FT SPECIAL REPORT

Turkey
Tuesday October 1 2013
www.ft.com/reports | @ftreports

Sleeping giant of old stirs amid fiery rhetoric

The protest fallout and the eventual ending of US financial stimulus pose big problems for Erdogans government, writes Daniel Dombey
In the shadow of a legend: Recep Tayyip Erdogan speaking last month under a portrait of Mustafa Kemal Ataturk
Getty

Inside
Economics The dependence on US Federal Reserve stimulus needs to end
Page 2

At loggerheads with the EU A dynamic nation risks permanent exclusion

Page 2

Trade routes Commercial ties with Israel suggest common economic interests
Page 3

ecep Tayyip Erdogan, the Turkish prime minister who towers over his countrys politics, was on barnstorming form. The sleeping giant has awoken, he declared before a meeting of business executives in Istanbul in September. Our economy is no longer fragile . . . We have carried our country to a new level. Such words resonate with many in Turkey. In relation to its neighbours in Europe, the country is a powerhouse of growth; compared with the Middle East, it stands out for its political stability.

After decades when the military wielded power, Mr Erdogan has established the supremacy of democratically elected government. His speech did not just strike a triumphant note, however; he also spoke of external obstacles, even conspiracies, that could hold the country back. Turkey will definitely reach the targets we set, nothing will keep us down, he continued. They will set traps for us, but first God and then the Turkish nation will frustrate them. It is a striking way to talk of economic goals notably Mr Erdogans ambition to make Turkey, the worlds

17th largest economy, one of the 10 biggest by 2023. But such talk of plots, of unidentified enemies, of a divine purpose is part of the prime ministers discourse, as his government seeks to deal with the two challenges that have shaped Turkeys year: the prospect of US Federal Reserve tapering and the mass protests sparked by plans to develop Istanbuls Gezi Park. The first issue matters greatly to emerging markets buoyed by inflows of cash over the past half decade. In September, its markets received a boost when the Fed decided not to cut

back its quantitative easing programme asset purchases of $85bn a month. But Ali Babacan, deputy prime minister for the economy, says there is little doubt the Fed will cut QE and raise interest rates, which may tempt investors away from emerging markets. Every emerging market should prepare for this, Mr Babacan said. That may be particularly true for Turkey. Despite efforts to shrink the current account deficit, which slowed the pace of growth from above 8 per cent in 2010-2011 to little more than 2 per cent last year, the deficit

remains formidably high and dependent on short-term capital flows. Martin Raiser, World Bank director for Turkey, says such risks should not be overstated. He highlights what he sees as the countrys sound fundamentals, notably its improved infrastructure, broadly favourable demographics and strong public finances. We are not worried by the financing, he says, but continue to point to the vulnerability it represents and the need for structural reform, to boost productivity, exports and
Continued on Page 4

Colourful steps to arts festival Democratic themes underpin the 13th Biennial in Istanbul
Page 4

Construction With the country on election footing, politicians tap into middleclass housing dream
Page 4

Call to increase birth rate draws sceptical response from women

Demographics

An ageing population is causing concern, report Norma Cohen and Funja Guler
For all the success of his economic policies, and an unprecedented three terms as Turkeys prime minister, Recep Tayyip Erdogan is aiming for what appears a quixotic goal: persuading Turkish women to have at least three children each. If you have a young population, the future is yours, Mr Erdogan has said. At the moment, thank God, 60 per cent of our population is under 30. But when we look at the increase, if we continue like this, alarm bells are ringing for 2037-40. There is more than a grain of truth in his words. UN data show the total fertility rate the number of children born to each woman during childbearing years has fallen from 4.3 in 1970-75 to 1.9 in 2010. When the number of children being born falls below 2.1 per woman, there are too few births to keep a population stable. But the push to increase births is not finding a receptive audience. This is insane, says Sema Ozkan, 45, who left school at 16, married, had three sons and is now divorced. If my parents were not so ignorant, I would have a better life. I would have completed my education, have a profession and not have got married so early. Gozem Arin, 23, a university student, agrees: I will be graduating this year and my first goal is finding a good job. I like children but not enough to have any yet. I might have some after 30. Ms Arin has no siblings because her parents felt they could only afford to educate one child. She dismisses calls for bigger families as a wish for more voters for Mr Erdogans party. The call for more children is an unusual national policy, especially as birth rates that fall below

replacement levels are becoming the norm, not only in developed countries but also in fast-growing economies such as China. This decline is associated with rising wealth and increasing urbanisation, trends noticeable also in Turkey. Between 1980 and 2012, UN data indicate, Turkeys GDP per capita rose at an average annual rate of 5.19 per cent, despite political and military upheavals much faster than more developed countries but more slowly than many of its neighbours. The percentage of the population living in urban areas rose from 24.8 per cent in 1950 to 70.5 per cent in 2010. The UN estimates this figure will rise to 81.2 per cent by 2015. The median age of Turkeys population is also rising, reflecting the declining birth rate. In 1950, the median age was 19.7 but had risen to 28.3 by 2010, a faster rise than in the average developing economy. Another factor that can

influence child birth is education. Women who complete university have better earnings prospects and delay childbirth. According to Fadi Hakura, head of the Turkey Project at Chatham House, a London think-tank, Turkey is enjoying a demographic dividend, a sweet spot after the sharp fall in

The risk is that procrastination over reform is coinciding with demographic change
the birth rate and before the population ages rapidly. At the moment, some of the governments social expenditure is falling, while national coffers are swelled by a rise in the number of working adults. But the ageing of the population of will bring an increasing social security

