ISIK OZEL

Meeting at the Market: Turkey and the CEECs

Meeting at the Market: Turkey and the Central and Eastern Europe
by Isik Ozel [ozel@sabanciuniv.edu] Sabanc University Orhanl, Tuzla 34956 Istanbul, Turkey

1. Introduction Turkey and the countries of the Central and Eastern European Region (CEECs) were considered as adversaries that belonged to rival blocs of the Cold War era: the former has been a member of the NATO which was the military pillar of the alliance between free market economies of Europe and the USA, whereas the latter were members of the Warsaw Pact that served as the military arm of an economic dependence/cooperation area formed by socialist economies under the leadership of the Soviet Union. Despite such difference with respect to historical trajectores, striking similarities have emerged between Turkey and the CEECs, throughout the process of drastic transitions these countries have gone through since the 1980s and 1990s. Turkey, in addition to its NATO membership, was a founding or early member of major multilateral organizations which set the post-war international economic order, including the OECD, GATT/WTO, the IMF, and the World Bank. Despite its membership in these international organizations that were created to serve different purposes around the commonly upheld principle of the supremacy of free enterprise, the Turkish economy had many structural characteristics that were not, indeed, in line with this principle. Its alliance with the free market economies of the Western bloc did not stop Turkey from having such market distorting policies and practices as price controls, a protectionist international trade regime, and strict barriers to international capital movements, at least until the beginning of the 1980s. Likewise, state-owned-enterprises (SOEs) had a sizable share in economic activity prior to the privatization drive which was launched in the 1980s but implemented in the 1990s and 2000s. To summarize, economic policies and practices the country had adopted prior to 1980 were far from free market principles, and the Turkish development strategy over the
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1930-1980 period was largely built around a curious mix where capitalistic structures were coupled with heavy state interventionism, usually referred to as state-led-capitalism. Yet, since the early 1980s, the country has gradually moved forward towards higher market orientation and promoted increased openness and integration into global commodity and capital markets. As a result, Turkish economy has been transformed from a nearly-closed economy with heavy government intervention to a liberalized market economy highly integrated into the global markets. Interestingly, some of these drastic changes that Turkey experienced during its transformation are akin to those post-communist CEECs have gone through following the end of the Cold War. The CEECs transition was certainly more drastic than Turkeys and progressed much faster as it was fostered by the support they received from the international community, particularly the European Union which quickly accepted these countries as full members, whereas Turkey has had little support from its Cold War allies in Europe, although it has been waiting for membership in the EEC/ EU for over five decades. Turkey has eventually become an official candidate whose accession negotiations started in 2005, and the accession process per se provided a strong anchor for Turkish reforms. A major difference between the CEECs and Turkey has emerged in the process of negotiations: the CEECs received significant assistance from the EU throughout the 1990s and this bolstered the transformation in most CEECs, whereas Turkey has not benefited from such assistance even after its official candidacy. Another major difference lies in the Customs Union membership that Turkey has been the first country which signed the Customs Union Agreement without a full membership in the EU. This bears assymetrical costs for Turkish economy which will be discussed in the following sections. Although Turkey has experienced major transitions since the 1980s, institutional weaknesses still prevail, constituting a major problem in economic governance. Institutional deficiencies marked the transition process particularly until the 2000s, populist politicians, facing fierce political competition, usually bypassed the existing rules and could not establish proper institutions, while decree-based-ruling prevailed throughout the 1980s and 1990s. One of the most significant examples of such ruling can be observed in privatization process which was initiated and conducted in the absence of a legal framework up until the mid-1990s.1
1

Ozel, I. Beyond the Orthodox Paradox: The Break-up of State-Business Coalitions in Turkey in the 1980s, Journal of International Affairs, vol.57, no.1, Fall 2003 and Atiyas, I. 2009. Recent Privatization Experience in Turkey, A Reappraisal in ni, Z. and F. enses, eds.,2009. Turkey and the Global Economy, Neo-liberal Restructuring
and Integration in the Post-Crisis Era, London: Routledge, pp.101-122.

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Policies and development strategies have gone through a sea of change and the country has evolved into a freer market economy with strong links to the global markets, and major institutional reforms have been implemented since the late 1990s. The establishment of independent regulatory agencies in various sectors is a central element of these institutional reforms.2 Nevertheless, economic governance still suffers from weak or ineffective institutions. Even the recent EU accession process has not cured this problem, because de jure formation and existence of institutions in order to fulfill the necessary criteria does not necessarily guarantee their de facto operation.3 The discrepancies between de jure design and de facto operation of various institutions in Turkey can be easily observed regarding rule of law, regulatory quality and voice and accountability and Turkeys governance scores are generally lower than the average scores of the CEECs.4 The purpose of this chapter is to take a comparative look at respective transformations of Turkey and CEECs so as to conduct an analytical discussion based on the similarities and differences regarding the experiences of these countries. The following sections present a brief account of the transformation that the Turkish economy has gone through, and provide comparisons with the economies of the CEECs. They also shed light on Turkeys engagement in multilateral and regional agreements and organizations, which act as important anchors in policy-making as well as shifts in development strategies. 2. Turkey and CEECs: Where do They Stand Economically? Swinging in a pendulum between developing and advanced economies for a long time period, Turkey is now considered an upper-middle-income country, with a fairly developed industrial base, similar to major CEECs like Poland, Czech Republic and Hungary. The Turkish economy has had a striking performance in the first decade of the 21st century, commonly applauded by international organizations. By attaining an annual growth rate of 7.2% between 2002 and 2007, Turkeys gross domestic product (GDP) reached $735 billion, making the 17th largest economy in the world5 and placing it among the G-20 group. Ranking the sixth largest in Europe, Turkish economy as a whole is significantly larger than the
2 3

ni, Z. and F. enses, eds.,2009.

Ozel, I. and I. Atiyas, Regulatory Diffusion in Turkey: A Cross-Sectoral Assessment in T. etin and F. Ouz, eds., The Political Economy of Regulation in Turkey, Springer, forthcoming and the Turkey 2009 Progress Report prepared by the Commission of the European Communities to monitor progress of Turkey in the context of the requirements maintained by the EU Accession Process: http://ec.europa.eu/enlargement/pdf/key_documents/2009/tr_rapport_2009_en.pdf. 4 Kaufmann, D. A. Kraay and M. Mastruzzi. 2009. Governance Matters VIII: Governance Indicators for 19962008. World Bank Policy Research Working Paper, No. 4978. 5 World Development Indicators, 2009, World Bank (based on 2008 data).

