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Turkey: Taking Stock of a Decade and the Prospects for the Economy


Abstract and Figures

An assessment of the economic policies and performance of Turkey between 2002-2014 and prospects for 2015-2016.
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AKP Justice and Development Party (Adalet ve Kalkınma Partisi)
ASKON Association of Anatolian Tigers Businessmen
(Anadolu Aslanları İşadamları Derneği)
BDDK Banking Regulation and Supervision Agency
BLS Bureau of Labor Statistics - USA
CBT Central Bank of the Republic of Turkey
CHP Republican Peoples’ Party (Cumhuriyet Halk Partisi)
DGUV Deutsche Gesetzliche Unfallversicherung
(German Social Accident Insurance)
EM Emerging Markets
EU European Union
GDP Gross Domestic Product
GP General Practitioner
HDP Peoples' Democratic Party (Halkların Demokratik Partisi)
HTP Health Transformation Program
IIF Institute of International Finance
IMF International Monetary Fund
ICT Information and communications technology
İŞKUR Turkish Labor Agency (Türkiye İş Kurumu)
MHP Nationalist Action Party (Milliyetçi Hareket Partisi)
MTP Medium Term Program
MÜSİAD Association of Independent Industrialists and Businessmen
(Müstakil Sanayici ve İşadamları Derneği)
OECD Organization for Economic Cooperation and Development
OSHA Occupational Safety & Health Administration USA
PISA Programme for International Student Assessment
PPP Purchasıng Power Parity
R&D Research and Development
RUCL Relative Unit Costs of Labor
SGK Social Security Institution
SME Small and Medium Enterprises
SGK Social Security Institution (Sosyal Güvenlik Kurumu)
TDZ Technology development zones
TFP Total Factor Productivity
TI Transparency International
TİM Turkish Exporters Assembly (Türkiye İhracatçılar Meclisi)
TMSF Savings Deposit Insurance Fund (Tasarruf Mevduatı Sigorta Fonu)
TOBB Federation of Chambers of Commerce and Industry
TOKİ Housing Development Administration
TTGV Turkish Technology Development Foundation
Turkstat Turkish Statistics Institute
TUSKON Turkish Confederation of Businessmen and Industrialists
(Türkiye İşadamları ve Sanayiciler Konfederasyonu)
TÜBITAK Scientific and Technological Research Council of Turkey
TÜSİAD Turkish Industry and Business Association
(Türk Sanayicileri ve İşadamları Derneği)
WB World Bank
WEO World Economic Outlook (IMF)
WHO World Health Organization
VAT Value Added Tax (KDV in Turkish)
YÖK Higher Education Council (Yüksek Öğretim Kurumu)
YTD Year-to-date
Introduction 4
Recent Economic Developments 6
Taking Stock of the Last Decade 10
Declining Savings 10
Genesis 13
Myths and Tales 13
Growth 15
Inflation 18
Monetary Policy and Interest Rates 20
Fiscal Management 22
Employment and Labor Markets 25
Wages and Labor Costs 31
Social Protection 34
Income and Regional Inequalities 36
Poverty Alleviation 44
SME Development 41
Incentive Framework 48
Governance and Investment Climate 50
Healthcare 56
Education 66
Other Sectors/Issues 76
Prospects for 2015 and Beyond 79
The Political Landscape 80
Global Economic Environment 84
Outook for Turkey 85
This note is prepared to provide an assessment of Turkey’s economic performance since the
beginning of the millennium and current situation of its economy. It also provides a discussion of
the prospects for the economy in the remainder of 2015 and 2016.
Turkey is now undergoing a difficult economic and political period. Parliamentary elections are
scheduled for June 7, 2015 coming on the heels of serious corruption allegations by the highest
echelons of the state, ensuing cover-up efforts by curtailing civil liberties and heavy-handed
police intimidation.
The ruling Justice and Development Party (AKP) which has been in power since 2002 enjoyed
growing political support during its first term in the office, reaping the benefits of stabilizing
macroeconomy, rapid economic growth and private consumption, buoyed, to a large extent, by
the expansion of global financial flows and trade.
The beginning of AKP’s second term from 2007 to 2011 coincided with the global financial crisis.