Young Turks: children mark youth day in Ankara in May

Getty

burden, paid for by a shrinking pool of workers and the dividend will disappear. Mr Erdogans birth rate concerns are twofold, Mr Hakura says. First, the prime minister may see the falling rate as a national security concern because the restive Kurdish minority is having more children. Various projections suggest Kurds will outnumber ethnic Turks by 2038. Mr Hakura also says the government is concerned about growth as the percentage of elderly in the population rises and the number of workers fall. But he thinks the focus on boosting birth rates is misguided. One report on Turkish demography found the central risk is that procrastination over economic and social reforms is coinciding with demographic change. By 2025, the effects of an ageing population will start to become noticeable. The great economic strides since the near collapse of the economy in 2001 fall far short of what is needed, Mr Hakura adds. There are two glaring shortfalls; relatively low levels of educational attainment, which hold the nation back from delivering higher-value goods and services; and low levels of investment and saving, with much of recent growth driven by consumption. The state statistical authority reports that the ratio of household liabilities to disposable income has grown from 4.7 per cent in 2002 to 50.6 per cent in 2012, making Turkey vulnerable to a financial crisis. Gender inequality, too, Mr Hakura says, is a barrier to growth, because the nation is not developing its female workforce. Rather than exhorting Turks to have larger families, the nation should move on structural economic reform before it is too late. After about 2025, Turkeys demographic window of opportunity will start to close, the population will be ageing and the countrys middling prospects for prosperity may well become entrenched.

FINANCIAL TIMES TUESDAY OCTOBER 1 2013

Turkey

Reliance on foreign capital inflows raises concern

Economics The country needs to end its dependency on Washington, writes Daniel Dombey
he economic clouds above Turkey seemed to lift in September, when the US Federal Reserve decided it was not quite the right time to begin tapering its monthly $85bn worth of monetary stimulus. As with other emerging market currencies grown used to the flow of US dollars, the lira immediately rallied. But as Turkish officials and executives heaved sighs of relief, two facts became apparent. For the short term, Turkeys economy depends at least as much on Washingtons decisions as it does on Ankaras. And, since Fed tapering is all but assured to take place eventually, the economys performance in coming years is unlikely to resemble its progress earlier this decade when, fuelled by dollars, it charged ahead. Emerging markets will not grow as fast as they have in the past decade; this is for sure, Ali Babacan, Turkeys deputy prime minister for the economy, told a recent conference in Istanbul, in comments that seemed largely based on Turkeys own prospects. But their growth rates will still be higher than developed markets this is also for sure. Many investors consider that, following a summer fall in the lira and the stock exchange, the worst is over for now. David Reid, co-manager of the BlackRock Emerging Europe investment trust, says: Until recently, Turkey was a relative underweight in our funds, but with the market down by almost a third in dollar terms compared with its May highs, it has naturally become much more interesting as an investment opportunity. Others are more alarmed. In an article published in September, Rahmi Koc, the patriarch of Turkish business and the honorary president of Koc Holding, the countrys biggest conglomerate, made clear his concerns that Turkeys official growth targets which involve becoming one of the worlds 10 biggest economies by 2023 were unrealistic. To achieve that goal, he argued, the country would have to grow by 14 per cent a year a considerable feat, since most of Turkeys growth in dollar terms over the past decade has been due to lira appreciation. But then he moved on to a more urgent topic. The most important structural problem Turkey faces is its excessive reliance on foreign capital inflows in its growth models, which makes it difficult to attain a sustainable growth path, he said. He cited the International Monetary Funds concerns about Turkeys domestic savings rate, which has suffered the biggest fall in the G20. Savings have fallen from almost 25 per cent in the late 1990s to about 15 per cent today. Other figures highlight that same dependence on short-term capital from abroad. For the 12 months to June, Turkeys current account stood at $54bn, or 6.6 per cent of GDP, more than 80 per cent of which was financed by portfolio flows. Foreign direct investment for the period a more secure form of financing stood at just $6bn. Meanwhile, Turkey has significant additional foreign liabilities, despite government success in bringing down the countrys public debt to less than 40 per cent of GDP. As of July, the countrys total stock of foreign exchange debt coming due in the following 12 months, including that owed by private banks and corporate groups, was $164bn. Ibrahim Turhan, the head of Borsa Istanbul, the Turkish stock exchange, explains why the country looks

Turkey and its trading partners

GDP growth estimates, 2013
Annual % change

2.5
10.3

Russia

GDP growth estimates, 2013

T Turkeys imports from country, 1 12-month sum to July 2013 ( (% of total) Tu Turkeys exports to country, 12-month sum to July 2013 1 (% of total) (

4.5

Germany

-0.2
3.4 4.1

France

0.3 0. .3 . 3

-1.8 1.8 .
5.3 4.4

Italy

9.0 .0
0.1 7.5

Iraq

9.4

8.6

Jordan

-1.6
2.5 2.6

Spain

3.3

0.5

Kuwait t

Turkey

1.1

0.2

3.4
Bahrain

-1.3 1. .3 . 3
4.3 3.1

Iran

-4.2
1.6 0.9

Greece

Lebanon

2.0

4.2

0.1

0.6

3.1 3. .1
2.1 5.8

UAE

3.6 3. .6 . 6
0.8 1.6

Israel

4.2

Oman

0.2

Saudi Arabia

4.4 .4

0.8

2.3

Quality of institutions
WEF global ranking based on perception of executives, 2013 (1 = best, 148 = worst) Qatar UAE Oman Germany Saudi Arabia France Bahrain Jordan Kuwait Turkey 56 Israel