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economies of the CEECs. Nevertheless, in terms of GDP per capita ($9,900 in 2009) Turkey remains within the ranks of upper-middle-income countries, due to its vast population (72 million as of 2010).6 The Turkish economy has had a striking performance in the first decade of the 21st century, commonly applauded by international organizations. By attaining an annual growth rate of 7.2% between 2002 and 2007, Turkeys gross domestic product (GDP) reached $735 billion, becoming the 17th largest economy of the world.7 As one of the G20 countries in the world and the sixth largest economy in Europe, Turkish economy is significantly larger than the economies of the CEECs. Nevertheless, Turkish GDP per capita ($9,942) only situates Turkey within the rank of upper-middle-income countries, due to its vast population (73 million as of 2010). Before the global financial crisis broke out, Turkish economy was one of the fastest growing economies in Europe and the Middle East, particularly over the 2002-2006 period. However, this growth spurt needs to be put into perspective by taking into account the contribution of the global liquidity boom which boosted the growth rates in many economies particularly in the middle-income-countries category, Turkeys peer group, including the CEECs. In fact, the global liquidity boom helped not just Turkey. Many countries grew at unusually impressive rates. The Polish GDP per capita, for example, jumped from $4454 in 2000 to $13.857 in 2008, while the Hungarian GDP per capita rose up to $20,729 from $5521 in the same time period.8 Thus, favorable global environment along with the performance of similar countries should be taken into account when evaluating the recent Turkish performance. Turkish economic growth was only slightly greater in the 2002-2007 period than that of its counterparts in the CEECs: 6.9% in Turkey and 5.2 in Poland.9 The chart below displays a basic comparison in terms of GDP per capita between Turkey and the CEECs including the two new members of the EU: Bulgaria and Romania.

http://databank.worldbank.org

7 8

World Development Indicators, 2009, World Bank (based on 2008 data). Ibid. 9 http://databank.worldbank.org

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Chart 1. GDP per capita, Turkey and the Selected CEECs, 1990-2008 (Current US dollars)

Source: http://databank.worldbank.org Within such favorable global environment, Turkish economy experienced some of the highest rates of growth since the 1960s (as the average real GDP growth was 7.2% in the 2002-2006 period). Turkeys performance in terms of both economic growth and institutional reforms between 2002 and 2006 is similar to that of some CEECs such as Poland in the 1990s when a virtuous cycle took place in terms of attaining macroeconomic indicators and undertaking institutional reforms.10 While the growth spurt in Turkey during 2002-2006 was relatively greater than in the CEECs, it needs to be evaluated considering the severe economic crisis the Turkish economy went through in 2000-2001, which caused a drastic downturn in Turkish economy, signified by 6-7% annual drop in GDP. Hence, this spurt was partially a recovery from the crisis, and it was facilitated by both sound macroeconomic policies and a favorable environment in global markets in the early 2000s. Nevertheless, the global financial crisis which emerged in 2007 halted this upward trend, when the Turkish economy was far from ready to take such a major challenge. It encountered the crisis in a relatively weak position with a high current

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ni and enses, 2009.

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account deficit, low savings rate, and already high unemployment along with myriad institutional flaws particularly with respect to governance. In spite of the growth spurt in Turkey in the 2000s, Turkish income per capita ($9,942) is still lower than in CEECs, but higher than in Bulgaria ($6,546) and Romania ($9,300), the two new members of the EU. The composition of the Turkish GDP is considerably similar to those in the CEECs along with Bulgaria and Romania: Total value added in industry constitutes 27.6 % of the GDP, while agriculture makes up 8.6% and Services 63.7% of the GDP. As can be seen in the Table1 below, the share of agriculture is the highest in Turkey amongst the selected countries below. Nevertheless, when the share of agriculture in GDP in these countries is examined before their respective accession dates, a more striking picture appears: Agriculture constituted a remarkably high percentage in the GDP in most of these countries before their accession into the EU. The share of agriculture in GDP was 20.1% in Poland in 1997; 41.8% in Romania and 25.8% in Bulgaria in 1999.11 Although agricultures share has also been declining in Turkey, it still strikes as a problem, particularly when the size of the rural population (27%) and accompanying low productivity in agriculture are considered. Table 1 below presents a basic comparison of the GDP composition in selected countries and Turkey. Table 1. Composition of the GDP in CEECs and Turkey (2008 values) GDP per GDP** Agriculture/ Industry/ Services/ GDP capita* GDP (%) GDP (%) (%) Turkey 9,881 735 8.6 27.6 63.7 Bulgaria 6,546 27 7.3 20.5 62.2 Romania 9,300 200 7.1 25.2 67.6 Poland 13,857 528 4.5 30.8 64.6 Hungary 15,408 155 4.3 29.4 66.2 Czech 20,729 216 2.5 37.6 59.9 Republic
*Current U.S. dollars; **Billions of current U.S. dollars

In terms of macroeconomic indicators, performance of the Turkish economy compares favourably to the group of countries we consider in some respects but unfavourably in others. An area where the Turkish economys performance is relatively poor is inflation. Currently, inflation rate in Turkey is relatively higher than in the CEECs. Although Turkey has had remarkable success in bringing down the inflation rate from plateaus like 120.3% in 1994 and 68.5% in 2001, it is still high compared to 4.3% in Poland and 6.1% in Hungary.12 Only in
11 12

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Eurostat, European Commission: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

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Bulgaria amongst the countries we consider in this study, the inflation rate is higher than in Turkey (12.3%). Despite such relatively inferior performance regarding inflation, Turkey has implemented sound fiscal policies, resulting in diminishing debt/GDP and public expenses/ GDP ratios, comparable to or slightly better than those in the CEECs. A persistent problem facing the Turkish economy is the current account deficit, that rose to $41.6 billion in 2008 from $22.1 billion in 2005, representing an increase in its ratio to the GDP from 0.3% to 5.6% between 2002 and 2008.13 Current account deficit increases rapidly during fast growth episodes, and falls when the economy slows down. Chart 2 and Table 2 below display selected indicators including inflation, central governments debt and current account deficit. Table 2. Selected Macroeconomic Indicators in CEECs and Turkey, 1990-2008
Turkey Czech R. Hungary Poland Bulgaria Romania

Inflation, CPI (annual %) Government debt (% of GDP) Cash surplus/deficit (% of GDP) Cur. account balance (% of GDP) Inflation, CPI (annual %) Government debt (% of GDP) Cash surplus/deficit (% of GDP) Cur. account balance (% of GDP) Inflation, CPI (annual %) Government debt (% of GDP) Cash surplus/deficit (% of GDP) Cur. account balance (% of GDP) Inflation, CPI (annual %) Government debt (% of GDP) Cash surplus/deficit (% of GDP) Cur. account balance (% of GDP) Inflation, CPI (annual %) Government debt (% of GDP) Cash surplus/deficit (% of GDP) Cur. account balance (% of GDP)

