BUSINESS AND ECONOMIC DEVELOPMENT IN TURKEY by Dale Foster

BUSINESS AND ECONOMIC DEVELOPMENT IN TURKEY

by Dale Foster

Introduction:

For two thousand years, the area of the eastern Mediterranean has been a vital economic region due to its strategic location at the crossroads of Europe, Asia, and north Africa. Arab traders did a thriving business throughout the Mediterranean and all across northern Africa as far back as the 8th century. Italian merchant Marco Polo traversed the region several times on his trips to and from China and the Orient. In the 13th and 14th centuries, much of Europe was dominated by the Ottoman Empire, the predecessor country of the modern state of Turkey.

Often overlooked by businessmen eager to do business in Europe and Asia, Turkey is the economically dominant country in this part of the world. The size of the market is still unknown because of the lack of current information. The advent of air travel initially diminished the trading and logistical importance of the region. But now, Turkey is making a comeback and the eastern Mediterranean region is booming. Turkey will play a primary role in this economic expansion because of its strategic position and an increasingly affluent population that is able and eager to purchase consumer goods and raise the standard of living.

Background Information:

With land areas in both Europe and Asia, and at the doorstep of both North Africa and the Middle East, Turkey has historically been perceived and presented as an economic, political, and cultural bridge between East and West. Its geographic boundaries are bordered by no fewer than 10 neighboring countries: Iraq and Syria to the south; Russia, Ukraine, and Romania to the north; Iran, Georgia, and Armenia to the east; and Greece and Bulgaria on the west. With a land area of slightly more than 300,000 square miles and a population expected to reach 70,000,000 by the end of the decade, Turkey has been destined by both size and location to be a major regional player in economic and political affairs of Europe and the Middle East.

Turkeyÿs strategic importance is enhanced by its history. In 1923 Mustafa Kemal Ataturk founded the modern state of Turkey out of the remains of the Ottoman Empire. When Ataturk arrived in Anatolia (western Turkey) to begin the independence war, the establishment of an efficient communication and transportation network was one of his priorities.

After the 1930ÿs, though, rail transportation was ignored by most groups, with highway construction swallowing almost all of the investments in the transport sector of the economy. For the healthy development of the country today, the government and business establishment believe that highway, rail , maritime, and air transportation investments should be coordinated with each other. The government has stressed a new state policy for developing railway transportation as the cheapest and safest means of transport and travel. Bidding for a high-speed train project between Ankara and Istanbul will be completed in 1998 and the start of construction on the Kars—Tbilisi railway will soon commence. Both Istanbul and Ankara are involved in planning and/or building of new subway links. With the economic privatization of Turk Telekom scheduled for completion by the end of 1998, the government has also been asked to take the necessary steps for the privatization of harbors belonging to the State Railways Agency.

Another of Ataturkÿs goals was for Turkey to advance along the path of modern civilization, specifically, Western Civilization. This historic fact, along with its partial European geography, set Turkey apart from other Islamic countries. In 1947, with the issuance of the Truman Doctrine, which promised U.S. military and economic aid to countryÿs resisting Soviet expansion, Turkey became part of the Westÿs cold-war strategy against the Soviet Union. Five years later, Turkey became the only Islamic country allowed in the North Atlantic Treaty Organization (N.A.T.O.), the Western military alliance created in 1949. Turkeyÿs own historic rivalry with Russia, dating back to the time of the czars, made Turkey a particularly enthusiastic and valuable N.A.T.O. partner. With the second-largest army in the alliance (after the U.S.), Turkey has been viewed as a bulwark against the spread of Soviet influence south of the Black Sea.

In recent years, leasing arrangements and the purchase of military items designated as “excess defense equipment” have become more central to the U.S. military relationship with Turkey than traditional economic aid provided in the form of cash payments and low-interest loans. In spite of the new direction in U.S. policy, Turkey still remains the third-largest recipient of U.S. military and economic assistance after the countries of Israel and Egypt. Secular Turks (those who emphasize national identity, statehood, and the legacies of Ataturk) feel strongly that closer links to Europe, not just the U.S., are critical to anchoring their country firmly in the West and modern civilization. They argue that, unless Turkey politically and economically (not just militarily) becomes an. integral part of the West, its orientation will inevitably drift eastward, because of religious influences (Islam) in Arab countries and ethnic linkages to Central Asian countries.

In 1964, Turkey signed an association agreement with the multi-nation European Community, the West-European free-trade area created in 1957, in what was perceived at the time as the first step toward eventual full membership in the E.C. and equal economic partnership. In 1987, Turkish Prime Minister Turgut Ozal officially applied for Turkish membership in the European Community (now designated as the European Union or E.U.). Despite European approval of a customs-union agreement with Turkey in December 1995, the fate of Turkeyÿs request for permanent E.U. membership remains very much in doubt today.