4.4
Spain Iran

Yemen
0.4

5.2

Qatar

0.2

Italy

Greece

Russia

Lebanon

Yemen

20

40

60

80

100

120

140

Quality of Infrastructure
WEF global ranking based on perception of executives, 2013 (1 = best, 148 = worst) France UAE Germany Bahrain Saudi Arabia Qatar Jordan Turkey 41 Israel Kuwait Italy Greece Iran Russia Yemen Lebanon

Spain Oman

20

40

60

80

100

120

140

GDP per capita, 2013

Purchasing-power-parity $000 (estimates) Saudi Arabia

Qatar

UAE

Germany

Kuwait

France

Israel

Spain

Italy

Oman

Bahrain

Greece

Russia

Lebanon

Turkey

Iran

Iraq

Jordan

Yemen

105.1

49.9

40.0

39.9

35.9

33.3

32.5

30.6

30.1

29.9

29.8

23.9

18.7 16.1 15.6 13.0 7.6 6.2 2.4

Size of the economy, 2013

GDP $bn (estimates)

189

369

3,598

173

2,739

254

746

1,388

2,076

79

28

244

2,214

44

852

429

233

34

39

Sources: IMF; Thomson Reuters Datastream; The World Economic Forum

FT graphic: Kripa Pancholi, research: Valentina Romei

We are missing the crucial element of domestic institutional investors

abroad so much for financing by saying institutional funds in Turkey account for only 4 per cent of GDP, compared with 40 per cent in other emerging markets and 50 per cent in developed countries. We are missing the crucial element of domestic institutional investors, he says, while pointing out there are hopes that government plans to encourage more people to take out pensions will boost savings. The worries about sustainability place a considerable burden on the

governments shoulders all the more so because the central banks margin for manoeuvre is widely seen as having been reduced by prime minister Recep Tayyip Erdogans attacks on an alleged interest rate lobby and the high rates it supposedly wants. Mr Babacan argues that the current account deficit is manageable at 4-5 per cent of gross domestic product, but that, beyond that, we should be really very careful. For now, the economy is growing at a relatively gentle pace ministers

suggest the country will miss its target of 4 per cent growth this year and Mr Babacan highlights concern at the quality of the 4.4 per cent growth recorded in the second quarter. Two big and perhaps unsustainable drivers for the period included public sector investment and domestic consumption. Meanwhile, private sector investment has slid. One question for 2014 is what the principal motor of growth will be. Reliance on domestic consumption, as

was the case in 2010-11, would push the current account deficit higher. The nearest export markets are afflicted by the eurozone crisis and the upheaval in the Middle East. A big push on infrastructure construction one of the governments targets requires a large infusion of capital. Further down the road, Mr Koc and Mr Babacan agree, Turkeys continued economic progress depends on structural changes particularly improvements to the education system and the rule of law.

A rekindled zeal to join the EU would reignite renewal at home

Opinion
DAVID GARDNER
Turkeys 50-year dalliance with Europe, which turned into a formal engagement almost a decade ago when the EU gave the go-ahead for entry negotiations, now looks as though it may never reach the altar. That is a shame because, paradoxically, following Junes nationwide outburst of demonstrations against the authoritarian whims of Recep Tayyip Erdogan, Turkey has never been more European. The emergence of Turkey as a vibrant democracy and dynamic economy had been one of the stellar and stirring stories of the first decade of the 21st century. That this success was steered by Mr Erdogan and his neo-Islamist Justice and Development party (AKP) suggested the idea of a Muslim version of Christian Democrats could catch on in a Middle East otherwise being set ablaze But then the EU surrendered its role as an engine of reform inside Turkey, which Germany and France evidently decided was too big, too poor and too Muslim to enter their club. Turkish political life visibly coarsened, and Mr Erdogan, after winning a third term as prime minister in 2011 on a rising share of the vote, started becoming intolerant of criticism, and seemingly determined to pack the institutions of state with his followers, seizing control of all the levers of power. In June, his high-handed plans to bulldoze a rare bit of green space near Taksim Square in central Istanbul sparked peaceful protests that, once riot police overreactedreacted, spread across urban Turkey. The prime minister, thundering with a solipsistic mix of menace and paranoia, denounced an internationally orchestrated conspiracy to bring to power discredited secular elites that cannot beat him at the polls. He staged mass rallies and cracked down on his opponents in the professional and business classes. Plans to resurrect the moribund EU accession talks were put on hold, at the behest of Germany. Angela Merkel, Germanys re-elected chancellor, appeared especially angry that police had attacked Istanbuls German hospital and teargassed a hotel near Taksim where leaders of the German Greens were staying. But Ms Merkel has always rejected Turkish entry and her Christian Democrat partys election manifesto said the country does not meet the criteria for joining the EU. An inward-looking, German-led Europe has collided head on with a wilful Turkish prime minister who keeps boasting that he is still around while the European leaders that blocked him such as Nicolas Sarkozy, the former French president have fallen by the wayside. The EU clearly has to address Mr Erdogans autocratic behaviour, but somehow engage with the diverse and democratic vitality of urban Turkey that blossomed this summer. Attentive Europeans should not have been surprised. Extensive research three years ago by the EU-funded Anna Lindh foundation and Gallup, the polling organisation, showed the values and beliefs of Turks often aligned with mainstream European opinion. The small proportion of people believing, for example, that truth is absolute was about the same in Turkey as in Britain, France and Germany. But Mr Erdogan needs a reality check too. Without the EU, the once banned neo-Islamist leader would not have been able to take office a decade ago, such was the hostility of the secularist establishment. Without the shield of EU club rules he could not have broken the power of the army, the final arbiter of Turkish politics before Europe entered the picture. Europe was transformative, for Mr Erdogan and Turkey. But this engine of reform and democratic renewal sputtered the moment the EU started raising the bar to entry. Mr Erdogan started reaching for control of all social spheres, from food and drink to science and sport. Turks have become disillusioned with the idea of Europe, which has little influence left. In the heat of this summers crisis, Egemen Bagis, Turkeys minister for the EU, said: The EU needs Turkey more than Turkey needs the EU . . . if we have to, we could tell them get lost. That is, to put it mildly, overstating the matter. Turkeys turn towards the Middle East decried by critics as a neo-Ottoman anachronism has, for the moment, proved to be a non-starter. But that does not mean Mr Bagiss demagoguery is a minority view. The EU accounts for more than 70 per cent of foreign direct investment in Turkey and 38 per cent of its exports. There are 14,000 EU companies in Turkey, and many of them transfer technology. Turkey, moreover, has no oil. It has to earn its living in the marketplace. The EU is by far its biggest market. This is not, thank God, a rentier economy, is how one academic puts it. There are more cases against Tayyip Erdogans Turkey than Vladimir Putins Russia at the European Court of Human Rights in Strasbourg, yet the academic insists we cannot behave like Putins Russia. The fact we have
Egemen Bagis: The EU needs Turkey more than Turkey needs the EU