60,30 n/a n/a -1,70 88,10 n/a n/a -1,30 54,90 n/a n/a -3,70 8,70 44,30 1,40 -5,80 10,40 44,40 -1,90 -5,70

n/a n/a n/a n/a 9,10 13,20 -0,90 -2,40 3,90 13,70 -3,60 -4,70 2,90 25 -1,60 -3,30 6,30 26,50 -1,50 -0,50

28,90 555,30 n/a n/a n/a n/a 1,10 5,20 28,30 91,70 -9 -3,60 9,70 61 -2,70 -8,30 8 69,30 -4,80 -6,70 6 73,80 -3,80 -7 28 n/a n/a 0,60 10 n/a n/a -6 2,40 42,80 -1,80 -4,70 4,30 44,70 -3,70 -5

23,80 n/a -5 -8,20 62 n/a -5,10 -0,20 10,30 n/a -0,39 -5,58 8,40 n/a 3,50 -25,30 12,30 n/a -3,10 -23,80

n/a n/a n/a -8,40 32,20 n/a n/a -5 45,60 n/a n/a -3,60 4,80 n/a -2,30 -13,60 7,80 n/a -4,60 -11,80

Source: World Development Indicators: http://databank.worldbank.org and International Financial Statistics Accessed on August 25, 2010 and Central Bank of Turkey: www.tcmb.gov.tr/yeni/eng/ Accessed on August 26, 2010. 13 Central Bank of Turkey: www.tcmb.gov.tr/yeni/eng/ Accessed on August 26, 2010.

2008

2007

2000

1995

1990

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3.

Turkeys transformations Turkish economy has gone through substantial transformations since the early 1980s. The

sections below will examine these transformations in various episodes and draw some comparisons with the CEECs with respect to the content and pace of the transformation processes.

3.1. Turkish Economy before 1980 Until the early 1980s, Turkey had a nearly closed economy, mostly oriented toward the domestic market and subject to heavy state intervention in various domains in the context of state-led development and import-substitution-industrialization strategy (ISI). Having swung between the Soviet Russia and the capitalist U.S. for a few decades, Turkey became a close ally of the U.S. in the late 1940s and 1950s. In the same time period, the country went through major political and institutional changes: a partial democratization process took place entailing a transition from single-party-regime (1923-1950) to multi-party regime (1950 onwards with lapses under military rules), a process supported by the U.S. aiming to create a capitalist democratic regime neighboring Soviet Russia. This was the critical juncture which separated the Turkish path from those of the CEECs where communist regimes were launched imposed by the Soviet Russia in the same time period. Nevertheless, the Turkish capitalistic path did not necessarily rely on free market principles, but comprised major state intervention. Although capitalistic development in Turkey was eagerly supported by the Western Bloc, particularly the U.S., Turkey had already begun its state-led development in the 1930s, to the extent that the so-called etatism was even put into the Turkish constitution in 1937. State ownership of the means of production was accompanied by heavy protectionism in the context of the ISI. State-led development in Turkey gave rise to large state investments which employed more than half of the workforce in the late 1970s.14 The gist was that the state invested in manufacturing in order to lead the private industrial enterprises, and provided them with the necessary inputs at cheap costs and cheap credits by the state-owned banks. Thus, domestic business was created and nurtured by the state, justified by the development

14

Waterbury, John. 1993. Exposed to Innumerable Delusions, Public Enterprise and State Power in Egypt, India, Mexico and Turkey, New York: Cambridge University Press.

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strategy, resulting in a high level of capital concentration, and the domination of large conglomerates--with access to multi-sectoral investment and inter-firm proprietary structures-as the main corporate structure within big business. For a business sector that emerged under the auspices of an interventionist state was highly dependent on it, the ISI regime and its adjoining arrangements (overall an ISI pact) were considerably lucrative for several decades. The states protectionist trade regime, constituted by high tariff and non-tariff barriers, particularly favoured big business and created tools for rent-distribution.
15

The conglomerates were encouraged to specialize in

distinct fields, partitioning the production of consumer products, and providing a major incentive towards monopolization. The insulated market had the additional benefit of a large population with an inflated purchasing power, as the statethe largest employerinstituted high wage policies and subsidized the agricultural sector. The interest and exchange rate regimes completed the scope of the implicit pact: A repressed financial system, together with a fixed overvalued exchange rate regime, was an essential component of the ISI regime. The government deliberately sustained the band between inflation and real interest rates by fixing real interest rates at negative levels, creating a strong investment incentive particularly for big business through providing credits at interest rates lower than those of inflation. 16 Concomitant to the ISI strategys core principles, exchange rates were also kept at a desired level to encourage domestic industrialists to use the aforementioned priorities to import. Throughout the implementation of the ISI until the 1980s, Turkey benefited from certain exemptions provided by the multilateral and regional organizations the country had already taken part in, such as generalized system of preferences (GSP) of the GATT and the Additional Protocol of Ankara Treaty which exempted Turkey from liberalization in various categories, while EEC members unilaterally abolished its tariffs for manufactured products originating in Turkey. In fact, like some other mid-income countries with large domestic markets, Turkey had considerable success with the ISI strategy particularly in the 1960s and early 1970s, especially with respect to industrial growth, but the economy was hit by severe crises in the 1970s. As in other countries that had implemented ISI strategy, Turkey also went
15

Krueger, A. 1974. The Political Economy of the Rent-Seeking Society, The American Economic Review, 64 (3): 291-303. 16 For instance, by 1979-80, the rates were as such: 9% interest rates on deposits, 11% on government bonds, 20% interest rates on credits as opposed to 100% inflation. Source: Various interviews with former bureaucrats and politicians. Also see Birand, Mehmet Ali and Soner Yalcin. 2003. The Ozal, Bir Davanin Oykusu, Istanbul: Milliyet Yayinlari, 6th Edition, p. 131.

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through the inherent crisis of the ISIs second phase, aggravated by the oil crises. Oil crises bolstered a devastating inflationary cycle and accompanying recession, particularly towards the end of the decade. When the second oil crisis hit in 1979, Turkeys economy was already deep in a foreign exchange crisis, hobbling its import capacity and causing widespread shortages, resulting in a triple-digit inflation rate (rising from 20% in 1977 to 100% in 1980).17 Political crisis accompanied the economic crisis, resulting in an impasse in the parliament that gridlocked the presidential elections in 1979-80.18 Sociopolitical tension was substantial: the country was highly polarized, armed groups from the extreme left and right engaged in assaults, assassinations; clashes between extremist groups and the states security forces intensified. Hence, such severe tensions paralyzed governments attempts at stabilization in the late 1970s.19 3.2. Process of Transformation, Episode I: 1980-89 In the midst of such crises, Turkey launched a thorough market reform program in 1980 under the auspices international actors.20 This major change in development strategy was accompanied by the change of the political regime, as the armed forces intervened in politics, yet again in 1980. After having implemented ISI strategy for about five decades with occasional attempts to open up, in the 1980s Turkey became one of the forerunners of the market reform process amongst developing countries. Until the late 1980s, it was the poster child of international financial institutions (IFIs) for its pioneering role and the speed of the reform processes it implemented. The market transitions were initiated under the auspices of the IFIs, and resulting hefty IFI loans in different time periods.