The momentum of growth gave way to questions of sustainability in the minds of the AKP
leadership who started focusing on accelerating their agenda making their core political base
rich and social engineering to dismantle the secular parliamentary system which they saw a relic
from Ataturk and, possibly, a hurdle for installing the theocracy they have had in mind.
Since then, the country’s political landscape was marred with a series of coup allegations,
excessively long trials and incarceration of high ranking military and opposition, all of which
turned out to be part of a witchhunt with fabricated evidence. It was probably the worst possible
way of reducing tutelage of the military on Turkey’s politics. As the 2011 elections approached,
then the Prime Minister Erdoğan became increasingly polarizing and authoritarian. The Gezi
events, protesting authoritarianism was dealt with police violence which lead to loss of lives.
Since a short-lasting recovery in 2010 and 2011, the economy has been muddling through as
long-term capital flows slowed down and the investment was confined to construction which
Erdoğan sees as the engine of growth, notwithstanding the bubble being created by the unsold
inventory of new housing.
Revelations about the high-level corruption since 2013, profusely denied by Erdoğan and
members of the ruling party, solidified the political split in the country. The upcoming elections
are crucial. For the incumbent president who needs a two thirds majority to revamp the
constitution to install a “a la turca presidential rule is crucial. For the opposition, it is an
opportunity to stop helplessly watching the ruling party pass any legislation it wishes.
Unfortunately, Turkey is suffering a serious information pollution at the moment. Erdoğan and
AKP leaders have no qualms about playing fast and loose wıth statistics and economic data, or
for that matter, anything factual. With a large media apparatus at their disposal and opposition
parties which are unable to pull their weights, the disinformation and propaganda campaign, at a
scale that would make Goebbels jealous is now in place. According to a recently established and
relatively independent fact checking organization, “Doğruluk Payı”
, more than half of the
statements made by AKP politicians were “far from the truth” in March 2015. While there are
inaccurate statements by the representatives of opposition parties, they are no where near the
distortions made by the ruling party.
It is neither surprising nor unusual for the politicians to lie or misrepresent truth around the world.
What is appaling in Turkey is the degree with which universal concepts and facts are distorted,
often in the form dissimulation. This modus operandi has worked for AKP in the past in Turkey
which has a high density of low information voters (LOI). Excessive use of religious references in
daily political life, even to justify ethical breaches or criminal activities, find traction among LOI
who do not bother to question the sincerity of self-agrandized piety of their rulers.
Inaccurate assessment of the current economic situation also leads to inaccurate assessment of
the prospects. It is the intention of this report to provide accurate data and analysis to allow
readers separating the wheat from the chaff.
While misrepresenting historical or actual data has been a problem in Turkey’s politics, promises
about the future direction of the economy are more problematic. One of the AKP’s notable
campaign promises is to put Turkey among the ten largest economies in the world by 2023.
Given the set of policy choices that have been made by AKP governments, this is at best a pipe
dream, as it will be discussed in the prospects section later in this report.
An important point to make in this introduction is that there are several references to the
incumbent head of state in different parts of the report. This is not a political document and its
intention is not to “pick on” a politician in particular. Those references arise from the need that
almost in every policy area, Erdoğan wants to put his stamp, often misguided or misinformed and
at odds with the government’s own institutions. As is the fate of the countries ruled by “one man”,
members of his own party do not challenge him because of the fear of losing theirs seats,
bureucrats for their jobs and the rest of the country for harassment by the police, tax authorities
et al. It is therefore difficult to discuss policy issues without making specific references to his
interventions to policymaking. Opposition parties which should challenge him more vigorously
often fall pray to his game of throwing a fake/strawman agenda in front of them while the main
issue is sidelined.
So far, what has been sold as New Turkey”, or Erdoğan’s utopia, sounds for at least the half, if
not the majority of the of country’s dystopia. If the last few years are any indication of what “New
Turkey might entail, perhaps “klepto-quasi-theocracy” might be the best term to describe it,
Elections will tell us how eager the people are to put up with more deceit, corruption,
lawlessness, piles of concrete everywhere and unending tirades of playing the victim of
international conspiracies on TV news night after night.
