Turkey
Country Report
University of Chicago
Graduate School of Business
April 2000
Phil Doyle
Jat Gullapalli
Pablo Hernandez
Kimberly Russell
Laura Walker
Turkey Country Report
Prepared by:
Philip Doyle
Jat Gullapalli
Pablo Hernandez
Kimberly Russell
Laura Walker
University of Chicago
Graduate School of Business
Business 487
April 2000
Abstract
The paper examines Turkey’s attractiveness to foreign investors in year 2000 and the subsequent five-year period. Conclusions are drawn from a combination of desktop research of press and academic journals, interviews with U.S. and Turkish journalists, businesspeople, politicians, and academics, and a two-week investigative trip to Turkey in March 2000. Factors affecting growth and structure of the Turkish economy are analyzed with respect to investment risk implications, including: EU candidacy and foreign relations; political stability; military influence; inflation reduction; privatization; infrastructure inadequacy; Islamist politics; and the Kurdish issue. The paper concludes that, while risks to backsliding on many of the examined issues exist, Turkey’s growth prospects are good, and the country now represents an attractive bet for investors relative to past years.
We would like to thank our sponsors CNA Insurance, Deutsche Bank, Diamond Technologies,
and Pfizer Pharmaceuticals for making this project possible. We would also like to
extend special thanks to Can Cadamoğlu and Izzmet Kohen for their extreme generosity.
Turkey Country Report, April 2000
Table of Contents
Introduction 1
Political Factors 2
European Union 2
Political Stability 3
The Military 5
Economic Factors 6
Inflation 7
Privatization 8
Infrastructure 9
Social Factors 11
The Kurds 11
Islam 13
Conclusion 16
Appendices i
Appendix A: Banking ii
Appendix B: Economic Development Trends iii
Appendix C: Turkey’s Kurds: Background Information iv
Appendix D: Upcoming Election v
Appendix E: Political Parties vi
Appendix F: Economic Trends vii
Appendix G: Contact List viii
Appendix H: Bibliography xii
Appendix I: Comments to Next Year’s Team xiv
Turkey Country Report, April 2000
Introduction
Discussion of Turkey in Western circles draws a wide range of curious questions. Educated and traveled Westerners are well aware of Turkey’s current sociopolitical factors and consider Turkey a potential emerging market success. Many that have never traveled to Turkey have a different reaction. While fascinated by Turkey’s unique and rich history, they are unsure what to think about Turkey given media coverage of human rights violations and political instability over the past two decades. Each of these reactions is simultaneously quite valid – the country is everywhere and nowhere the same. The country’s population of approximately 60 million people is 99% Muslim, but considers itself secular. It is also governed by a coalition democratic parliament, but was founded by a military general, Mustafa Kemal, and the military retains primary power. It has periods of spectacular real GDP growth (7.3% and 7.6% in 1996 and 1997, respectively) followed by periods of contraction (-5.0% in 1999); inflation has been volatile throughout the late 1990s culminating in a rate of 69% during 1999. Finally, Turkey is uniquely located at the crossroads of Europe and Asia.
A Model for Factor Analysis... In creating a generic model to analyze any country from an investment perspective, it is important to study political, economic and social factors to reach a conclusion. Our analysis of Turkey focused on factors in these broad areas. We studied political factors such as the political structure, the power of the military, and the progress of Turkey’s relations with the EU. We studied economic factors such as inflation, privatization and infrastructure. Finally, we analyzed social factors such as Turkey’s ability to manage conflict with Islamic groups as well as its unofficially recognized Kurdish minority. The factors that we chose to study and present in this report are those that will have the primary impact on Turkey’s investment prospects going forward. These factors reflect Turkey’s ability to manage economic and social development in the future, and the degree to which an investor can expect stability, certainty, and consistency.
A good bet going forward... After analyzing these variables, we conclude that at the present time, Turkey’s investment climate offers high expected returns with a reduced risk profile than at previous times in its history. Politically, Turkey is likely to experience a smooth transition to a more popular democratic form. Economically, the likelihood of lower inflation and structural reform will lead towards an increasingly market-based economy. Finally, Turkey’s social factors are, for the moment, “quiet”. The unique combination of these factors leads us to conclude that Turkey represents a good investment bet going forward.