17

For further analyses of the crises and the mechanisms through which their intensity increased, see Kazgan, Gulten. 2004. Tanzimattan 21. Yuzyila Turkiye Ekonomisi, Istanbul: Bilgi Universitesi and Rodrik, D. 1991. Premature Liberalization, Incomplete Stabilization: The Ozal Debate in Turkey, in Bruno et al. eds, Lessons of Economic Stabilization and Its Aftermath, Cambridge: The MIT Press.
18

Bianchi, R. 1984. Interest Groups and Political Development in Turkey. Princeton, N.J.. Princeton University Press.
19

Krueger, Anne. 1995. Partial Adjustment and Growth in the 1980s in Turkey, in Dornbush, Rudiger and Sebastian Edwards eds., Reform, Recovery and Growth, Latin America and Middle East, Chicago and London: University of Chicago Press.
20

Several adjustment programs had been implemented since the 1950s, but many of them were left incomplete. See Nas, Tevfik F. and Mehmet Odekon, 1988. Liberalization and the Turkish Economy, New York, Westport and London: Greenwood Press and Kazgan (2004).

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Simultaneity of the Turkeys severe crisis and its increasing geo-strategic importance before the end of the Cold War intensified the interaction between Turkey and those international actors, while easing the terms of the loans.21 The milestone of this new era was the reform program popularly known as January 24 decisions which aimed for openingup of the Turkish economy. This comprehensive policy bundle included a wide range of liberalization in the areas of financial markets; foreign trade; capital markets; and privatization of public enterprises. However, the realization of these ambitious goals not only took a long time (some of which, like privatization, have not been completed as of 2010), but their application diverged from initial orthodox rhetoric, since it has ended up with a mishmash of government intervention and populism. Therefore, the beginning of Turkish transformation had preceded the end of the Cold War which brought about drastic transition processes in the CEECs. Although the transition of the CEECs started after that of Turkey, theirs took a much steadier and quicker path than Turkeys. The EUs support for the transitions in the CEECs along with the concrete prospects for accession to the Union played an important role in the CEECs transitions. Such international and regional support was mostly backed up by the domestic actors who had been alienated by the communist regimes in the preceding decades. In the Turkish case, however, the domestic coalitions for transitions were not as strong as in the CEECs either, as strong domestic actors with intensified preferences had vested interestst in the previous development strategies where they had access to sizeable rents in the context of state-led development strategy and accompanying protectionist regime. The Turkish experience with market reforms throughout the 1980s and 1990s was remote from a steady pattern, but mostly followed an unsteady path mostly entailing liberalization without stabilization, except for the period 1980-84, when stabilization was relatively achieved. After the transition to democracy in 1983, populist measures were used extensively, impairing the stabilization efforts, a trend exacerbating in the 1990s during the coalition governments.22 Despite its status as one of the pillars of the program, import liberalization stalled until 1984 and only accelerated after 1989. Although the 1980 package had announced the opening of the Turkish economy to the world, the implementation of trade liberalization in its initial phases emphasized export promotion rather than overall
21

International creditors were mainly OECD, European Community, Paris Club, IMF and the World Bank in 1970s Turkish political economy. See Rodrik (1991). 22 ni, Z. 1998. The Political Economy of Turkey in Comparative Perspective, Istanbul: Bogazici University Press.

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liberalization, turning de jure Washington Consensus into a de facto mercantilism in the initial phases of liberalization.23 Import liberalization gained a new momentum with the initiation of the Customs Union preparation process in 1989. 3.3. Process of Transformation, Episode II: 1989-2000 Although not as turbulent as in the CEECs, 1989 was also a turning point in the Turkish transition process. While the free elections were held in Czech Republic, Hungary, Poland, and Rumania, initiating a new era as the Cold War was unfolding, Turkish transition accelerated further. However, the transitions in the CEECs would take a much faster path despite their initiation for about a decade later than Turkeys. The material and institutional support provided by the EU for the CEECs considerably reinforced the transition process, whereas Turkey did not benefit from a similar support in that time period. The critical changes in Turkey in this time period were launching the Customs Union process and implementation of the capital account liberalization in the midst of severe instabilities. Capital account liberalization, usually referred to as premature, increased the vulnerability and instability of the economy.24 It enabled arbitrage-seeking short-term capital inflows (hot money) and made high interest rates sticky, triggering a process between governments (borrowing through GDIs at high interest rates); commercial banks (client of GDIs and host of short-term foreign capital inflows); and individual investors (lend to commercial banks at extremely high overnight interest rates). Governments caused and exacerbated a disastrous vicious cycle not only by increasing indebtedness, but also by their choice of borrowing instruments, whose functioning was possible due to capital account liberalization. By the same token, high interest rates persisted in the 1990s, since they were instrumental for attracting hot money. On the other side, high interest rates hindered investment because of the skyrocketed cost of credits for the real sector. In sum, governments used capital account liberalization and resulting inflows for their own political purposes, to finance their expansionary fiscal policies and debt.

23

Washington Consensus refers to a set of specific policy reforms that entail a thorough liberalization and stabilization of previously closed economies. It was originally developed in 1989 by John Williamson at the Institute of International Economics and particularly suggested for Latin American countries which had gone through severe economic crises in the 1980s. For Williamsons own account on the Washington Consensus and its various interpretations, see http://www.iie.com/publications/papers/williamson0204.pdf 24 Rodrik, D. 1991. Premature Liberalization, Incomplete Stabilization: The Ozal Debate in Turkey, in Bruno et al. eds, Lessons of Economic Stabilization and Its Aftermath, Cambridge: The MIT Press.