Türkiye Siyasetinin ‘Doğruluk Payı’ Ortalaması
Recent Economic Developments
Following another politically tumultuous
year in 2014, Turkey saw a significant
deceleration in growth, increasing
unemployment rates and higher
inflation. GDP growth was 2.9 percent
against the target of 4 percent in the
2014-2016 Medium Term Program
(MTP) of the Government which was
later revised down to 3.3 percent in the
2015-2017 MTP document.
Private consumption growth slowed
down to 1.3 percent, providing 31
percent of growth and public
consumption which was ramped up to
4.6 percent contributed 17 percent of
growth. (Figure 1)
Heavy intervention by the Housing
Development Administration (TOKİ) in
private sector construction industry
resulted in a 9.4 percent growth in
construction related private investment
representing a turnaround from 0.7
decline experienced in 2013. Overall
private investment growth, however,
decelerated to 0.5 percent, on account
of the 3.7 percent decline in private
non-construction investment.
There are a number of factors behind
the slowdown in private investment.
Among these have been the increasing
political and governance risks,
slowdown in domestic demand,
tightening domestic credit and
difficulties in arranging for external
Following a record annual growth of 24
percent in 2013, public investment
declined in each of the four quarters
and by 8.8 percent in 2014 as a whole.
Net exports contributed 60 percent of
the GDP growth as imports of good
and non-factor services (g&nfs)
declined by 0.2 percent against the 6.8
percent increase in real terms in
exports of g&nfs, responding to the
depreciation of the real effective
exchange rate index mainly during the
last quarter of 2013 and the first
quarter of 2014. (Figure 2). Following a
decline in exports of goods in 2013,
they picked up in 2014 with
automobiles, electric machinery,
electronics, knitted and other clothing
leading. The top ten commodity groups
accounted for 54 percent of total
In a number of key economic
indicators, there were deterioration as
the economy had to adjust to lower
short-term capital flows than earlier
years and smaller current account
deficit. (Figure 3)
Downward trend in industrial
production growth and capacity
utilization rate was coupled with rising
unemployment where the non-
agricultural unemployment rate
reached 12.9 percent, the highest level
since 2011.
Consumer confidence index has been
on a decline since April 2014. It was at
its lowest level since the index was
redesigned in 2012.
The same is true
for the sub-index measuring
expectations of about economic
conditions during the next twelve months. In terms of sectoral confidence indices, construction
suffered a jolt in early 2014 but slightly increased since then. Retail trade index has been
declining since the second half of 2014.
While the revised index is not compatible with the previous one, if, by making heroic assumptions, they could have
been spliced, the March 2015 level of 64.4 in the revised index would have been 53.4 and significantly lower than 68.9
for December 2008, the lowest recorded observation for the 2003-2012 period.
There was a significant deceleration in the
growth of banks’ lending to the economy and
consumer loans during 2014 as part of the
Central Bank’s efforts to bring inflation down.
These efforts, including the management of
policy rates were met with a rather strange
reaction from Erdoğan who was elected as
the president of the country in a three-way
race, with 51.8 percent of votes not a
resounding success for presidential
elections. The Central Bank has resisted
calls to lower the rates for sometime,
tinkering at the margins, but the ensuing
political duel led to jolts in the exchange rate
after every Erdoğan statement criticizing the
Central Bank policies. (Figure 4) While there
have been several other factors affecting the
exchange rate such as the weakening of
Euro, worse than expected performance of
exports since the beginning of the year,
unorthodox interventions by the president of
the country added to the uncertainties
surrounding Turkey’s economic policies.
Between January 15 and March 20, close to
$27 billion of portfolio investment in the form
of stocks, government securities and repo
held by non-residents. Non-residents’
holdings of stocks declined by $15 billion
while governments securities by about $10
billion during this period.
Pressures on foreign exchange markets are
reflected in the banks’ net FX position which
has been in red since July 2014.
Correspondingly, gross foreign exchange reserves of the Central Bank declined by $9 billion and
net foreign assets by $4 billion during the same period.
Recent depreciation of the lira has stretched the balance sheets of the corporate sector as its
dollar denominated external debt account for about 60 percent of total external debt of the
corporate sector. Their dollar debt obligations have increased by about a quarter compared to
April 2014. While companies exporting in dollars are hedged, others importing in dollars and
exporting in euros as is the case for most of the manufacturing - , they will have to deal with
rebalancing their balance sheets.
