Critical Evaluation of Development in Turkey - Lab Report Example

Critical Evaluation of Development in Turkey Introduction Turkey has experienced a spate of economic growth that has resulted in the country emerging as one of the greatest developing countries in the world. This economic development is a result of structural transformation achieved after introduction of economic reform and political stability. This essay identifies and critically evaluates the key economic political and technological factors that made it necessary for Turkey to achieve its status as a Rapidly Developing Economy. Further recommendations are also presented in terms of future strategic direction that will lead to sustainability of the achieved economic growth. 1. Key factors positioning Turkey as a Rapidly Developing Economy/Emerging Economy a) Economic Turkey has demonstrated its potential as one of the fastest rising economies in the world due to its impressive annual increase in GDP. For instance, the country recorded 8.5 per cent rise in 2011 GDP statistics released on April 2nd revealed that Turkeys GDP increased by 9 per cent in 2010 followed by a further 8.5% in the year 2011(see graph 1). These rates provides a solid argument to justify the inclusion of the country into MIST by Jim ONeill of Goldman Sachs to demonstrate the country’s continued economic growth together with countries such as South Korea Mexico and Indonesia. Countries under MIST categorization have the the potential match development rates recorded by those recognized as big emerging economies (BRIC) (The Economist, 2012). The current rate of Turkey’s FDI means its closest rival is China, followed by other rapidly developing countries such as Brazil, India and Russia. Demonstrating the shift of development from core greatest developing countries recognized under BRICs other countries with potential to report even faster growth rates. Among the economic factors that have contributed to Turkey’s growth rate is the 2000–01 banking crisis as the aftermath led to strategic alignment based on the country’s, medium-term economic roadmap (Ernst & Young, 2013; Index Mundi, 2014). Before introduction of economic reforms Turkey had been economically disadvantaged due to a gap in policies to enforce fiscal discipline in addition to the country’s economy being reliant on monetary financing which resulted in high inflation and interest rates. Financial institutions took advantage of inadequate and sometimes nonexistent regulatory and supervisory policy to manage the banking sector to channel short-term borrowing from depositors into loans schemes of questionable quality and government securities. Additionally, state corporations that were characterized by inefficiency and embezzlement were major players in several economic sectors. Private enterprises did not have the incentive to participate in the economy, as there were no policies to improve infrastructure necessary for sustainable investment. This economic environment was characteristic of government lack of commitment to meaningful development as projects that were introduced before 2001 mainly targeted populist measures to generate support for the often short-lived coalition governments (Hakura, 2013). Structural reforms in core sectors helped to eliminate insufficient macro-economic policies and weak regulatory environment that had held back the country’s ability to attract take full advantage of resources and attract FDI. Core areas targeted for reforms included extensive revamping of the banking system, improvement in investment climate, introduction of liberal foreign investment regime and privatization of none performing publicly controlled companies. The reforms provided a catalyst for rapid development in following years with Turkey achieving 8.5 percent GDP growth rate a decade later. Part of the reforms has also been in regulatory and supervisory frameworks, which policy makers perceives as being essential in cushioning the the Turkish economy from market shocks (Ernst & Young, 2013). These reforms have positioned turkey to continue attracting foreign investors with available statistics indicating a total of 8.6 billion dollars for the first eight months of 2014, the figures representing a 9.8 percent increase compared with the same period in 2013. Two of the greatest drivers of continued growth in FDI are the manufacturing sector, which brought in 2.1 billion US dollars’ worth of investments followed by the financial sector at 1.18 billion US dollars (Hurriyet Daily News, 2014). While a selected core business opportunity has enabled Turkey to improve gain significant economic benefit from exports, the country is now known for increased diversification of export commodities. Turkish exporters have taken advantage of the globalized market to export an assorted commodity structure and composition to different world markets. Apart from the European market, Turkey has improved the level of exports for products with different destinations within the Middle East and outside markets in Africa and Asia. The diversification of markets played a significant role in protecting the country from the fall in demand from European countries during the world economic meltdown (Ernst & Young, 2013). Access to funding for small and medium-sized enterprises (SMEs) has had significant impact in the level of economic development attained by the country in the decade. The government moved to provide financing to SMEs in major cities within the country in order to facilitate their expansion and capability to compete in their industries and markets. The result of this investment was capacity building, which made it possible for the enterprises to find markets outside Turkish borders instead of competing with other domestic firms for the Turkish markets. The enterprises have gained significance in the economies of neighbouring countries as they source for additional markets (Ernst & Young, 2013). While the government has made significant impact on the development of SMEs in Turkey, the presence and contribution of a group of domestic investors referred to as the Anatolian Tigers cannot be ignored. The Anatolian Tigers are export-minded group of business leaders with increased knowledge of regional economic outlook, which allows them to increase production of their mostly family-owned SMEs. The activities of Anatolian Tigers have had great impact on the country’s economy through their enhanced capabilities to invest and contribute to industrial renaissance in a number of identified cities. The group of local investors operates mainly from cities such as Denizli, Balikesir, Gaziantep, Konya and Kayseri with their well-developed business models challenging Istanbul, which has acquired the reputation over the years as Turkey’s undisputed export and investment powerhouse (Hakura, 2013). b) Political Turkey is located at a geographical meeting point of different