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1990s are usually considered as the lost decade for the Turkish economy, resonating that of Latin America in the 1980s. Credibility of governments policies diminished in this period, as political competition and resulting increased populism prevailed in economic policy-making. Macroeconomic indicators worsened throughout the 1990s, stabilization efforts stumbled, as expansionary fiscal policies shaped economic policy-making. The Turkish economy got into a spiral of high levels of debt, interest rates, and inflation along with a new debt crisis where domestic debt mostly replaced the foreign debt. Public sectors increased financial demands, accompanied by financial liberalization, triggered an inflationary spiral. As the public sector borrowing requirement (PSBR)25 increased, the public sectors share in the financial markets increased by means of government debt instruments (GDIs). High interest rates and inflation impaired investment; public-private competition in the financial markets (and the formers virtual hegemony in those markets) diminished the availability of credits.26 Drowning in the lure of hot money, the Turkish economy was trapped in a vicious cycle of debt and sticky rates of interest and inflation, leading to severe crises in 1994 and 2001. The culprit behind the disastrous spiral was not only the government, but business also contributed to this vicious cycle by transferring its resources to the GDIs as well as other securities, partially facilitating a rentier-economy.27 The state used GDIs as buffer instruments, helping industrialists and banks making big profits, while it compensated its deficits with further borrowing, based on an implicit agreement between industrialists and the state. Such spiral gave rise to three major financial crises emerged in 1994, 2000 and 2001, the latest being the worst in the history of modern Turkey. 3.4. Process of Transformation, Episode III: Post-2001 The 2000-2001 crisis in Turkey became a major milestone with respect to transformation of the Turkish economy, entailing substantial stabilization accompanied by major institutional reforms. In accordance with the post-Washington Consensus which

25

Conventionally used as an indicator of public account balance. Akcay et al. (1997) suggests that PSBR is a better indicator of fiscal deficits and inflation compared to consolidated budget deficits. Akcay C. O., C. E. Alper and S. Ozmucur, Budget Deficit, Inflation and Debt Sustainability: Evidence from Turkey (1970-2000). 26 Between 1989 and 2000, fixed private investment increased only 5.2% on the average, while changes in private stock (contribution to growth) averaged 0.17% (based on 1988 prices). Source: Treasury Statistics, 19802003. The Undersecretariat of Treasury, General Directorate of Economic Research, Ankara: 2004, p.5.
27

Kose, A. H. and E. Yeldan. 1998. Disa Acilma Surecinde Turkiye Ekonomisinin Dinamikleri: 1980-1997, Toplum ve Bilim, 77, pp. 45-68.

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emerged in the aftermath of the Asian Crisis in 1997, Turkish economy has gone through major institution-building and reforming, a process eagerly fostered by international and regional actors, such as the IMF and the EU, in accordance with the newly emerging belief in good governance. As regulatory governance was considered central in the post-2001 transformation, regulatory frameworks were created and independent regulatory agencies were established in various sectors, the most important of which is finance. In this process, external anchors, multilateral and regional alike, have played critical roles through both their conditionalities and transnational policy networks they have led.28 Amongst those anchors, IMF and the EU have been the most prominent in terms of their influences in the recent reform process. The declaration of Turkeys official candidacy to the EU in 1999 and the beginning of the accession negotiations in 2005 have been critical turning points, pushing Turkey to implement policies towards fulfilling the Helsinki criteria. Despite such strong anchor provided by the EU, Turkey has not had access to the funds which the CEECs had benefited from in the 1990s before their accession to the Union, and this consitutes a significant difference between Turkey and the CEECs. Geopolitical considerations also mattered in terms of increasing funding for the recovery of the Turkish economy from the crisis. Turkeys 2001 crisis nearly coincided with 9/11 attacks in the U.S., giving rise to a restructuring of U.S. foreign policy, which, entailed increasing importance of Turkey in the Middle East. Accordingly, this translated into enhanced endorsement by the U.S. for the IMF funds flowing into Turkey. Thus, Turkey has re-acquired its geostrategic importance which it had lost since the end of the Cold War. In the midst of the political turmoil that emerged in the aftermath of the 2001 crisis, another major change has taken place in Turkey, a new political party, Justice and Development Party (JDP), with roots in the Islamist movement came to power in 2002, landing in a strictly secularist state establishment of Turkey. Despite the prevalent enigma about the JDP, which was able to form a one-party government following successive coalition governments between 1991 and 2002, one can easily assert that JDP-government has been the most committed government regarding institutional and policy reforms, along with Turkeys accession process to the EU. Such commitment was more striking in the first term of JDP in government (2002-2007) when major institutional reforms were carried out, and stabilization was achieved, as depicted in Table 2. The Turkish economy grew at an average rate of 7.2%
28

ni, Z. and F. enses, eds.,2009.

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between 2002 and 2006, when the global liquidity also prepared a suitable ground for fast growth for several countries including Turkey. It should also be underlined that the success of the JDP in terms of recovery form the severe crisis was mainly based on the programs (particularly the Strong Economy Program) designed and implemented by the previous coalition government, that appointed transnational technocrats such as Kemal Dervis to crucial posts like the Minister in charge of the Economy. Yet, presence of a strong base for recovery cannot undermine the commitment, and resulting performance of the JDP governments for furthering reforms, and stabilizing the economy. Some of the indicators of stabilization were the decline in inflation rate (from 35% in 2002 to 6.5% in 2009).29 Since 2002, FDI flows increased to an unprecedented level, partially facilitated by effective privatization of state owned assets-as explained in Section VI below. Despite these positive developments particularly between 2002 and 2007, macroeconomic indicators began to worsen in the second term of the JDP government (2007- ), which coincided with the global financial crisis. Turkish economy encountered the crisis without stabilization and strong governance. 4. International Trade and the Level of Trade Openness The Turkish market has increasingly opened up since the 1980s, with a ratio of trade openness around 60-65%.30 The increase in this ratio strikes as significant when the ratios in pre-1980s are considered, but the level of openness is still lower than in some CEECs and other middle income countries (130.9% in the Czech Republic, 136.4% in Hungary and 71.6% in Poland).31 Nevertheless, the limitations of the conventional definition and measures of trade openness along with relative importance of the trade volume realized in a particular country in the global trade volume ought to be taken into consideration with respect to the differences in these ratios.32 Since its entry into the Customs Union in 1995, Turkey has harmonized its tariffs with the Common Externall Tariff of the EU: Turkey's weighted protection for imports of industrial products has zeroed down (dropping from 5.9%) for products originating in the EU and EFTA, while diminishing from 10.8% to 6% for products originating in third countries. '
29 30

Central Bank of Turkey. http://www.tcmb.gov.tr/yeni/eng/ Accessed on August 26, 2010. Here, the conventional measure of trade openness, which is the overall trade volume as a percentage of the GDP) is being used. Although this is the most commonly used measure of openness, there are certain disagreements about it 31 World Development Indicators, World Bank, 2009. 32 For the new approaches about the measures of trade openness, see Squalli, J. And K. Wilson. 2006. A New Approach to Measuring Trade Openness, http://www.business.curtin.edu.au/files/squalli_wilson.pdf