More importantly, Turkey’s main source of external financing since 2010 has been short-term
capital flows in the form of portfolio investment and short-term borrowing. As these development
lead to their drying up, the economy will need fundamental adjustments.
Taking Stock of the Last Decade
Declining Savings
Turkey has a low savings economy that has
relied on external capital flows to finance
investment or consumption-driven growth
during the last decade. (Figure 5) Among
the reasons for low and declining household
and corporate savings rates are systematic
leveraging of households with credit card
and consumer debt, a relatively shallow
financial market
, financial illiteracy, infancy
of non-bank financial instruments, high
dependency ratio of the young population
and a lopsided tax structure.
Since 2008, the Government has
encouraged policies to stimulate
consumption of durables, in part to bolster
the appearance of rising purchasing power of
the population. Credit card and consumer
debt skyrocketed from 3 percent of GDP in
2003 to 21 percent in 2014. (Figure 6)
Mortgage lending started to gain momentum
after 2005 reaching 7 percent of GDP. While
the new lending instruments have helped
financial deepening, the progress on the
diversification of the asset side was limited.
With domestic savings rates hovering around 15 percent of GDP during the same period,
investment rate has been constrained by the availability of external financing at about 20 percent
of GDP against an average real growth of 3.2 percent, pointing out to the low efficiency of capital
(or relatively high ICORs). The relationship between the country’s ability to run up current
account deficits and GDP growth during the 2007-2014 is clear. (Figure 7)
Net foreign direct investment flows peaked at $20 billion in 2007, averaging 15.4 percent of gross
fixed private investment during 2005-2008, contrasted to 8.1 percent during 2011-2013. (Figure
8) The shift in the nature and maturity composition of external financing from pre-2008 to post-
2010 period was drastic. (Figure 9)
In terms of the performance of equity markets, based on MSCI indices dollar based, large and
mid-cap- show that returns over 1-year, 2-year, 3-year, 5-year periods were negative while it was
3.6 percent over 10-yr period, ranking the 16th, below the Philippines (15.3 percent), Indonesia
(11.7 percent), China (11.1 percent) and emerging markets average of 6.5 percent
In 2009, 78 percent of gross household financial wealth was held in liquid assets.
They were calculated with data as of April 6, 2015.
Short-term portfolio investment flows have
provided handsome returns for investors
along with relatively stable economic
envıronment until recently (Figure 8) Not only
the rates of Turkey’s local currency bonds
were significantly higher than other EM
countries, the yields from Turkish papers
were very attractive because of the
appreciation of the currency for non-resident
Investment as a tool of “rent generator”
focusing on non-tradables such as housing
while borrowing from abroad to finance it has
not really helped put the country on a
sustainable growth path. Instead, boom and
bust cycles, accentuated by the structural
fragilities of the economy characterized much
of the past fifteen years.
One of the factors behind Turkey’s ability to attract short-term capital flows (hot money) was the
hype created about the performance of the economy and underlying policy framework. There are
three distinct phases of the AKP rule. The first is the 2003-2008 period during which Erdoğan
and the rest of the party played the “good boy” role, particularly for the Western audience while
learning and testing which buttons to press to enable state capture. The second phase covers
the 2009-2012 period during which efforts focused on expanding control over economic and
financial resources and, when needed, play the “good boy” act politically. During the third phase
which started in 2013, the real AKP came out of the closet, shedding all pretentions and
inhibitions. It also showed that the so called “democratization” of the country that AKP has been
advertising was a scam, covering up Erdoğan’s insidious move to establish a one-man
dictatorship reminiscent of strong-man Arab regimes.
After hitting the most severe crisis of its recent history in 2000-01 that led to a 7.9 percent decline
in GDP in 2001 and an unemployment rate of 10.3 percent in 2002, the ruling dysfunctional
coalition government put in place and started implementing a stabilization program supported by
the IMF. Significant cuts in public expenditure, strict budget discipline coupled with the autonomy
granted to the Central Bank under proved to be successful in stemming the financial crisis and
helped bring inflation down and restoring growth. Banking sector was restructured and problem
banks were liquidated at a cost of $47 billion (about 30 percent of GDP). As the stabilization was
starting to take root, the some of the parties in the coalition government became reluctant to
implement structural reforms, leading to early elections in November 2002.