to make a living sets a floor against [the extent of] authoritarianism, but how do you break through the ceiling above to full democracy? His answer is a two-way re-engagement with the EU. Only if the EU accession engine fires up again will it reignite the renewal Turkey still needs at home.

Turkey has to earn its living in the marketplace. The EU is by far its biggest market

FINANCIAL TIMES TUESDAY OCTOBER 1 2013

Turkey

Ankara takes slow road to rapprochement with Israel

Foreign relations Growing commercial ties suggest that, despite the rhetoric, there are common economic interests, says John Reed

New trade route: a ship docks in Haifa. Turkish trucks now frequently arrive at the Israeli port on ships and then head overland into the Middle East

Alamy

osef Levi Safari, Israels charg daffaires in Ankara, was invited to attend a state reception in August at the Cankaya presidential palace. This was the first invitation to an Israeli envoy since May 2010, when its forces stormed the ship Mavi Marmara in international waters as it was heading for the Israeli-blockaded Gaza Strip. Israel killed nine people, causing the two countries to withdraw ambassadors. So slow is the pace of political rapprochement between Turkey and Israel that some Israeli media organisations seized on his attendance at what was a routine diplomatic gathering as a news event. Mr Safaris invite came just days after Recep Tayyip Erdogan, Turkeys prime minister, accused Israel of masterminding the coup that toppled Egyptian President Mohamed Morsi. In response, Avigdor Lieberman, Israels rightwing ex-foreign minister, compared Mr Erdogan to Joseph Goebbels, Adolf Hitlers propaganda

chief. Relations between two of the Middle Easts pre-eminent economic and military powers were not meant to be so difficult. In March, US President Barack Obama, on a visit to Israel, sought to reconcile two of his nations strongest regional allies when he brokered a call between Israeli Prime Minister Benjamin Netanyahu and Mr Erdogan, in which the former apologised for the incident, the first of three main Turkish preconditions for restoring ties. The two countries were also meant to agree on reparations, and Israel was to lift is blockade on Gaza, whose ruling Hamas movement is supported by Turkey. But since then reconciliation talks have foundered, officials and analysts say, as Israeli officials bridle at what they see as hostile and anti-jewish rhetoric by Mr Erdogan, and the Turkish prime minister copes with his own domestic political problems and growing isolation in the Middle East. At home, this summers mass protests, which began in Istanbul, have

preoccupied the Turkish leader. Abroad, Mr Morsis forced departure deprived Mr Erdogan of his strongest regional ally. By siding with anti-government rebels in Syria, he further strained relations with that country, Iran, and Iraq. Gallia Lindenstrauss, a Turkey specialist with the Institute for National Security Studies in Tel Aviv, says: I think the main reason that the negotiations are stuck is the Gezi Park events, which have both made the Turkish side less prepared to advance in negotiations, as well as making the Israelis and for sure the Americans more hesitant in pressing the Turks. Israel has eased some of its restrictions on Gaza in areas such as the import of construction materials. However, that became a moot point after Egypts army began to crack down on border tunnels linking Sinai to the Palestinian enclave, putting it under new economic pressure. A planned trip by Mr Erdogan to Gaza in late August, meant to bolster

his standing as a champion of the Islamist group, was hastily cancelled after Egypts coup dtat. Yet, while Turkey and Israels political relations remain fragile, growing commercial ties suggest that companies and citizens are finding common economic interests. The joint trade agreement, signed in 1996, remained intact through their political estrange-

Relations between these two powers were not meant to be so difficult

ment; foreign trade, after dipping, bounced back. According to the Manufacturers Association of Israel, Israeli exports to Turkey grew from $1bn in 2009 the year before the flotilla incident to $1.5bn now. Turkeys exports to Israel rose over the same period, from $1.4bn to nearly $2bn.