regions that have significant impact on the country’s political situation. The country’s geographical location ensures close contact with countries from regions such as Middle East, Asia and Europe. Over the years, Turkey has taken advantage of its location to enhance its political association with these regions as a strategy to increasing the country’s market share. The result of this association is that the country has developed its policies to reflect the advantages of its strategic geographical location and substantial domestic market (Ernst & Young, 2013). The growth rate achieved over the years has been because of political will to institute major reforms that would position the country as one of the biggest global economies. The government under Prime Minister Recep Tayyip Erdogan has always reiterated commitment towards improvement of citizens’ lifestyle. This political goodwill led to the government initiating important reforms to ensure Turkey emerges from the banking crises that had threatened to cripple the economy in 2001. The reforms introduced under government led by Recep Tayyip Erdogan have demonstrated a greet level of commitment towards stabilization of the country’s economy (Ernst & Young, 2013). Since the rule of Recep Tayyip Erdogan commenced, the country has enjoyed relative political stability except during the time of Arab spring. Among the regions that have greatly influenced Turkey’s political situation is Europe. Proximity to members of the European Union has influenced the social, economic, cultural and political outcomes in the country with recent government efforts seeking to realign institutions to correspond with those in Europe. There have been increased activities of civil society, which agitate for various rights of different interest groups leading appropriate government reaction. Other treaties such as that of Copenhagen that relates to observation of principles of human rights in addition to assessment of gender relations and minority rights have been incorporated into national dialogues on improvement of the citizens. These are some of the factors that have resulted in Europeanization and democratization of Turkey with effects on political stability and and economic development (Kastoryano, 2013). The economic development experienced in the past decade has been because of political reforms that seek to increase citizens’ democratic space, which enables them to undertake economic development with the necessary freedom as access to factors of production increases. Within the Middle East region, there have been a number of political issues affecting Turkey’s collaboration with member within the region. Among such issues is dealing with significant numbers of Kurdish population within Turkey as well as with countries under the rule of Kurdish government (Larrabee and Tol, 2011). Successful governments in Turkey have always viewed the increased autonomy of Kurds in the Iraq negatively particularly as history has favoured the Turks during the process of government formation. This perception of the Kurds in both Iraq and Turkey reflected emphasis on political outcomes with minimal considerations of the economic impact that such associations might have for the economy (Larrabee and Nader, 2013). However, the economic reforms undertaken to stimulate rapid economic growth has resulted in a shift of policies with the government being more willing to undertake economic cooperation with the government previously seen as hostile (Barkey, 2010). For instance, Turkey’s relation with the Kurds has undergone significant transformations with the the two governments cooperating in a number of energy related agreements (Tol, 2014). Under the government of Justice and Development Party (AKP), Turkey signed a number of agreements with the Kurdistan Regional Government (KRG) where for instance, in 2012, Turkish authorities collaborated with KRG in a deal that resulted in the creation of gas and oil pipelines from the Kurdish controlled Iraq regions. Therefore, rapid economic developed in Turkey is a result of alignment of political systems in the country to respond to the economic needs instead of focusing mainly on the political situation within and outside the country (Tol, 2014). c) Technological Turkey does not have large oil reserve that has powered majority of economies in Middle East and Europe over the years. The lack of this precious natural commodity might seem a disadvantage for the economic development of the country (Daly, 2014; International Oil Agency, 2013). However, the country has also taken advantage of existing technologies to invest in alternative sources of energy. Investment in alternative energy has made it possible for the country to implement policies on increased use of renewable energy generate from solar energy and hydroelectric power. The country has natural waterways and hot climate, which have made it possible to enhance the capacity of energy derived from renewable energy (up to a third of installed capacity). Renewable energy plays a significant part in the country’s rise as one of the greatest developing countries since pressure on natural occurring hydrocarbons is minimized by having domestic industries dependent on alternative energy (Kaya, 2006; Evrendilek and Ertekin, 2003). While the country continues to record exponential growth that will require increased energy consumption to sustain, there are further avenues for increasing energy production as almost half of the country’s capacity is yet to be exploited. By 2009, Turkey had already improved its capacity of solar hot water installed capacity to come second on that China in global comparisons (PwC, 2012). Apart from the technologically driven exploitation of renewable energy, Turkey has also increased its manufacturing and assembly capabilities with the country reporting production of over one million vehicles in 2010 (Invest in Turkey, 2013). Increased capacity in manufacturing and assembly sector driven by the presence of major European companies including Fiat, Ford and Renault that have taken advantage of customs agreements with the European Union. Under this agreement, Turkey received access to European markets with the country allowed to export non-essential products to member countries without customs limitations. For stance, Turkey has taken advantage of reduced customs limitations to increase its production of light-commercial vehicles (LCVs) with the country strategizing to take advantage of opportunities in this sector. The Tax regime in Turkey presents an area of advantage for the sector combined with increased local purchase and the presence of low wage demand for the labour intensive sector compared to developed European economies (PwC, 2012). 