Nearly every party represented in the pre-2002 parliament lost all of its seats in the elections.
AKP took 363 out of 550 seats, and the Republican People’s Party with roots went back to the
foundation of the republic in 1923, won 178 seats. The remaining nine seats went to
independents. AKP that held no seats in parliament before the 2002 elections was established a
year before as a splinter from the banned Islamist Refah Party.
The new AKP government unexpectedly and unprepared - came to power in late 2002. Its
election platform claimed to be a democratic, conservative and not a religious party unlike its
predecessors and promised to fight against corruption, political bans/restrictions and poverty. It
espoused liberal economic policies for a market economy and implemented the stabilization
program negotiated by the previous government to the letter. The government signed up for all
the structural reforms that sounded good to the markets and the international community. It was
also adamant about its commitment to accession to the European Union.
Initially, Erdoğan relied on the disciples of the Gülen movement some of whom were already
injected into the bureaucracy, in particular in the judiciary and the police force, others were
experienced in the private sector, running Gülen associated businesses to help his
administration. The Gülen people who owned several media outlets were also well versed in
public relations and they played an important role in “advertising” that the AKP rule was creating
an economic miracle in Turkey.
Buoyed by global capital flows in the first half of the last decade and responding to the
stabilization program, the economy bounced back quickly and became among the fastest
growing economies in the OECD in 2004. While the stabilization program was implemented with
rigor, structural reforms have been pursued with less vigor with the exception of privatization.
A key success of the AKP governments has been to make sure that macro balances did not go
out of whack despite a number of close calls. A number of key reforms such as the tax, social
security reforms lagged. The burden of fiscal adjustment fell on the expenditure side while
indirect taxes became the main source of revenue, weakening competitiveness of the economy.
One of the PR successes of AKP was to use the “structural reform” jargon very effectively with
the international finance community. Initially, it stuck to policy anchors of the IMF program and
the EU accession process; but started to redefine universal concepts. The key post-crisis reform
was the financial sector reform that included closing down insolvent bank, creation of the
Banking Regulation and Supervision Agency (BDDK) and shoring up prudential regulations in
2001. It was already completed to a large extent which allowed the incoming AKP government to
pick and claim ownership to a lot of low hanging fruit. Not only the remaining agenda in the
financial sector reform was jettisoned, stronger prudential rules were relaxed to allow state
owned banks to extend loans in exchange for political support, outright bribes and under
conditions which can be defined as nepotism.
Similarly, “privatization” was seen, by the incoming ruling party, as an opportunity for selling state
assets to family, relatives, sycophants and those who agreed to lend political and financial
support to the party for a song. During the 2003-2014 period, privatization yielded $52.2 billion
multiples of $8.1 billion for the 1986-2002 period. With others such as interest income, dividends,
total revenues of the privatization administration was $57.5 billion. Of this, only $38.9 billion was
transferred to the Treasury, most of which was recorded as revenue. In principle, proceeds from
privatization should be recorded below the line and used to pay down public debt. This practice
was stopped in 2008 after the stand-by program with the IMF ended. During the AKP rule, a third
of privatization proceeds came from block sales, about half from asset sales and only 17 percent
from “mass privatization”.
“Judicial Reform” meant the attempts to institutionalize direct government control of the judiciary,
blocking corruption investigations and imprisoning journalists and political opposition in
contravention of EU principles and past reforms while it was presented to the public as part of
process of harmonization with EU norms. “Improving investment climate” meant installing
invisible barriers to entry only allowing those belonged to the AKP club while forcing out others
out of their business by imposing excessive tax fines, excluding them public procurement and
Erdoğan saw and used the EU accession process as a way to demilitarize the politics in Turkey,
packaged as democratization reforms. Political Islam in Turkey has always considered armed
forces as its biggest enemy and constraint to its expansion. Reducing military tutelage on politics
was achieved to a large extent, but AKP and Gülen movement embarked on a series of
investigations of coup attempts allegedly took place in 2003-2004, dubbed as Ergenekon,
Sledgehammer, and Cage with eight others in 2007. Hundreds of active duty and retired military
An example of abuse of state-owned banks was extending $300 million loans each by Halk Bank and Vakıf Bank to
the Çalık Group to facilitate the purchase of Sabah-ATV media group (known as the Turkuvaz Group) which became
an Erdoğan mouthpiece. At the time of the purchase, Erdoğan’s son-in-law was the CEO of the Çalık Holding. In 2014,
the Turkuvaz Group which was not doing well financially was sold to a group of construction firms in deal arranged by
the former minister of transportation in exchange for promises of large public contracts. While this bailed out the Çalık
Group from a financial burden, it must have given Erdoğan a more direct control of these medıa outlets.