Dan Catarivas, the MAIs director of foreign trade, says: Because there is such complementarity between the Israeli and the Turkish economies, the economic interests of the two sides probably overcame the bad political climate. Turkish importers are buying Israeli technology, semi-finished products and raw material, he says. Meanwhile, Turkey exports consumer goods that Israel buys because it does not make them. Energy executives in both countries have been quietly studying the feasibility of an undersea gas pipeline that would pump some of Israels abundant offshore reserves to customers in Turkey. Proponents of the pipeline say that, if built, it could reshape the Middle Easts energy map. However, Israels energy companies are studying other options for the gas too, including exports via pipeline to Jordan, Egypt, Cyprus, or to overseas markets in liquefied form. The war in Syria, by disrupting the passage of Turkish goods trucks to

Jordan and the Gulf, opened a new trade route through Israel. The trucks, which are brought by sea to Haifa with Turkish drivers on board, roll off the ships and head to the Jordanian border, then further afield. Israels government is torn between keeping a low profile around the new trade route, because of lingering political sensitivities, and championing it. More than 2,000 trucks have made the journey since November 2012. Trade has gone up since the Marmara incident, says David Behrisch, managing partner of Tiran, an Israeli shipping company involved in the trans-Israel-Turkey shipping trade. Analysts and officials say that, if the two countries bury the hatchet, they could step up their relationship in areas such as military co-operation. However, this would have to await full political reconciliation, and that is not yet in sight. Israel doesnt need warm relations with Turkey, but both sides will benefit much from working relations, says the INSSs Ms Lindenstrauss.

Popularity slumps as policies fail to win over near neighbours

Middle East

Hopes that the nation would be a stabilising force have been dashed, says David Gardner
When
Recep Tayyip Erdogan, Turkeys prime minister, went on his triumphal tour of Egypt, Tunisia and Libya two years ago, he was greeted by youthful crowds that had overthrown dictators in their countries. The assumption was that Turkeys ability to expand democracy and accommodate political Islam would help guide the Arab spring countries through the trauma of transition. He was mobbed like a rock star in Cairo, just after he had won his third election at the head of the neoIslamist Justice and Development party. Barack Obama, US president, deferred to him on regional affairs. His foreign minister, Ahmet Davutoglu, was telling everybody including Bashar al-Assad, Syrias president that Arab leaders who tried to hold back the tide of change would be overwhelmed. Turkey has shown that democracy does not bring chaos but freedom, economic development and stability, and that without freedom you cannot have stability any more, Mr Davutoglu told the FT. Two years on, Egyptian demonstrators gather regularly outside Turkeys Cairo

embassy to denounce Mr Erdogan after he criticised Egypts coup dtat in July, which toppled Mohamed Morsi, the elected president from the mainstream Islamist Muslim Brotherhood. And Turkeys borders with Syria, overwhelmed by Syrians fleeing civil war, have been targeted by car bombs. The fall in both Turkish fortunes and Mr Erdogans popularity have been near uniform across the region. As a member of Nato and candidate for entry to the EU, it had been hoped Turkey would help bring stability. Yet the reasons for this fall from grace are by no means wholly Turkish. Nobody foresaw, and few now can fully grasp, how the Muslim Brotherhood, having survived 84 years of precarious semi-underground activity and finally winning power in Egypt, would implode in one year. But perhaps Mr Erdogan should have guessed. When he commended secularism to Egypt, as a common platform to protect the rights of all, including Islamists, he was attacked by the Brotherhood as if he were advocating godlessness. The military takeover in Egypt, preceded by demonstrations against Mr Morsi even bigger than the civic uprising that brought down Hosni Mubarak in 2011, came as a shock and strategic blow to Mr Erdogan. The coup took place only weeks after Turkey itself was convulsed by a civic upheaval against his perceived authoritarianism. With Turkeys long history of coups and military tutelage in mind, the Erdogan

narrative proclaims he has successfully faced down an Egypt-style attempt to overthrow his government. Comparisons between the Turkish authorities clearing of Istanbuls Taksim Square and the saga of Cairos Tahrir Square whether from government or opposition are overblown. But the damage to Turkeys reputation is real. Mr Erdogans regional compass is spinning. Turkey had a reputation as a status quo power that could not only adapt to, but also lead change, and mesh its foreign policy with commercial expansion. Now, at

Nobody foresaw how the Muslim Brotherhood would implode

home and abroad, officials say policy often mirrors Mr Erdogans erratic moods. It is not just that the government placed all its chips on the Brotherhood in Egypt and served as the hub for Syrias fragmented opposition, in which Gulffinanced jihadis many using Turkey as a route into Syria have risen to menacing prominence. Turkeys reputation in Lebanon and Iraq has also crumbled. Again, the reasons are not just Turkish. Both countries, divided by sects and still coming to terms with the trauma of civil wars, are becoming part of the Syrian frontline in the battle within Islam

between Sunni and Shia. Mr Erdogan had been carefully nonsectarian in his dealings with both countries, but seems to be retreating behind Sunni lines as the space for pluralism shrinks. But that situation is far from simple. Frustrated at Muslim failure to act on Syria, the government lambasted the Turkish secretary-general of the 57-nation Organisation of Islamic Cooperation, Ekmelledin Ihsanoglu, rather than attack Saudi Arabia, Turkeys Sunni rival and OIC sponsor. In August, Mr Erdogan criticised Ahmad al-Tayyib, sheikh of al-Azhar university in Cairo, a Sunni authority, for backing the Egyptian coup. That is the end of that man of learning, he thundered. But he said little about $12bn in Saudi and Gulf backing for the new rulers. Turkish policy has failed to secure strategic support from the Arabs, while its rivalries with Iran and Israel continue. Turkey is seeking to combine its peace initiative towards some 15m Turkish Kurds with the turmoil in Syria and Iraq, and turn a liability into an asset by appending their (mainly Sunni) Kurdish minorities on to Turkey a sort of Turkosphere that offers prosperity and a Sunni majority. As Ankara-based foreign affairs commentator Semih Idiz said last month, we have ended up in a strategic impasse while boasting of strategic depth. Turkeys regional reach appears to have exceeded its grasp.

