make inroads in Central Asian affairs peaked in the middle of the 1990s. Hoping to renew older attempts to forge Pan-Turkism under the direction of the secular and western-oriented direction of Ankara, Turkey set out to promote new modes of cooperation in the Turkic world. Although Turkey was successful in realizing the adoption of Latin script in Azerbaijan, Turkmenistan and Uzbekistan, their efforts to create greater cultural, political and economic cooperation were stymied. Progress was made in Azerbaijan due to a shared antipathy for Armenia, but Turkey was unable to overcome the lingering obstacles related to the Soviet era in Turkmenistan and Uzbekistan. Since meaningful progress was not made during this first post-Soviet attempt, the cause of Pan-Turkism seems to have been abandoned for the time being.

American military activities and the new Great Game to control the flow of Central Asia's energy resources have dominated the region's geopolitical headlines during the past decade. Compared to its political initiatives in Europe and along its southern borders, Turkey has not been particularly active in the east. Making deals to transport Central Asian energy through Turkey's system of pipelines represent the recent highlights of Ankara's dealings in Central Asia.

Joshua Foust of Registan.net recently wrote a piece about the future of Central Asian geopolitics entitled, "Iran and China Rise; Shall Russia and the U.S. Fade Away?" While his insights are all quite sound, it is remarkable how Foust does not feel it necessary to mention the possibility of Turkey playing a bigger role in Central Asia's geopolitics. When asked about this omission by this observer, Foust answered:

I certainly see Turkey trying (they’ve made a few weak stabs at it), but I don’t see how they can overcome the heft of Iran, Russia, China, the U.S., or the EU. The Turkic connection exists, but it’s also fairly weak, as you rightly said. There remains more cultural affinity for, depending on the country, China, Russia, or Iran—no one seems to want to announce Turkey as their best friend. Which, I think, is too bad. I would prefer Turkey to Russia or Iran or China any day.

It would seem that Turkey can not afford to continue this course of treading lightly in Central Asia. Central Asia simply has too much economic significance for Turkey's future. Although the United States currently protects Turkey's interests as a conduit for Central Asian energy, Turkey should not depend on this arrangement alone. While Ankara does not possess the same financial resources as Beijing or Moscow to back its policy in Central Asia, it will become more capable as the Turkish economy receives more foreign investment.

If Turkey does not pursue its interests in Central Asia more aggressively, it ultimately risks losing Central Asian energy to ports on the Persian Gulf and to pipelines built by Russia and China. Such a fate would significantly diminish Turkey's standing in the region.

Pipeline Politics: Further Reading

For further information concerning the transportation of natural resources in Eurasia, please refer to the article "Putin’s battle over Caspian energy resources and transport routes" in Turkey Financial. Click here.

This piece outlines Russia's energy strategy and competitive interests related to future pipeline development in the region. Its consideration of Chinese interests in Central Asia is also noteworthy.

In July 2007, The Bosphorus Watch featured its first article about Turkey's recent maneuverings concerning pipeline politics in Eurasia.