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Although Turkey has also reduced its non-tariff barriers, they are still used in various forms such as antidumping and safeguard measures which have been subject to disputes before the WTO and the EU.33 When the increase in Turkish exports is analyzed, successive devaluations most drastic of which were carried out in 1980, 1994 and 2001, following the severe crises, strike as a major drive. Contracting demand as a result of the domestic crises also provided an impetus for expanding exports. For instance, in 2001 alone, exports volume rose by 13% reaching up to 31,3 billion dollars. In 2007, this volume went up to 107.2 billion dollars, surpassing the 100 billion dollar phychological threshold. Such positive trend was expectedly interrupted by the emergence of the global crisis, and the Turkish exports declined by 22.6% in 2009, while the rate of decline in the same year was 26.1% in the US, 35.7% in Rumania and 33.5% in Greecein current values.34 In addition to the expansion of overall trade volume, another positive trend is increasing diversification of export markets.35 Currently, the EU is the largest market for Turkish exports by constituting around 55-60% of overall Turkish exports. In terms of countries of origin for Turkish imports, EU also has a share over 40-45%.36 Turkeys dependence on the EU for export markets strikes as a problem, particularly in the context of the global crisis through which the demand in European markets has contracted drastically.37

33

See the Turkey 2009 Progress Report prepared by the Commission of the European Communities to monitor progress of Turkey in the context of the requirements maintained by the EU Accession Process: http://ec.europa.eu/enlargement/pdf/key_documents/2009/tr_rapport_2009_en.pdf 34 The Development of Turkeys Exports, 2010 Report of Turkish Undersecretary of Trade. 35 http://www.dtm.gov.tr/dtmweb/index.cfm?action=detay&dil=TR&yayinid=1128&icerikid=1234&from=home Accessed on August 30, 2010. 36 http://ec.europa.eu/enlargement/candidate-countries/turkey/eu_turkey_relations_en.htm 37 Eurostat, European Commission. http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Accessed on August 25, 2010.

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Table 3. INTERNATIONAL TRADE of TURKEY, 1923-2009 (Million US dollar) Year 1923 1930 1950 1970 1980 1990 2000 2005 2008 2009 Exports 51 71 263 588 2.910 12.959 27.775 73.476 132.027 102.139 Imports 87 70 286 948 7.909 22.302 54.503 116.774 201.964 140.869 Trade Balance -36 1 -22 -359 -4.999 -9.343 -26.728 -43.298 -69.936 -38.730 Volume 138 141 549 1.536 10.819 35.261 82.278 190.251 333.991 243.008

Source: Turkish Statistical Institute (TUIK)

Trade agreements with the EU, EFTA, and other regional organizations Turkey has been a member of twelve regional organizations and agreements the most important of which is the Customs Union which covers all industrial goods but does not address agriculture (except processed agricultural products), services or public procurement. Besides establishing a common external tariff for the products covered, the Customs Union aims Turkeys alignment with the acquis communautaire in various internal market areas. Turkey has been the first country which signed the Customs Union Agreement without a full membership in the EU and this causes major concerns for Turkish economy. By signing the Customs Union Agreement in 1995, Turkey not only conformed with the External Tariffs of the EU, but it has also become obliged to adopt all preferential and free trade agreements (PTAs/ FTAs) that the EU signs with the third countries. Hence, Turkey is required to provide EFTA countries, GSP beneficiaries, and all other countries the EU has PTAs with, with various tariff preferences without being incorporated into the process of advisory mechanisms prescribed in the 1/95 Decision of the Association Council. Such automatic requirement
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imposed by the Customs Union has been highly problematic since it only includes goods originating from the EU member states while excluding those originating from Turkey. Although there has been a recent practice of the EU to include a Turkey clause in its PTAs, this usually is subject to third parties reluctance due to the similarity in these parties export products with those of Turkeys. Overall, Turkey has an ambiguous and asymmetrical position in the Customs Union Agreement, since it has no say on the EU agreements with the third countries. Hence, what Turkey has done to alleviate the cost of such assymetry is to sign FTAs invidividually with the third countries. So far, it has signed FTAs with many countries and blocs including EFTA, Israel, the former Yugoslav Republic of Macedonia, Croatia, Bosnia-Herzegovina, Tunisia, Morocco, the Palestinian Authority, Syria, Egypt and Albania. Turkey has also become a member of the Euro-Mediterranean partnership and in the process of concluding FTAs with all other Mediterranean partners through the prospects of EuroMediterranean free trade area. Ambiguities about Turkeys CU membership are not limited to the FTAs with third countries, and do not only originate from the EU, but also caused by Turkey. Although Turkey is generally considered to have gone through a high level of alignment with the Customs Union, it is deemed to have undertaken limited progress in complying with common commercial policy and the most important issue in this domain is the vessels and aircrafts originating from Cyprus, a current member of the EU. Other pending issues are duty relief legislation, free zones, duty relief, transit, fight against counterfeit goods, etc.38 The Customs Union membership exposed Turkish firms to fierce competition, which initially caused severe reactions from certain sectors like automotives and pharmaceuticals, based on the acclaimed concerns that domestic producers would go bankrupt.39 Despite this initial reaction, particularly large Turkish firms in these sectors have shown that their adjustment capabilities were, indeed, fairly high, to the extent that they started exporting to the European markets at significant volumesparticularly automotives and consumer durables. Turkeys effort to become a member of the EU/ EEC has almost a six-decade-long history, which had begun in 1959 when Turkey applied for associate membership of the

38

Turkey 2009 Progress Report prepared by the Commission of European Communities. See http://www.euractiv.com.tr/fileadmin/Documents/TR_Rapport_to_press_13_10.pdf 39 Interviews with industrialists, Istanbul July 25, 2004.