Contributors
Daniel Dombey Turkey correspondent David Gardner International affairs editor Norma Cohen Demography correspondent Funja Guler Reporter

John Reed Jerusalem bureau chief Andrew Finkel Freelance journalist Adam Jezard Commissioning editor Andy Mears Picture editor Steven Bird Designer For advertising details, contact: Jim Swarbrick +44 (0)20 7775 6220, email: jim.swarbrick@ft.com, or your usual FT representative. All FT Reports are available on FT.com at ft.com/reports Follow us on Twitter @ftreports All editorial content in this supplement is produced by the FT. Our advertisers have no influence over or prior sight of the articles or online material.

FINANCIAL TIMES TUESDAY OCTOBER 1 2013

Turkey

Democratic themes underpin festival A touch of

Culture Istanbul has all the necessary ingredients to stage an international event, says Andrew Finkel

as it just the latest run-in between citizenactivists and the authorities, an installation questioning the nature of public art, graffiti vandalism, or as Istanbul wags would have it the citys answer to Fifty Shades of Grey? The controversy began at the end of August, when passers-by discovered a public walkway, a concrete staircase in the centre of Istanbul, had been painted in bright rainbow colours. The steps led up from the Bosphorus shoreline in the direction of streets where, earlier in the summer, demonstrators had fought to save the trees of Gezi Park. This led most to believe the daubs were yet another form of protest. This was denied by the man responsible, a retired local resident, Huseyin Cetinel. I was just trying to make people smile, he told the press. The smile did not last long. In the dead of night, municipal workers appeared to restore the steps to their original battleship grey. Outraged, the neighbourhood demanded the council repaint them. Now there are rainbow staircases throughout Istanbul. It was a civic victory that meets with the approval of Fulya Erdemci, curator of this years Istanbul Art Biennial, entitled Mom, Am I Barbarian?, the theme of which is art in public spaces. This is the events 13th outing and, to some, it seems an unlucky number. The Biennials organisers set out to generate ideas . . . that question contemporary forms of democracy and to challenge current models of spatio-economic politics. However, it was overshadowed by a physical battle for public space, with many of the scheduled outdoor venues filling with plumes of tear gas and water cannon as police and demonstrators clashed. It is a case, not so much of art imitating life, as art being overtaken by events, says Richard Calvocoressi, director of the UK-based Henry Moore Foundation, and one of an estimated 5,000 visitors from the international art community who will attend the Biennial, which lasts until November 20. Until then it is open season for artistic happenings and coincidental events include an exhibition of Anish Kapoors work in the citys Sakip Sabanci Museum, with vast onyx

An art project in the public domain works to unfold hidden conflict

sculptures that have never before been displayed. The Biennial is organised by the Istanbul Foundation for Culture and Arts, which is 15 per cent publicly funded, with the remaining part of the estimated 2m budget coming from sponsors and cultural organisations. Over the past quarter of a century, it has unquestionably primed the pump for Istanbuls transformation into an international cultural venue. These were the decades during which Turkey integrated more with the global economy, prepared the ground for potential membership of the European Union, and learned how

In step: the people of Cihangir and Findikli repaint stairs in colourful hues after council workers had painted them grey Getty

to keep its militarys nose out of politics. Nazan Olcer, director of the Sakip Sabanci Museum, says: We lived through a time when creativity was suppressed. We were ripe for an artistic explosion it was overdue. Modern Istanbul has all the ingredients of a vibrant artistic centre including a buoyant economy, according to Amin Jaffer, international director of Asian art Christies, the auctioneer. It also straddles one of the most important pinch points of world history. Anything produced in Istanbul is done against the background of an incredible natural setting and a heritage of great civilisations, he says. But the city has the additional backdrop of a political maelstrom. The biennial had a tradition of converting the citys neglected monuments into exhibition spaces. In past years, this has included using a fourth-century basilica, a sixth-century cistern, and a 19th-century royal mint. This was to be the year when it would hit the streets. As curator, Ms Erdemcis original idea was to question the use of public space in public spaces themselves. This, however, was interrupted by events in Gezi Park. She took the decision to move the Biennial out of harms way into enclosed spaces, albeit on the condition that entry was free. It changes your relationship to the art to be able to see it at leisure, rather than feel you have to consume it all at one go, she says. It was a controversial decision, attacked by some as a surrender rather than a tactical retreat. Ms Erdemci rejects the criticism. She likens the withdrawal to John Cages composition 433 in which a pianist sits at a piano but plays no music, an absence that forces its listeners to focus on natural sound. An art project in the public domain works to unfold hidden conflict. It points to what is to come, she says. To illustrate what shes talking about, she describes an exhibition she co-curated at the Tanas gallery in Berlin that was to be a preview of the current Biennial and its attempt to rethink the public realm, and the role of art in social engagement. That was on the May 25. Three days later, the Gezi Park protests began in Istanbul.

