When the AK Party was elected to lead Turkey in 2002 it was known as the sick man of Europe because of the poor health of its economy. Among its biggest problems were soaring inflation, a violent boom/bust cycle and rampant corruption caused by the military’s influence in government (big contracts given to company owned by general’s brother in law rather than the best vendor).
But since the AK Party came to power it has consistently grown and bettered itself in almost every way possible to the point where, not only is it no longer one of the sickest economies in Europe, but is one of the strongest economies in the world. Here’s how.
Reforms and Stability
The AK Party won power on a wave of discontentment at the corruption and economic mismanagement and took over an economy in the aftermath of one of its frequent crashes. That crash crippled the banking system and the AK Party heavily reformed it as a result, including increasing reserve levels and posting an office of the central bank in every branch to take daily reports. That, combined with Turkey’s small mortgage market and subsequent small exposure to the sub-prime contagion meant Turkey’s banking system was able to stand firm against the financial crisis and came out of it relatively unscathed.
The AK Party had also paid down Turkish debt from 74% of GDP when it took power in 2002 to 39% of GDP in 2009, and debt to the IMF from $23.5 billion in 2002 to $7 billion in 2009 and to 5.5 billion in 2011 according to Prime Minister Erdogan. It is poignant that Turkey ended its standby arrangement with the IMF in 2010, and 2 supposedly established markets Ireland and Portugal asked for emergency IMF aid shortly after.
The AK Party also consistently lowered inflation, with a big drop from 45% in 2002 to 25.33% in 2003 and then to 8.6% in 2004, before staying between 8 and 10 per cent until 2009 when it dropped to 6.2%. Thus, when the financial crisis struck and Turkey reduced its interest rates, it wasn’t just a rapid response to stem the crisis, but a measured policy response to falling inflation. This gave investors the confidence that interest rates wouldn’t shoot back up just as quickly, or certainly more confidence than many places could offer.
Growth
In 2001 Turkish GDP contracted by 5.69%. This was preceded by a 6.77% growth in 2000 and a 6.16% growth in 2002. This kind of cycle was normal in Turkey, in fact before 2002 the economy has a crash and year long recession about once every 5 years. But that cycle is broken by the AK Party, as GDP then grows at an average annual rate of around 6% between 2002 and 2009, at which point it suffers a year long recession, but as a result of the international crisis, not an internal disaster as was the norm pre-2002.
After a yearlong recession Turkey comes out of the financial crisis one of the strongest economies in the world. The recession officially ended with a 6.4% growth in Q4 2009 before soaring into double digit growths of 11.7% and 10.3% respectively in Q1 and Q2 2010. Growth then had a soft landing at around 6% for the next 2 quarters leaving the yearend total a strong 8.2%. Growth then accelerated back into double digits, with 11% in Q1 2011 and 8.8% in Q2 Turkey was officially the fastest growing economy in the world in both Q1 and 1H 2011. Yearend figures for 2011 haven’t been released yet but we know it was a good performance in the second half as well.
Standing Out for all the Right Reasons – the Golden Boy of Europe
Lest we not forget that Turkey once stood out as the sick man of Europe, it has come to stand out for all the right reasons. During all this strong growth in Turkey the EU has suffered from abysmal growth in 2010 and narrowly avoided a double dip recession in 2011. Not to mention the sovereign debt crisis and the possibility that several EU economies including 2 of its 3 biggest would go bankrupt.
There we have Turkey with a strong stable banking system including high liquidity, a strong stable economy including growing employment, soaring exports and surging FDI and a population growing rapidly in numbers and affluence, it is easy to see why we would call Turkey the golden boy of Europe. Many economies can match Turkey on growth, but in terms of the overall package of stability and safety of investment as well as growth Turkey is set apart.