A number of factors have complicated Turkeyÿs application, including both political and economic issues. The political issues are continued military rule, fear of Islamic fundamentalism, Kurdish human rights, and continuing conflicts with Greece (already an E.U. member) over the island of Cyprus. From an economic standpoint, Turkeyÿs level of industrialization and business development is significantly below the Western European average (although it is slightly higher than the least—developed E.U. countries). Persistant problems of high inflation and unemployment, high birth rates (partly due to Moslem religious beliefs), and and disproportionately large numbers of young people ready to enter the labor market (more than 50% of the population is under age 25) have made Turkey a less desirable candidate (in most European eyes) for full European Union membership.

In spite of these problems, Turkey is the most important market and largest economy in the region. It currently has a population of at least 63,000,000 and a gross domestic product (GDP) of more than $225,000,000,000. In 1996, the U.S. Department of Commerce named Turkey as one of its “Big Emerging Markets” and forecast that Turkish imports will grow an average of 15% per year to about $60,000,000,000 in the year 2000. Turkeyÿs economy has been rapidly expanding in the 1990ÿs. Gross domestic product (GDP) grew 8.1% in 1995 and 7.9% in 1996 before slowing to about 7.6% last year. Since 1994, total imports have grown more than 80% to approximately $42,500,000,000 for the current year. The countryÿs overall trade deficit in 1997 increased to $2,750,000,000, from $2,440,000,000 in 1996, according to the Central Bank of Turkey. Exports were up by 13% in 1997 and imports rose by more than 12%.

The Turkish government is pursuing a high—growth economic and industrial policy. Increased investment in Turkeyÿs communications, transportation, and energy networks is a high priority so that the country can meet modern global standards as it enters the 21st century. The government has been privatizing electricity, telecommunications, energy, transportation, and oil companies, creating many opportunities for international firms. It has also set up a number of high—profile national and regional economic—development projects. The country is seeking capital investment from the private sector and greatly increasing spending on infrastructure projects. Already the government has approved 125 projects as high priority and has allocated TL 2.5 quadrillion from the 1998 budget for these infrastructure investments. In spite of anti-inflation restrictions on the national budget, investments have increased in real terms, but these real—money advances will still not cover the increase in population. The government has been promoting the (B-O-T) building-operator-transfer model to attract private sector funds for infrastructure investments, with a total of 85 projects, costing about $15,000,000,000, already begun.

American companies have won contracts for building roads, bridges, and tunnels, and for providing satellite data transmission services. There are also opportunities for companies building power plants, water and sewage systems, new ocean ports and airports, and urban transportation projects. Many of these projects, including two large private power projects developed by Enron and Edison Mission, are being done on a build-operate-transfer (BaT) basis or through revenue-sharing.

Foreign suppliers have to assume much of the financial and operating risk, but the potential rewards are great. Turkeyÿs infrastructure needs are tremendous, and it will continue to be an excellent market for capital goods and services for at least the next decade. Other sectors where multi-national firms have opportunities in Turkey include: aircraft and aircraft parts, telecommunications equipment and services, motor vehicles and auto parts (Turkey has only 37 vehicles per 1,000 persons, compared with 350 to 400 per 1,000 in the European Union). Turkeyÿs str~ategic location is also a huge advantage for foreign companies that are willing to work with their Turkish partners to distribute projects and products into larger regional markets and pursue joint—venture infrastructure efforts.

Spending on national defense in Turkey represents the major part of government appropriations and is a significant sector of the national economy. Modern Turkey is still wary of being surrounded by traditional enemies such as Russia, Iran, Iraq, Syria, and Greece, all of whom still present heavy armed opposition. Turkey has compulsory military service for all males. The military payroll and maintenance of a relatively-large standing military force (active-duty personnel) helps relieve national unemployment and partially diffuse the countryÿs large population explosion. Turkey has the second largest Army (after the United States) in the N.A.T.O. Alliance. Ground forces make up the largest component of the Turkish military. The Army owns, operates, or controls major segments of the manufacturing sector in the country, producing airplanes, tanks, trucks, ammunition, and other weapons, including co-production of the high-performance U.S. Air Force F-16 Jet Fighter. Turkey also plays host to two major U.S./N.A.T.O. military bases.

Turkey is a primary producer and major international exporter of all types of construction materials, ranging from mined products (marble, granite, gravel, sand, and gypsum) to manufacturing processed products such as aluminum, steel and polymer plastics. Engineering graduates of Turkish universities are in great demand, both at home and abroad. Turkish Engineering and Construction firms are some of the largest and most experienced in Europe, providing services throughout the world and heavily contributing to Turkish foreign trade and positive balance—of-payments. The construction business is also a primary component of the industrial sector in the domestic market. Every major city (and most small ones) has multi—million—dollar construction projects currently in—progress.