the exotic that is on the beaten track

Tourism

Peter Chapman reveals the pleasures and temptations of a first visit to Turkey
Everywhere you go, the atmospheric old market at Kusadasi draws you in. Up its winding streets and around its corners, salesmen stand at their doors, bidding you enter for a cup of apple tea as you discuss the virtues of this scarf or that carpet and look, how this piece of jewellery matches your complexion. We had a break of only six days and left our shopping until the last evening. It was rushed but, both being adept at bargaining, we cut the price of a suede jacket by half the price as marked was only for visitors who came on the cruise ships we were told, not for wiser folk like us. Still, the skill of buying is often in walking away and we pushed on to a shop selling leather handbags and purses. We chose Kusadasi for our first trip to Turkey because of the nearby ruins of Ephesus. For that journey into the past, we hired a private guide, having heard that the English of those ferrying tour groups around might not be very good and that they were intent on getting you into their favoured shops as quickly as possible. The option was relatively expensive but our guide knew the ruins well and, if anything, talked too much. Occasionally, I had to stand a few yards away to find the mental space to imagine how it was all those years ago, as the Meander river slowly silted up the port of Ephesus and brought its eventual ruin. We were left alone in the amphitheatre to imagine for ourselves St Paul telling the citys silversmiths to stop making graven images of their gods, for which antibusiness sentiments they had him thrown into jail. Any FT reporter there at the time would certainly have backed the silversmiths. Todays raging debate in Turkey about an enhanced role for Islam in the daily lives of its people felt distant from a westernorientated resort such as Kusadasi. Official strictures on alcohol had not affected supply, although it was expensive: more than 33 in

the restaurants we ate in for a pleasant, though not exceptional, bottle of local wine. The government is no doubt mindful that tourism earns more than an annual $20bn for the country. About 30m international visitors come each year and many return. Asia Minor is far enough away from most parts of Europe to be a little exotic but not too far to be a major expedition into parts unknown. At three and a half hours, our flight from Stansted to Izmir was near the outer limits of the distance I wanted to travel. The food was pleasantly familiar, as the Turkish diaspora in London had long since introduced us to its cuisine, and everyone we met was impeccably civil. Tipping was 10 per cent, if at all, and the English spoken by staff was reasonable. The same went for taxi drivers, each of whom gave us their business card and insisted that, should we want to visit Ephesus again, we would get a far better price with them.

The skill of buying in the bazaar often lies in walking away

The facilities in our hotel the LaVista on the edge of town were what they promised to be when we booked online and the views from the infinity pool towards Samos were excellent. Watching the ferry distantly make its way there offered the temptation of a trip over to Greece, but the pool invariably won. So on our final night, we headed to the market and, having rejected the suede jacket, engaged in discussion over a fake branded handbag for 300. Everyone agreed it was as good as any original and the deal was done. An escort was even arranged to show us to the restaurant we wanted to find nearby. Two weeks later the handbags clasp fell off, but I am sure it can be reattached. Various lessons can be drawn, such as never buy fake branded goods, or simply take more holidays in Turkey to accustom yourself to its ways. Obviously, it is best to avoid rushing your purchases in a Turkish bazaar.

Politicians tap into middleclass housing dream

Construction

Desire for homes can be transmuted into election gold, says Andrew Finkel
In the run-up to the 1991 general election, adverts for the eventual winner, the True Path Party, dared voters to dream an impossible dream. They showed Tansu Ciller, an economics professor who went on to become the countrys first woman prime minister, promising two keys for every household one to a car and one to a house. This vision has been at the centre of postwar Turkish politics an era in which the demographic balance of the population shifted. In 1960 Turkey was almost 70 per cent rural. Today, it is more than 70 per cent urban. Prizes went to the politicians who managed to translate the growth of the cities and the demand for houses and urban infrastructure into votes. No party has been more

successful in this than Justice and Development (AK). In 2011, it won its third term with nearly half the popular vote. Its success was partly due to that of the public housing authority, which, following AKs first victory in 2002, had built 500,000 homes, and in so doing constructed its own electoral constituency. Previous governments had wooed the new urban electorate. But they did so with scant public resources, turning a blind eye to the unofficial use of stateowned land and violations of building codes. For example, Ms Cillers promise of widescale membership of Turkeys middle class failed to materialise as the country slid into a vicious cycle of spiralling public debt, high interest rates and chronic inflation. Some lost their houses altogether after a 1994 crisis in which the lira suffered a 75 per cent depreciation. These events paved the way for the election that same year of Recep Tayyip Erdogan as mayor of Istanbul. One of his most successful schemes was the con-

struction of 17,500 low-cost homes, the Basak housing project. This was overseen by Erdogan Bayraktar, a contractor appointed to head a construction company owned by the municipality. He now heads the ministry for urban planning and development. In the first two AK governments, Mr Bayraktar was president of Toki, the Housing Development Administration of Turkey, a semi-independent leviathan that sidesteps bureaucracy by reporting to the prime ministers office. Toki is transforming the landscape of many Turkish cities. The once low-density neighbourhoods of rural migrants, housed in older inner-city districts, are being turned into high-rent commercial properties and residential tower blocks. Now the dream includes a third key the one to a garage to park the car, says Tebernus Kirecci, who runs a property advice website, emlakkulisi.com. It is the demand, not just for homes, but betterquality housing by second and third-generation newcomers to the suburbs that

keeps demand buoyant, he says. Although the construction industry accounts for 6 per cent of Turkish GDP, its links to other sectors gives it a far greater importance. This partly explains why the government puts such emphasis on keeping interests rates low, says Ilhan Tekeli, emeritus professor of urban planning at Ankaras Middle East Technical University.