officers, opposition politicians, journalists, academics were detained for several years before they
were given long sentences. Later evidence shows that the Ergenekon - allegedly a secret
network of secular-minded Turks bent on overthrowing Erdoğan’s government and
Sledgehammer a group of senior officers plotting to overthrow the Erdoğan government in
2003 - cases are frauds, show trials built on fabricated evidence
, designed to suppress
Erdoğan’s domestic political opponents, staged by Gülenist elements in the security services and
Myths and Tales
Both IFIs and the EU chose to take these reform efforts at their face value. IMF declared Turkey
a success case and the senior managers of the World Bank welcomed the AKP government as
model for other Islamic countries in the first month of its inauguration
. Even as recent as
December 2014, a World Bank
report was charitably gracious to the government
notwithstanding the blatant corruption, dysfunctional economic governance and successive
policy failures over the last five, six years, not to mention the obliteration and subjugation of
literally every institution in the country. Against this background, painting a rosy a picture can at
best be considered as disservice to country by these IFIs. Unfortunately, unprecedented corrupt
practices by the AKP governments are seriously harming economic governance in the country
and hard to wish away.
A timeline of key policy instruments and outcomes are provided in a stylized fashion in Figure 12.
Behind the myths and urban tales, examples of which are highlighted in green fonts, key
outcomes can be summarized as follows:
The government often claims that “the economy grew by more than three times since 2002 and
that Turkey has become the 17th largest economy in the World.” AKP leadership has also
argued that “Turkey has been the fastest, if not one of the, growing economies under its rule”.
To be accurate, Turkey’s GDP expressed in current US$ grew 3.47 times between 2002 and
2014. But this is neither here or there and it is akin to saying “we accomplished to make the year
2014, much bigger than 2002, the year we took over.”
GDP growth, based on 1998 constant
price data was 73.8 percent or 4.7 percent a year. In per capita terms, GDP growth in real terms
was 49.2 percent or 3.4 percent a year.
There are a number of objective reports on Turkey’s sham trials. Gareth Jenkins, Between Fact and Fantasy:
Turkey’s Ergenekon Investigation, SILK ROAD PAPER, August 2009
pdf/2009_jenkins_between-fact-and-fantasy.pdf; Dexter Filkins. The Deep State, New Yorker, March 12, 2012; Dexter Filkins. Show Trials on Bosphorus, New
Yorker, August 13, 2013
A.Chibber, J. Linn, Turkey’s Chance to become European, Financial Times, November 22, 2002
The World Bank, Turkey’s Transitions: Integration, Inclusion, Institutions, Washington, DC, December 2014
Politicians everywhere often resort to bending statistics, but most of the statements about economic data have been
intentionally distorted. For instance, Erdoğan denominates public expenditures in “old money”, referring to Turkısh lira
before six zeros were dropped in 2004 in his speeches. He would, for instance, say “we invested 10 trillion liras for this
road”, meaning actually “we invested 10 million liras for this road”. Using a denomination that ceased to exist 14
years ago to bloat facts is confusing, if not deceptive.
By using the same yardstick, GDP would have shrunk by three percent in 2014 as the
denominating average exchange rate depreciated from 1.9 lira to the dollar in 2013 to 2.19 in
2014, instead of the 2.9 percent growth in real terms.
Turkey’s economy was already the 17th largest economy in 1990. In 2002, following the global
crisis, it slid back to the 21st place and the 17th place 2007 and slid back again to the 18th place
in 2010. In 2014, it was the 18th largest economy
on GDP in US$ based in the IMF WEO data.
Being the fastest growing economy is again a wrong assertion. Turkey’s GDP growth at an
average rate of 4.8 percent a year was below the 6.2 percent average for middle income
countries and 5.8 percent for low income countries during the 2002-2013 period. (Figure 13)
In current PPP terms, Turkey was the 15th largest economy in 2000. Since then, it has remained at the 16th place.