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European Economic Community (EEC). Then, in 1963, the Ankara Agreement was signed, foreseeing Turkeys membership in three phases, followed by the Additional Protocol of 1970 which had put forward that Turkeys full integration to the CU would take place within 22 years. Although the Turkish state perceived the CU membership as a natural step toward full membership in the EU, the accession route has proved rather thorny, as the accession negotiations began in 2005. In addition to the Customs Union, Turkey has also taken part in several regional agreements and organizations such as the Economic Cooperation Organization (ECO) with Iran along with several other countries in the region, Organization of the Black Sea Economic Cooperation (BSEC), Organization of the Islamic Conference and the D-8 Group, mostly composed of Muslim countries. The prolonged process of the EU accession and the perceived reluctance of the EU to integrate Turkey lead the Turkish state to disperse its focus onto other regional agreements, besides its commitment in the Customs Union. Recent developments in Turkish politics, particularly the rise and incumbency of the Justice and Development Party (AKP), which has Islamist leanings, bolstered the increasing emphasis in cooperation with neighbouring regions, particularly Muslim countries, a process interpreted as the shift in Turkish foreign policy. 5. Cooperation with multilateral agreements and organizations Turkey has taken part in nearly all multilateral agreements and has been a member of multilateral organizations since their inception in the post-war period. It has been member of the UN since its establishment, and one of the non-permanent members of the UN-Security Council, a post it will hold until December 2010. Becoming a member of the so-called Bretton Woods-Trio, namely, the IMF, IBRD / World Bank, GATT/ WTO, signified Turkeys alliance with the Western Bloc during the Cold War. It also became a recipient of the Marshall Plan what was accompanied by transfer of funds: one of the two main drivers (together with Greece) of the well-known Truman doctrine, and a NATO member since 1949. Turkey is also a founding member of the OECD that had evolved from the Organisation for European Economic Cooperation, of which Turkey was also a founding member since 1948. Having been incorporated into these organizations in the context of the bipolar politics of the postwar era, Turkey has mostly

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struck as an outlier in these groups particularly with respect to the level of both economic and political development. Although Turkey made commitments for the GATT regarding the liberalization of its international trade regime, it has been exempted by means of the GSP (generalized system of preferences) clause, paving the way for sustaining its protectionist trade regime until the 1980s. Since the 1980s, the IMF and the World Bank have been the leading agents that pushed Turkish economys transformation through their conditionalities attached to the funds. Turkey has been one of the champions amongst the recipients of IMF funds since the 1950s, as it has signed many stand-by agreements with the IMF. Although the main emphasis of IMF coditionalities was on liberalization and stabilization in the 1980s and 1990s, such emphasis started including fundamental institutional reforms in the late 1990s, influenced by the so-called post-Washington Consensus emerged after the Asian Crisis. Turkeys membership in the WTO coincided with the Customs Union Agreement signed in the same year with the EU. Thus, the WTO and the EU became the main anchors in shaping Turkey s trade policy.

6.

Foreign Direct Investment

One of the most remarkable changes in Turkish economy is the increase in FDI inflows since the 2000s fostered by the EU accession process along with stabilization of the Turkish economyIt also required monetary and fiscal stability. Turkey went through an extremely sluggish path regarding the FDI inflows and it was identified as a country with low FDI attractiveness throughout the the 1990s. It received consirerably limited inflows compared to the CEECs along with other middle-income countries in Latin America and Asia. For instance, in 1999, Turkey received around one-tenth of overall FDI inflows into Poland (783 vs. 7270 million dollars). Nevertheless, there has been a remarkable upward trend in terms of FDI inflows into Turkish economy: FDI went up to $10 billion in 2005 and nearly $30 billion in 2006, while the volume has been declining since the beginning of the global financial crisis, despite a gradual recovery in 2010.40 The chart below shows the changes in FDI inflows in Poland and Turkey in the last decade:

40

World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf

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Chart 3. FDI Inflows into Turkey and Poland, 1999-20009 (billion US dollars)

Source: World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf

The global credit bubble of the early 2000s played an important role in the substantial increase in FDI inflows in both Poland and Turkey. Although Turkey made a big jump in the 2000s and began to attract similar amounts of FDI on an annual basisto those in the CEECsit is still far from catching up with the CEECs in terms of the FDI stock: $249 billion in Hungary and $183 billion in Poland, $116 billion in the Czech Republic, while only $78 billion in Turkey. Such major difference in FDI stocks is caused by Turkeys sluggish performance in the 1990s with respect to attracting FDI inflows. 41 Turkeys economic and political instabilities in the 1990s, when the CEECs and their peer group received substantial FDI inflows, impaired Turkeys FDI attractiveness. As explained in the preceding sections, Turkish economy suffered from high inflation and interest rates, along with high public debt in the 1990s. In a business environment where the state crowded out the market by becoming the rival of the corporate sector in the financial markets, foreign capital hesitated to invest in Turkey. Economic reforms took an erratic pattern, oscillating between anti-reform and proreform stances even in the course of the same government, brought about by political instabilities. Such a protracted history of start-stop reforms due to weak commitments of the incumbents and skepticism towards foreign capital fed by populist policy-making curtailed
41

World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf

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potential FDI inflows to Turkey. An insolvent and indebted state, chronic inflation, credit difficulties, insider credit transactions, along with various other problems in the Turkish market accumulated and triggered the 2001 crisis, which provided another backlash against the FDI inflows. However, the fast recovery after the 2001 crisis led to a spurt of FDI inflows into Turkey. Recent improvements in public finances which helped economic stabilization, faciliated yielding positive signals to the investors, leading to the inflows of considerable amount of FDI. A recent privatization programme (effectively privatizing many SOEs unlike the previous programmes in the 1980s and 1990s) was also instrumental in attracting FDI inflows. The ongoing EU accession process has become a major pull factor for FDI, by bolstering Turkeys creditworthiness. Recent improvements in legal and regulatory framework are also significant for positive signaling to the investors. Establishment of the Advisory Council, abolishing Treasurys authority in providing permits, easing the process of starting business are all noteworthy developments. The dominant skepticism toward foreign investment is disappearing, as the AKP governments since 2002 have been influential in changing the prevalent discourse against foreign capital inflows. Thus, a combination of domestic, international and supranational factors triggered increasing FDI inflows in Turkey between 2001 and 2007. Parallel to the global trend in declining FDI inflows, FDI inflows to Turkey showed a substantial decline after the emergence of the global financial crisis in 2008, dropping from 18 billion dollars in 2008 to 8 billion dollars in 2009. FDI outflows from Turkey also followed a similar trend: they declined from 3 billion dollars in 2008 to 2 billion dollars in 2009.42

6.1. FDI Flows in CEECs The positive impact of FDI on export booms and competitiveness can be observed in all CEECs. FDI inflows accelerated towards CEECs long before their actual accession to the EU, paralleling with rising credibility in the respective markets. Since the early 1990s, CEECs received substantial amounts of investment particularly originating from EU-based companies and, resultingly, FDI inflows constituted about 20% of total investment and nearly 5% of overall GDP (Barysch 2006: 5). Hungary, Poland and the Czech Republic provide good
42

Source: World Investment Report, 2010, UNCTAD, P.43. http://www.unctad.org/en/docs/wir2010_en.pdf

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examples for high volumes of FDI inflows and their spillovers regarding growth and competitiveness. The table below shows annual FDI inflows into major CEECs and Turkey between 1999 and 20009. Table 4. FDI Inflows to Turkey and Selected CEECs, 1999-2009 (Millions of dollars) 1999 783 Turkey 819 Bulgaria 1041 Rumania 1977 Hungary Czech Republic 6310 7270 Poland 2002 1037 479 1106 854 9319 4119 2007 22023 12388 9921 71485 10444 23561 2009 7611 4467 6329 -5575 2725 11395