The housing department is a prime instrument of patronage

He calculates there is a demand for some 350,000 homes a year and that the industry has double that capacity. The sector has retreated from countries such as Libya, where it had been strong, adding to the pressure on politicians to boost domestic demand. Even so, there is a remarkably high degree of home ownership, more than

60 per cent in a market that, by European standards, is very underleveraged. The ratio of mortgages to GDP is only 6 per cent, compared to an EU average of 62 per cent or the US figure of 76 per cent. Even though more homes are being built, the government is determined not to abandon a sector that has been central to its success. The government has adopted various strategies to stimulate the market, including making it easier for foreign nationals to buy properties. A big programme of urban clearance, demolishing buildings that do not meet stringent earthquake standards in Istanbul is also serving to increase demand. The construction of a $3bn third bridge across the Bosphorus is not simply an tasty morsel to tempt an industry hungry for big project. Critics say it is almost certainly intended to lead to the development of Istanbuls last area of greenbelt. There are also plans to create twin satellite cities on virgin land either side of the historic waterway, with projected populations of 1m each.

The government has guaranteed joint contractors, Turkeys Ankara-based IC Ictas Insaat Sanayi and Ticaret and Italys Astaldi, the toll income from 135,000 vehicles a day a figure far higher than if the bridge were merely intended for its declared aim of easing existing intercity traffic. Toki satisfies quite a different need, says Aykut Erdogu, an opposition MP who sits on the parliamentary committee that audits state-owned enterprises. He describes the housing authority as the prime instrument of government patronage. At a press conference last year he reported his committees finding that Toki had deliberately undersold land it earmarked for development to the tune of TL774m (224m). The most egregious abuse Mr Erdogu documented was by the KC Group of companies, which went bankrupt having been allowed to use TL106m worth of Toki property as collateral. The victims in this case were not just the taxpayers but also the clients who had paid for their homes in advance.

Street scene: the market at Kusadasi

Alamy

Sleeping giant of old stirs amid fiery rhetoric

Continued from Page 1

attract more foreign direct investment. Still, the government sometimes has explanations of its own for the economic problems it faces, linking them with the protests in Taksim Square against Mr Erdogans plans to redevelop Gezi Park. At the height of the demonstrations, he frequently suggested they were the work of the interest rate lobby a seeming reference to domestic and international financiers seeking to keep Turkeys growth down for their own reasons. Such rhetoric appears to have eased for now but it has not vanished entirely. Nor is it likely to; the coun-

try is on election footing. First, in March, come local polls in which the chief prize is Istanbul, stronghold of Mr Erdogans own AK Party but also the epicentre of the protests. Then, by late June, there will be the countrys first direct election for the presidency, the post to which Mr Erdogan aspires, having sworn not to serve another term as prime minister. He remains the overwhelming favourite and says his electoral support is above 50 per cent, but the country still faces months of electioneering and socially divisive rhetoric. One of the questions Turkey faces in Gezis wake is whether the country has become polarised between

the urban, largely secular middle classes who demonstrated in their hundreds of thousands and Mr Erdogans often socially conservative supporters. Last year, the Islamicrooted prime minister declared the goal of raising a more pious generation and pushed through changes allowing children to be educated at religious schools from the age of 10. This year, he championed a law restricting the sale of alcohol and banning its advertising one of the measures that inflamed many Gezi protesters. The more we concentrate on creating the ideal society in somebodys head, the more we are going to postpone the real issues

that face Turkey, such as becoming more competitive, more innovative, says Umit Boyner, the businesswoman who formerly headed Tusiad, the confederation made up of the largest private groups. This country is going to have a working age population of 65m people by 2030; if we dont educate those people well, we will have a huge problem on our hands. A related question is whether the country is not just perceived to be more authoritarian than before, but has become so. While the Erdogan government alleged the demonstrations were in part the work of terrorists and provocateurs, its opponents denounce what they say is police

brutality and government acts of revenge against those deemed to oppose it. Senior business executives none of whom were willing to speak on the record also highlight allegedly partisan moves taken by officially independent bodies not just as a concern in itself but as a deterrent to foreign investment. Among such measures, the countrys Savings Deposit Insurance Fund has appointed a former ruling party MP as editor-in-chief of the Aksam newspaper. And, to resolve a shareholder split that had all but paralysed the company, the Capital Markets Board appointed to the board of Turkcell, the biggest mobile group, three members of

the ruling Justice and Development party, including two former ministers. Most notably, tax investigators arrived in force at subsidiaries of Koc Holding, the countrys biggest company by any measure, after

65m
Estimated number of working age people by 2030

Mr Erdogan spoke of his anger that one of the groups hotels, the Divan, sheltered Gezi protesters, although the government says the two developments are wholly unrelated. Meanwhile, the prime minister seems to cut a more solitary figure

unchallengeable in his influence over the government, but at odds with a large part of the population. Nor are Turkeys external relations immune from the atmosphere of antagonism: in a Middle East in turmoil, Ankaras relations with neighbours and near-neighbours such as Iran, Iraq, Syria, Israel, Egypt, Lebanon, Saudi Arabia and the United Arab Emirates range from difficult to deadly. Such obstacles may be far from insuperable. Trade has flourished with Israel and Ankara argues it is on the side not just of justice but also of history in opposing the rule of Syrias President Bashar al-Assad and the military takeover in Egypt. Despite its slowdown, the

Turkish economy is forecast to grow much faster than the eurozone. And in political terms Mr Erdogan could still tack to the centre. In late September he was promising a democratisation package to address demands made by the countrys Kurdish minority, as well as other groups. That could bolster the countrys faltering peace process with the outlawed Kurdistan Workers Party. No other Turkish leader in recent history has presided over such a sustained period of growth and pushed through more meaningful reforms. But, in his second decade of office, the question is whether he will build on that record or, instead, sabotage it.