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Turkey as a Regional Economic Actor: Successes and Weaknesses

Turkey as a Regional Economic Actor: Successes and Weaknesses

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In this latest of the Paralleli Brief series, the author outlines Turkey's economic ties in the eastern Mediterranean region.
In this latest of the Paralleli Brief series, the author outlines Turkey's economic ties in the eastern Mediterranean region.

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Published by: German Marshall Fund of the United States on Nov 23, 2010
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Summary
: Favorable economicprospects encourage Turkey to strengthen its presence in the Middle East North Africa(MENA) region. By leveraging both its geographical prox-imity and a series of bilateralagreements on free movementof people and goods, Turkey
is signicantly increasing its
exports to the region, whichnow account for more than aquarter of its total exports. Thisis supporting rapid economicrecovery and the growing assertiveness of Turkishforeign policy in the region.Sustainability of economicgrowth in the medium- tolong-term requires structuralreforms to improve productivityand enhance competitiveness.
However, reforms have a signi
-cant political cost, and areslowed down by the upcoming elections. If the governmentdoes not take advantage of  the current favorable condi- tions to achieve these reforms,Turkish economy prospects willbe damaged. This would alsoweaken the economic founda- tions of current Turkish foreignpolicy in the MENA region.
Mediterranean Policy Program—Series on the Region and the Economic Crisis
Policy Brie 
 Turkey as a Regional Economic Actor:Successes and Weaknesses
by Franco Zallio
*
1744 R Street NWWashington, DC 20009T 1 202 745 3950F 1 202 265 1662E ino@gmus.org
Prepared in Partnership with Paralleli (Turin) November 2010
Turkey’s 2010 economic growth is thehighest among the OECD. Among G20countries, it is lower only than that o China and India. In the rst hal o the year, real GDP grew by 11 percent andorecasts indicate a ull year growth o 8 percent. Turkey’s data on employ-ment is quite signicant given the sharpcontrast with the trend in the EU andthe United States. Between July 2009and July 2010, total employment grewby 1,265,000 positions, mostly in theindustry and services sectors (933,000),while unemployment rate droppedrom 14.0 percent to 11.7 percent.
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 The high economic growth simulta-neously supports and is supportedby the growing regional assertive-ness o Turkey. Strong commercialinterests bind Turkey to the regionalcontext and its success in gaining newmarkets in the region has sustainedits economic growth at a time whentraditional markets (primarily the EU)
*
Franco Zallio is senior consultant to Paralleli, and haspublished extensively on issues related to the econom-ics and international relations of the Mediterranean and the Middle East. The views presented in this paper are the personal views of the author and not those of theinstitutions he represents or The German Marshall Fundof the United States. These papers are translated from theItalian by Kamilah Khatib.
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Unemployment is closely correlated to economic growth,as shown by the previous boom-and-bust cycles.
are stagnating ater the sharp all in2008-2009.However, both Turkey’s outstandingeconomic perormance and its growingregional assertiveness need to pass asustainability test: will Turkey be able toconrm its recent economic successesin the medium to long term, or, as ithas oten happened in past decades, willthese successes prove to be only transi-tory? I the latter is true, the currentregional assertiveness o Turkish oreignpolicy may prove too ambitious.This brie examines the two mainchallenges the Turkish economy has toace: its strong reliance on the oreigncapital that nances the wide tradedecit caused by the high importelasticity o growth and internationalcompetitiveness. The link betweenthe two is evident: low productivity reduces international competitiveness,and increasing the trade decit alsoincreases dependence on oreign capital.
Turkish Foreign Trade and theIncreasing Role of Regional Partners
In the rst eight months o 2010,Turkey registered a trade decit o $42billion according to data rom customson a ree on board/cost, insurance and
 
Mediterranean Policy Program—Series on the Region and the Economic Crisis
Policy Brie 
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reight basis; exports grew by 13 percent in respect to thesame period in 2009, while imports have expanded by 30percent, causing a 79 percent increase in the trade decit.The trade decit originates mainly rom trade with Asiancountries (or a total o $15.3 billion, an increase o 103percent in respect to the same period in 2009; $9.2 billion iswith China), the European Union ($10.9 billion, an increaseo 70 percent) and other European countries ($11.9 billion,an increase o 39 percent, o which $10.9 billion is withRussia, which is the principal energy supplier o Turkey).As an illustration o trade interests that sustain the newregional oreign policy, the Middle East and North Arica(MENA) is the only region with which Turkey is registeringa trade surplus: $6.8 billion. MENA represents 11 percento Turkish imports and 27 percent o its exports. This sharehas risen quickly in the past years; it was only 10 percent in2000, but reached 17 percent in 2005.The Turkish balance o trade is positive with almost all o the countries in the region. The major surplus is the oneregistered with Iraq ($2.9 billion); ollowed by the UnitedArab Emirates ($1.6 billion), Libya ($1 billion), Egypt ($1billion), Syria ($600 million), Israel ($400 million), Jordan($400 million), Lebanon ($300 million), and Saudi Arabia($200 million). Surpluses with other monarchies o theGul Cooperation Council (GCC) are more modest: traderelations with the GCC are still limited, awaiting a ree tradeagreement, which seems ar rom being achieved.In the past years, Iraq has represented the most dynamicmarket or Turkish exports, and today is its th largest.In the rst eight months o 2010, Turkey exported goodsworth $3.7 billion to Iraq, a value only inerior to its exportsto Germany, Great Britain, Italy, and France. The increase inexports to Iraq can be explained by both the geographicalproximity and the recent improvement o security in Iraq,which allowed the increase in oil production, thus undingthe growth o Iraqi imports. It is important to remark thatthe signicant increase o Turkish exports to Egypt, Jordan,and Syria is avored by the ree trade agreements thatTurkey signed with these countries.In such a avorable regional landscape, two exceptionsstand out, both related to energy suppliers: Iran, withwhich Turkey registered a trade decit o $2.8 billion inthe rst eight months o 2010, and Algeria, with a decito $500 million. As ar as Iran is concerned, the Turkishdecit — ater expanding rom $4.6 billion in 2006 to $5.2billion in 2007, and to $6.2 billion in 2008 — was greatly reduced in 2009 ($1.4 billion). This can be explained by the simultaneous all in Turkish energy demand and theprice o hydrocarbons. The trade decit has increased againthis year with the growth in energy demand related to theeconomic recovery and the rise o oil prices. The analysiso trade with Iran is nevertheless complicated, as a shareo Turkish exports transits through Dubai and thereoreappears in Turkish statistics as exports to the United ArabEmirates. This is, however, a declining phenomenon giventhe increasing controls recently applied in the Emirates tothe transit trade with Iran.Market penetration in the MENA has thus witnessed aconsiderable success in both oil and nonoil producingcountries. This is destined to continue as MENA-avorablegrowth prospects, compared with the more limited pros-pects o European economies, promote geographicaldiversication o export markets. Opportunities are ratherconsiderable: by exploiting the network o ree trade agree-ments built in the past years, Turkey could become theintegration pole o regional productive systems. However, inorder to capture these opportunities, the Turkish economy 
By exploiting the network of free trade agreements built in thepast years, Turkey could become the integration pole of regionalproductive systems. However...theTurkish economy must undergoprofound reforms.
 