In fact, there is no difference between the period of the AKP rule (2003-2014) and the preceding
52 years in terms of GDP growth for both periods, the annual average growth rate was 4.7
percent. (Figure 13) There was, however, a significant difference in terms of private consumption
expenditures; per capita private consumption growth averaged 6.4 percent between 2003 and
2008, while the per capita grew by an average of 5.5 percent, in stark contrast to the average
decline of 2.7 percent during the preceeding five years. The composition of imports where the
share of consumer good imports went up to 12 percent of total imports of goods from an average
of 9.8 percent in the preceeding period. This helped bolster the sense of being better off and
contributed to the AKP victory in 2007 elections.
Erdoğan often claims that annual rate of inflation was 73 percent when AKP took over and the
government managed to bring it down to single digits.
One of results of the stabilization program put in place in 2002 was the rapid decline in inflation.
It came down to 30 percent by November 2002 from 73 percent in January/February. It took a
year for the AKP government to bring it down to 9 percent. (Figure 15) The fact that the
Government chose to remain within the boundaries of the IMF programs and kept the primary
surplus in check helped manage inflationary pressures. Despite the fiscal good-behavior,
slippages emerged from expansionary lending to private sector. Inflation was maintained
between the 6.4 percent and 10.5 percent band since then. Still, this was an important
development in terms of its political impact since Turkey lived with hyperinflation during much of
the 1980s and 1990s. For the first time in decades, near single-digit inflation was sustain over a
number of years. (Figure 16) Like everything else, AKP claimed its bragging rights and used it
effectively during election campaigns.
Inflation targeting was, however, less successful. During the same period, Central Bank’s
inflation targets were undershot three times and overshot 9 times and five of the last six times.
(Figure 17) There are, however, a number of studies which conclude that the outcomes would
have been worse without the inflation targeting during that period. Throughout the period,
Turkey’s inflation remained 3-4 percentage points above the average rate of inflation of emerging
Monetary Policy and Interest Rates
"Now I'm giving my opinion. Inflation will be high if the market interest rate is high. I don’t really
take others into account. But inflation will be low if we can pull down the market interest rate. If
we had been able to lower inflation which was around 30% when we took control to 5%, we
did that by lowering the interest rate." January 10, 2012
Inflationary pressures from rapid credit growth during the 2003-2006 period were absorbed by
rapid appreciation of the lira resulting from large inflow of short-term capital. (Figure 18) After the
2008 Global financial crisis when the economy went into a sharp decline, policy easing and
return of “hot money” allowed quick recovery but strong inlationary pressures persisted.
In 2010, the Central Bank decided to adopt an “unorthodox” monetary policy (Figure 19) when
the post crisis credit growth went up 30 percent, such as using an interest rate corridor instead of
a single policy rate, or schizophrenic actions like introducing mechanisms to slow down bank
lending while reducing interest rate. By 2013, the Central Bank was back using the traditional
monetary policy instruments. The recent ranting remarks by Erdogan, in part explains the Central
Bank’s past behavior of being between a hard place and a rock. Since Erdogan became the
President, the tone and dose of tongue lashing to the Central Bank and Deputy PM Babacan has
become completely out of control, to the extent of accusing them with high treason. Since the
middle of March 2015, a truce seems to be in place between Erdoğan and Team Babacan/Başçı
but that has not stopped Erdoğan from attacking hıs favorite straw man the interest rate lobby
which is out to
destabilize Turkey
and run by
“superior minds”
who are jealous of
Turkey’s success.
For reasons not
easy to
Erdoğan says that
he believes that
high interest rates
result in high
inflation. He wants
the Central Bank to
cut the policy rate,
probably to zero.
One theory is that
he can boast that
he is implementing
“no interest” rule as
a good Muslim. But
it sounds like a simplistic explanation as the Islamic banking uses the “profit sharing” mechanism
and it cannot be achieved by reducing benchmark policy rate to zero. Since he lacks basic
understanding of economics, it is hard to pinpoint what drives his rage against his colleagues.