Political Factors
Throughout the last decade, Turkey’s political instability has led to ineffective governance of the country. On three separate occasions the military has stepped in to “rescue” the country from political chaos, thus relieving politicians of the responsibility of their actions. In the past year, the military has relinquished some power, political cooperation has improved, and the EU has emerged in as the new disciplinarian.
European Union
1-Year Outlook: EU candidacy will continue to underlie government support for democratic and social reforms.
5-Year Outlook: EU membership is unlikely, but Turkey will continue to strive for increased alignment with the West, motivating further economic, political and social reforms.
It is highly unlikely that Turkey will be admitted into the European Union within the next five years, and even optimists in Turkey talk about a timeline for accession measured in decades rather than years. However, this long-term goal will continue to motivate economic, legal and social reforms, bringing Turkey more in line with European norms in these realms.
Although westernization has always been an ideal of the Turkish Republic, Turkey opened up to the West only in the 1980’s when Prime Minister Turgut Ozal liberalized the economy, facilitated travel abroad for Turks, and lifted trade barriers and currency controls. Since then, Turkey has prospered and membership in the EU, proposed as early as 1960, is more realistic now than at any other time in the past. The European Union represents the “West” and membership would be the culmination of Atatürk’s dream of making Turkey a secular, Western nation. For this reason, membership has deep resonance across most constituencies in Turkey. The military, which still considers itself keeper of Atatürk’s vision for Turkey, supports eventual membership in the EU. The business community sees long-term benefits to joining, feeling the negotiation process and membership itself would impose an outside discipline on the civilian government to be more fiscally responsible. Businesspeople are hard-pressed to identify tangible economic benefits beyond those achieved through the customs union signed in 1996, and instead seem to support EU negotiations in an effort to maintain pressure on the government to reform. The general public accepts the goal primarily because it has been a national goal for such a long time. The Kurdish minority feels that membership would guarantee it the elusive rights it has been seeking. Just about the only group not committed to the goal are the Islamists, but even the main Islamist party does not oppose membership outright.
One potential flashpoint for future EU-Turkey relations is the very different expectation of each side concerning the nature and extent of the changes required of Turkey. While most European Union members envision significant strides in the area of human rights in Turkey as a prerequisite of membership, the Turks feel that this is comparatively minor issue. While Turkish governments have concentrated their reform efforts on streamlining government and transforming the economy, the West has impatiently waited for the government to guarantee the abrogated rights, such as freedom of speech and assembly, now outlined in the Constitution. Similarly, Turkey views outside insistence on the “resolution” of the Kurdish conflict with suspicion resulting from the memory of the 1920’s attempt by the Great Powers to carve up the remains of the Ottoman Turk Empire. History leads many Turks to view the motives of the West as mere pretexts to keep Moslem Turkey out of the EU.
Turkey’s historical enmity with Greece, already an EU member, feeds Turkish skepticism about the eventual success of its EU bid. Greece has in the past blocked attempts by Turkey to advance its EU candidacy. Greece has also put forward proposals to include Greek Cyprus as an EU member, something Turkey vehemently opposes. Other EU members have recently been more active in putting roadblocks on Turkey’s path to accession, allowing Greece to moderate its position. However, should Turkey move to satisfy the preoccupations of these other EU members, the right of current members to veto new entrants would almost certainly put Greece in the role of spoiler once again.
Ultimately, most European nations realize that, despite the obstacles, including Turkey in the EU is more desirable than excluding it. Turkey has continues to have geopolitical importance to Europe due to its proximity to large oil producing regions and its control of the transportation routes for this oil. If brought into the EU, it could also serve as a stabilizing influence on otherwise volatile regions such as the Caucasus and Central Asia to the east and Iraq, Iran, and Syria to the south. This means that Europe will be careful not to discourage Turkey from the long-term goal of joining the Union, but progress towards that end will be slow.