Housing construction (mostly apartment buildings) comprises musch of the new development. Thousands of new apartments are started every week to keep up with the mushrooming population. Population growth is more than 3,000,000 people annually. Hundreds of miles of freeways are also under construction. This extensive network of freeways is being built to serve the rapidly—expanding population, as well as to promote strong economic growth. The national highway network provides support for trade logistics and the movement of tourists around a vast, diverse country. Most cargo and internal transport of consumer products is carried by fleets of trucks. These distribution fleets are services by hundreds of truckstops, which double as rest stops for travel tours and have multiplied along the widespread network of mainline highways and other paved roads.

Agriculture is still a mixture of traditional and modern methods in Turkey, with most farms still being small agricultural plots cultivated by extende families. More people are employed in agricultue than in any other singl economic sector, although the number is declining as many younger people migrate to the cities. Grain crops make up a large part of agricultural production, with barley being used primarily as feed for livestock. The extensive rice production provides a major export crop, as well as being a staple food for Turkish meals and dietary habits.

Wheat is another major grain crop, with much of the production being used for export markets in the Middle East and North Africa. Turkey is the “bread-basket” for the Arabic regions of the world. Cotton is a major production crop extensively used in the large textile industry of Turkey. Textile products, particularly linens, are a major export item. Sheep raising can also be found in all areas of the country, with lambs being the primary source of meat and the sheep contributing their wool to the textile industry. Many sheep are raised for their continuing source of wool. In addition to its use in clothing, the wool serves as the textile base for a very large carpet-manufacturing industry. Original Turkish carpets are prized throughout the world. Carpet sales are also a major lure for foreign tourists. Tobacco is a major export crop and is widely used domestically, in spite of an extensive (and expensive) government advertising campaign and public—schools promotion which strongly discourage the use of tobacco. The production of sugar-beets, instead of sugar-cane, provides almost all of the processed-sugar needs of the nation. Finally, there is extensive grape production maintained in the hill-country of western Turkey, as well as in the warm, coastal climates near the Aegean Sea and the Mediterranean Sea.

After agriculture, tourism is the second largest segment •of the Turkish economy. Europeans (particularly the Germans, English, and Italians) make Turkey the Number 1 travel destination for Europe, Africa, and the Middle East. Cultural themes and relics from the era of the Ottoman Empire are a lure for foreign tourism. There are also thousands of historical sites and archaeological excavations from the Phrygian, Hittite, Greek, Roman, and Byzantine civilizations. These sites include the ruins of Gordion, tomb of King Midas, Aphrodisias, the Temple of Aphrodite, the Library of Celsius at Ephasus, the Trojan War, and the house where St. John took the Virgin Mary after the Crucifixtion of Jesus Christ. Sun and sand play a major part by the provision of locales for the fun, rest, and relaxation crowd of tourists. Numerous four-and-five-star hotels can be found in the major cities, as well as near the Mediterranean, Aegean, and Black Seas. With the longest coastline of any European country, Turkey has a favored sunny, sub-tropical climate to match.
Additional information on the Turkish economy may be found in any of the following reference materials.

Reference Sources:

Barkey, Henri J., ed., Reluctant Neighbor: Turkeyÿs Role in the Middle East. United States Institute of Peace, 1997. (243 pp.)

Onis, Ziya, “Turkey in the Post-Cold War Era: In Search of Identity”. The Middle East Journal, Winter 1995, pp. 48-68.

Rouleau, Erik, “Turkey: Beyond Ataturk”. Foreign Policy, Summer 1996, pp. 70—87.

Talbott, Strobe, “U.S.-Turkish Leadership In the Post—Cold War World”. U.S. Department of State Dispatch April 24, 1995; pp. 358—362.

www.amideast.org —-- America-Mideast Educational and Training Services (AMIDEAST), 1730 M St. NW, Suite 1100, Washington, DC 20036; (202) 776—9600; FAX (202) 822—6563.

www2.ari.net/mei/wwwhome.html -—— Middle East Institute (MEl), 1761 N St., NW, Washington, DC 20036; (202) 785—1141; FAX (202) 331—8861.

www.mepc.org --- Middle East Policy Council, 1730 M St., NW, Suite 512, Washington, DC 20036; (202) 296—6767; FAX (202) 296—5791.

www.washingtoninstitute.org --- Washington Institute for Near East Policy (WINEP), 1828 L St., NW, Suite 1050, Washington, DC 20036; (202) 452—0650; FAX (202) 223—5364.

Aricanli, T., and Rodrik, D., eds., The Political Economy of Turkey (1990).

Hershlag, z.y., The Contemporary Turkish Economy (1988).

Kopits, George, Structural Reform,~StabiVization,and Growth in Turkey (1987).

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