Source: World Investment Report, 2010, UNCTAD. http://www.unctad.org/en/docs/wir2010_en.pdf

6.2. Rivalry amongst the countries to attract FDI The rivalry over attracting FDIs is pervasive in todays economy. Global FDI flows grew by 29% in 2004, but the lions share is again acquired by developed nations, which experienced almost 40% increase only in 2004. FDI inflows to the EU-15 had even a higher surge: 76% increase in 2004. Although at a more mediocre level, the flows into the EU-10 also increased considerably: 36% in 2004, reaching a record level of US$ 38 billion. FDI into developing countries overall was up 41% in 2004, and 13% in 2005, achieving the highest levels of the FDI inflows in this category. For instance, China itself received about $95 billion, while Russian Federation received $75 billion in 2009.43 Thus, compared to such levels of FDI attracted by other countries, FDI inflows in Turkey are still at modest levels. Currently, the competition for FDI inflows is not only limited to pulling higher amounts, but also higher quality. Some CEECs have been able to pull high-tech and R&D investment. Czech Republic and Hungary are good examples for such upgraded FDI. Upgrading the FDI gives a considerable competitive niche to certain countries.44 A significant pulling factor with respect to such high quality FDI is the investment in human capital. In general, CEECs have significant advantages regarding human capital brought about by higher enrollment rates in schools, science education, etc. Turkey can also achieve a lucrative niche in terms of high-tech FDI, as it has its own leverage in terms of human capital. Turkish

43 44

Source: UNCTAD 2009: http://www.unctad.org/wir Accessed on August 26, 2010. Barysch, K. 2006. Is Enlargement Doomed? Public Policy Research, 13 (2): 78-85.

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workforce, in general, falls into a remarkably competitive category in the world. 45 Nevertheless, the most striking problem in Turkish labor market stems from is its dual quality: juxtaposed to a relatively larger pool of hi-skill workforce including engineers, senior managers, etc., there is a much larger pool of low-skill or no-skill labor. Thus, more investment in education is essential for Turkeys competitiveness. Turkeys leverage in comparison with its counterparts can be its well-established coporate structure and culture, as the country has had a longer experience with entrepreneurship; well-developed supplier-buyer chains and distribution channels;

sophisticated company operations and strategies. Another advantage might be demographic: with a vast market of seventy-two million population, which is much younger on the average than that in Europe, Turkish market can be appealing for foreign investors. 7. Governance Governance has been a central issue in Turkey as the country has suffered from institutional deficiencies throughout its transition process in the last three decades. A critical turning point in terms of goverance has been the 2000-2001 financial crisis which created a significant exogenous shock giving rise to a series of new instituions.46 Although major institutional reforms have been undertaken in Turkey since 2001 and these reforms have improved governance, such improvement has not yet put Turkey into the ranks of its peers like the CEECs. Turkeys governance scores with respect to various indicators such as the rule of law, regulatory quality and voice and accountability are generally lower than the average scores of the CEECs.47 In the context of institutional reforms, Turkey has established independent regulatory agencies in several sectors. As a result of a regulatory inflation carried out in the late 1990s and the early 2000s, regulatory agencies were not only established in key network sectors, where market failures necessitate regulatory intervention, but also in unusual sectors such as agriculture (specifically for tobacco and sugar markets) which did not necessarily suffer from usual dynamics of market failures.48 Initially, the major demand for regulation mostly arose
45 46 47

World Competitiveness Yearbook, 2010, IMD.

ni, Z. and F. enses, eds.,2009.

See Kaufmann et al. 2009.

48

Currently, there are nine NRAs in Turkey: Capital Markets Board (date of establishment: 1982), The Higher Board for Radio and TV (1994), Competition Agency (1994 and 1999), Banking Regulation and Supervision Agency (1999), Telecommunications Agency (2000), Energy Markets Regulatory Agency (2001), Sugar Agency (2001), Tobacco and Alcohol Market Regulatory Agency (2002), and Public Procurement Agency (2002).

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from international and supranational organizations, namely the IMF, the World Bank, OECD and the EU, which became the key actors in launching regulatory reforms in Turkey. IMFs influence played a major role in the establishment of the regulatory agencies in energy and finance, while the EU was the central actor in the establishment of the Competition Agency a conditionality for Turkeys entry to the Customs Union in 1996--, both the EU and the IMF played important roles in the establishment of the public procurement agency, and the World Bank was the leading actor in generating international coercion in the establishment of the regulatory agency in telecommunications. Nevertheless, there was neither a strong domestic support nor political commitment for regulation particularly in the earlier phases of regulatory reforms in Turkey. Thus, these agencies were mostly established under such pressures of international and supranational actors along with a rather thin domestic coalition, and, they generally have led to further politicization and capture by either politicians and/or private actors.49 Then, the resulting regulatory quality is rather low, particularly compared to those of the CEECs. 8. Conclusion Turkish economy has gone through major transformation since the 1980s, similar to the systemic changes the CEECs went through since the end of the Cold War. This chapter pointed out that although Turkey was included in the capitalist block during the Cold War, it was not a free market economy until the 1980s, therefore, one can draw parallels between the transition processes of Turkey and the CEECs. Over the course of three decades since the 1980s, Turkish economy has been transformed from a nearly-closed economy mostly ruled by an interventionist state to a liberalized market economy integrated into the global markets. Such transformation process has relatively been less steady and took much longer in Turkey compared to those in the CEECs which enjoyed the support of the EU and the rest of the international community at large. Turkey, however, has not had the similar level of support from the EU, although it has been eventually provided with a membership status in 2005. This chapter, then, aimed to provide a general comparison between the transitions Turkey and the CEECs have gone through.

49

Ozel, I. and I. Atiyas, Regulatory Diffusion in Turkey: A Cross-Sectoral Assessment in T. etin and F. Ouz, eds., The Political Economy of Regulation in Turkey, Springer, forthcoming.

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The chapter underlined that despite the good performance of the Turkish economy in the 2000s, the governance performance has been relatively low, particularly compared to that in the CEECs. Although major institutional reforms have been undertaken in Turkey since 2001, fostered by the IMF and the EU, Turkeys governance scores have not arisen adequately. Additionally, the relatively better economic performance particularly before and during the current crisis cannot undermine the importance of protracted problems of the Turkish economy such as heavy reliance on short-term capital inflows to finance current account deficits; external indebtedness; high levels of unemployment; and pervasive inequalities in the Turkish society.

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