What to watch for:
· A specific timeline for Turkey’s accession, which has not been agreed until now, will indicate that that the candidacy is being seriously considered by EU nations.
· Changes to the Turkish constitution removing abrogated rights will speed the process.
· Continued commitment to the privatization and inflation reduction program will put Turkey’s economy in better position to meet convergence limits for inflation and government budget deficit.
· Progress to resolve the longstanding tensions with Greece over Cyrus will signal the seriousness of Turkey towards membership and the willingness of Greece to allow it.
Political Stability
1-Year Outlook: Assuming a new president is easily chosen on May 16 and a smooth transition is achieved, Turkey is expected to continue on its path of economic and social reform. If the parties have trouble coming to agreement on a candidate, reform is likely to take a back seat to politics until the matter is settled.
5-Year Outlook: In the long run, social and economic reform is unlikely to be derailed by political infighting. The government’s stance on most policies does not change substantially despite who is elected. Turkey is likely to experience greater political stability as evidenced by reduced government turnover and increased responsiveness to public and business demands.
Turkey’s political system has traditionally been unstable and ineffective, as characterized by frequent government turnover (six coalition governments in the last seven years alone) and a chronic inability to respond to the needs of its constituents. Turkey’s political structure, consisting of a multi-party parliament directly elected by citizens, lies at the root of this problem. Partly because of the proliferation of political parties, no party ever wins a clear majority, so time is spent negotiating the selection of a prime minister and appointment of key cabinet positions. Little policy-making or governance is accomplished during the long and frequent coalition negotiations. Additionally, even after the coalitions are formed, many times party leaders are unable to work together, and the government dissolves shortly after formation. For example, in 1995, parties led by Mesut Yilmaz and Tansu Çiller formed a coalition that dissolved within three short months.
Turkey’s power structure exacerbates the instability and inefficacy engendered by its political structure. The lack of political power combined with the strong influence of the military creates a moral hazard for each ruling government, which in the past have been able to operate without full accountability to the people. Additionally, the lack of public memory longevity contributes to this problem; politicians who are not held accountable for their actions are able to abandon one agenda in favor of a new one with impunity.
The risk of moral hazard and the power structure seems to be changing recently. The current coalition, formed after the April 1999 elections, has been more effective in passing reform than the governments in power throughout the 1990s. There are serious differences of opinion between Prime Minister Ecevit’s center-left Democratic Left Party (DSP) and the more conservative Nationalist Action Party (MHP) on such questions as the role of Islam in politics and society and on some aspects of how to deal with the Kurdish issue. However, the government has succeeded in forging a consensus on economic questions and passing some controversial, albeit limited, changes to the Constitution. Social reforms include:
§ In June, the Turkish parliament passed an amendment to the Constitution removing military judges from the State Security Courts. This removed an anticipated objection by the European Court of Human Rights over the case of PKK leader Öçalan.
§ The Minister of State announced in June that sentences for policemen convicted of torture or ill treatment would be increased, and laws hampering prosecution of state officials would be reformed.
Whether these social reforms are truly enforced is a different story, and it is likely that further social reform will be required. Other types of reforms that were recently passed or that are under consideration in the parliament include economic reform (social security reform, reduction of the government payroll, and improvements in tax collection) and programs to increase the level of foreign investment (in particular international arbitration rules and privatization processes).
Turkey benefits from a fair justice system and a strong business community. Big business plays a proactive role and is extremely vocal in demanding democratic as well as economic reforms. TÜSIAD (the Turkish Industrialists’ and Businessmen’s Association) is a powerful non-governmental association that plays a visible role in working with the government to establish a Western-style market economy. Its progressive reports having earned it a reformist image, centered around the business community’s vested interest in EU membership.
What to watch for:
· An easy transition to a new president in May 2000 would be an indication that cooperation among political parties is taking precedence over the personal ambitions of political party leaders. On the other hand, a rocky election would likely increase infighting among political parties, thus taking attention away from economic and social reform, reducing the public's new confidence in its government to act effectively and efficiently.