2. Recommendations for Future Strategic Direction for Sustainable Economic Growth in Turkey Despite recent unprecedented GDP growth that fuelled by increased FDI, Turkey and most of the fastest developing countries in general, face future uncertainty due to the unpredictability of the markets. The countries have experienced a decline in demand for many of the commodities that have driven the success of Turkish economy over the past decade. Although the country as over the years sought to diversify destinations where exports are delivered, product sophistication is also an important source of competitive advantage for countries that aim at sustainable production for local consumption and export markets (World Bank, 2012). Therefore, the sustainability of the Turkish economy is dependent on the country’ success in product sophistication (Hakura, 2013). Currently, the country has begun these efforts and is considered being at the middle of the spectrum of export sophistication (Zhu, Fu, Lai, and Xuan, 2010). Therefore, Turkey should move forward its export sophistication in the coming years to attain levels achieved by countries such as China and India. This entails moving from specialization in products existing in stagnant sectors, which are characterized by declining global trade. The products that have led to increased export from Turkey have been those requiring reduced pricing in order for the products to gain competitive advantage (Daily Sabah, 2014). Export sophistication demands the adaption of technologies that result in production of high-tech products for exports. These products result from high levels of research and development intensity with sectors such as computers, aerospace, pharmaceuticals electrical machinery and scientific instruments playing significant role in sustainability. The contribution of these key sustainability sectors to economic development of Turkey has averaged minimal 2% over the past decade. Therefore, improvement in export of high-tech products as part of export sophistication is one of the areas that will generate sustainability for the continued economic development of Turkey (Hakura, 2013). The implication of export sophistication will be emergence of the country from reliance on consumer goods to investment in capital goods, which have increased returns and provide an opportunity for higher investments and savings rates. The country risks experiencing a reversal of the gains made as the advantage accorded to developing countries by accumulated debts in pre-global crisis developed nations might not happen again. The growth rate in developed countries is gaining momentum with many of them seeking higher borrowing from international financial institutions, which leads to increased competition with the fastest developing countries such as Turkey. Rapidly developing countries will experience constrained growth rates as they achieve the status of developed countries in future (Oner and Cubeddu 2014). Additionally, the growth of markets for exports from Turkey was driven by high commodity prices, which might not be the case in the long-term (Colombo, 2014). These realities will eventually lead to progressive slowdown of economic development. One of the approaches that will cushion the economy from external shocks is saving of large sections of profits gained from exporting commodity products. Saving will present an opportunity to invest in other more promising sectors while also providing the necessary liquidity to protect the economy from suffering market shocks generated by outside factors. While Turkey’s growth rate has been impressive, the cost of investment in the country faces threats from continued high inflation rates and budget deficits. The government has introduced a number of reforms to tackle the inflation rate resulting in a reduction from about 25 percent in early 2000s to about 10 percent currently while budget deficit is currently at 2.1 percent (Ernst & Young, 2013). The inflation rates are higher than the projected figures by Central Bank while also being significantly more than what is experienced in many of the emerging markets that Turkey is competing with for the regional and global markets. For the deficits experienced in the country’s current account, there are concerns about sustainability of the country’s FDI as flows are mainly into banks or purchases of stocks and the investors easily withdraw bonds, which can. The potential impact of withdrawal of these funds was experienced during the period of euro zone crisis, as investors were concerned about the security of their investments (The Economist, 2012). Therefore, Turkey has a high potential of maintain its high growth rate if constrains existing due to current account deficit and the volatility of the growth rate are addressed. While the public debt is low, the economy might suffer in the long term due to continued increase in the private debt, which reached 8 percent in 2011. The country should increase its level of savings and export the surplus commodities attained by the increased savings. However, these growth prospects are dependent on the competitiveness of Turkey’s industry, which must undergo dramatic improvement to meet the needs of a future developed country (Kastoryano, 2013). While Turkey has the potential to continue the high rate of economic development, the country’s competitiveness is hampered by existence of domestic firms that have maintained a small size over the years. The business model adopted by important businesses such as those driven by the Anatolian Tigers advocates for small enterprises that will not attract additional cost implications due to arduous regulations. This business model is not effective in long-term strategy and may not translate into sustainable growth unless the government implements new policies that stimulate further SMEs growth. Growth of these enterprises will afford them the capability to compete with global multinationals that continue to enjoy the resultant economies of scale due to operating large corporations (The Economist, 2012). From the foregoing, Turkey has continued to experience rapid development due to the political, economic and technologic factors that has ensured improved exploitation of existing resources. However, for the development to be sustainable, the country should undertake further reforms to improve specific areas that still inhibit the achievement of the country’s reform objectives. From the critical evaluation, the government should improve efforts to bring the current account deficit and inflation rates under controlled for the country to maintain the attained levels of growth. Export sophistication is also important for sustainability of the as the country moves from consumer product to high tech commodities. These efforts will result in sustainable economic growth as the country seeks to be among the developed countries in the world. Appendices Graph Adopted from The Economist: Turkey rise in GDP http://www.economist.com/node/21552216 References Barkey, H., J., 2010. 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