Mediterranean Policy Program—Series on the Region and the Economic Crisis
Policy Brie 
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must undergo proound reorms, reducing its dependenceon imports and oreign capital.
Challenges: Productivity and Dependenceon External Savings
The economic history o Turkey is marked by severalepisodes o rapid growth, which have turned into extendedperiods o stagnation or severe crises. International andnational contexts changed, but growth has always beeninterrupted by the same phenomenon. Infows o oreigncapital, which initially sustained economic growth andnanced the increase o imports, have later caused a realappreciation o the Turkish lira. This occurred in a contexto low productivity with a rather rigid labor market, thusdecreasing the international competitiveness o the country.Capital infows have subsequently allen sharply andimports were cut. This was ollowed by prolonged stagna-tion, or even a crisis, like the one related to the oreign debtwhich took place at the end o the 1970s or the one that hitthe local nancial system in 2001.Will this negative evolution repeat itsel? Will dependenceon oreign capital and imports, coupled with low produc-tivity, again limit economic development? To avoid this,Turkey aces a double challenge: on one hand, there is aneed to maintain international condence to guaranteethe continuous infow o oreign capital. On the otherhand, new economic policies that can increase productivity and participation in the labor market are needed to reducedependence on imports and preventing oreign capital infowrom translating into a loss o international competitiveness.In relation to capital infows, increasing concerns relate totheir recent qualitative deterioration, namely less oreigndirect investment (FDI) and more portolio investment andcredits. This amounts to an increase in the most volatilefows, creating debit rather than productive capacity. Thedecline o FDI, which ell rom a record $22 billion in 2007to $18 billion in 2008 and urther to $8 billion in 2009,can only be partly explained by the impact o internationaleconomic crisis. Actually, FDI decline continued in 2010(-14 percent in the rst eight months o the year) notwith-standing the strong Turkish economic recovery. The trendo FDI could thereore be the rst symptom o a loss o competitiveness. This is, however, a tentative assessmentgiven that other actors may have played a role, includingseasonality (2010 gures reer to the rst eight months only).On the other hand, portolio investments have increasedto an extraordinary degree: $15 billion in the rst eightmonths o 2010 compared to $3 billion or the same periodin 2009. The infow is part o the current emerging marketrally, and is ed by the global liquidity food, thus having asignicant volatility.The infow o portolio investment has been accentuated by the upgrade o Turkey’s sovereign debt rating (rom BB- toBB) awarded by Standard & Poor’s last February. It shouldbe noted that despite some avorable undamentals (publicand external debt are both less than 50 percent o GDPand the nancial system is rather solid), Turkish sovereigndebt continues to be evaluated in a cautious manner (Ba2/BB)
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remaining below the investment grade. Improvingthe rating could thereore stimulate a greater infow o oreign capital. The crucial actor aecting rating is themanagement o public nances, especially given the immi-nent political cycle. Parliamentary elections will be held inmid-2011, ollowed in 2012 by the rst direct presidentialelections. On this matter, opinions o analysts are mixed:the optimists point out that the outcome o the September2010 constitutional reerendum has strengthened thegovernment, making public spending or electoral purposesless relevant. The pessimists point instead to the lack o agreement with the International Monetary Fund regardinga new economic program
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and delays in the approval o theFiscal Rule that rom next year would have imposed a brakeon decit and public debt, but that was postponed to 2012and might even be abandoned.The political cycle will be also critical or the other key challenge, the one that relates to productivity and hence tothe structural elements o the Turkish economy. To supportthe country’s international competitiveness, structuralreorms that promote productivity growth, mainly through
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On a regional scale, it is a rating equal to Jordan, lower than Israel, Tunisia, Morocco,and Egypt, and only higher than Lebanon. Neither Moody’s nor Standard & Poor’s have sofar assigned a rating to Syria.
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The latest agreement, which entered into force in 2005, expired in May 2008.Subsequent negotiations have not led to a new agreement. With the outbreak of theinternational economic crisis, Turkey has chosen to avoid an agreement that would limitits economic policy options.

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