Another plausible explanation is that aware of the emerging economic crisis, he is paving the
way to blame the Central Bank to be able say “I told them but they didn’t listen to me”
It is not only Erdoğan who dumps on the Central Bank regularly. One of the other Deputy Prime
Ministers, Ministers of Economy, Transport (past and present), advisors to Erdogan (as PM and
now as President) do not spare words in attacking the conduct of monetary policy. Even the
malformed coalition governments in the last thirty-forty years did not exhibit the dysfunctionality
and policy cacophony that Erdogan led governments have, not just on interest rates but on a
wide range of economic and social policy issues.
Fiscal Management
Additional taxes could be on the agenda.
December 20, 2014
There are no plans for new taxes or rate increase at the loca or central levels at this moment
January 15, 2015
We have no plans to increase pensions.
March 10, 2015
Mehmet Şimşek, Minister of Finance
I am giving the good news to the retirees. Those who receive less than 1,000 lira will get a 100
lira increase.
April 14, 2015
Ahmet Davutoğlu, Prime Minister
One of the strengths of the AKP
governments was to keep the fiscal
discipline and maintain fiscal balances
within reasonable limits in an earlier life.
Reductions in primary surplus in recent
years has reduced fiscal space
considerably. (Figure 20) As can be seen
from the statements above, fiscal
management has become confused, ill-
coordinated and reactive to election
campaign politics.
Most of the fiscal reforms in place were
pretty much completed before AKP took
over in November 2002, These reforms
which included politically unpopular
measures such as reduction of subsidies to
agriculture and state-owned
enterprises.were, however, on the
expenditure side and no comprehensive
revenue side reforms were undertaken
during the last twelve years.
“İlave vergiler gündeme gelebilir”
“Yeni bir vergi veya vergi oranlarında artış hususunda ne yerelde ne de genel olarak şu anda bir çalışmamız söz
konusu değil"
“Emekli aylıklarında genel bir düzenlemeyle ilave artışlar yapılmasına yönelik çalışma bulunmamaktadır”
"Emeklilerle ilgili müjdeyi veriyorum. Maaşı 1000 liranın altında kalan SSK ve Bağ-Kur emeklilerine seyyanen 100
lira zam yapacağız.”
Unlike the previous governments which
relied on the budget to finance political
expenditures AKP has used off-budget
resources to deliver political favors and
campaign finance. One of the large off-
budget sources
is TOKİ (Prime
Ministry’s Public Housing Development
Agency). TOKİ is a black box with no
transparency of its operations and
It operates in an
environment where there are no checks
and balances. It can convert state lands
(owned by the Treasury) to private land,
change their zoning (to residential or
commercial), decides who will build it,
subcontracts it to its favorite construction
firms and redistributes rents created.
Part of these go to fınance low cost
housing built in AKP strongholds and
offered to those who have been living in
squatter settlements. Others are
rumored to be used for varıety of
purposes, from campaign financing to
padding personal accounts. TOKİ’s
transparency was said to be the deal
breaker when Turkey was negotiating for
an IMF program in 2008. It was also
instrumental in creating a new breed of
contractors and construction companies
either loyal to AKP or owned by AKP
leadership through proxies which had
exclusive access to TOKİ contracts. The success of the old school Turkish construction
companies abroad is attributed to their survival instinct in finding new markets as they were cut
off from public sector construction projects to favor the AKP-class contractors.
The burden of fiscal adjustment was borne by expenditures which yield more rapid response
than most revenue measures. (Figure 21) Taxation in Turkey is heavily lopsided toward indirect
Part of the proceeds from privatization that were not transferred to the Treasury was another source
discretionary political spending.
There are no financial information available on the TOKİ website, except the total volume of contracts
tendered between 2003 and February 2015 which was 68.4 billion lira (at an average exchange rate of
1.57 for the period. It would correspond to $43 billion.
Güven Sak, TOKİ modeli 1930’lardan kalmadır, Radikal Newspaper, July 10, 2012 Also, Emre
Deliveli, Turkey: Don’t Mess with Loki or TOKİ, July 16, 2012, Economonitor
Sak, ibid
taxes. More than half of the VAT and Special VAT collected are imposed on hydrocarbons
products, telecommunications and energy. Not only these taxes are regressive by nature, they
have also contributed to the erosion of the competitiveness of domestic production and exports.
(Figure 22) A comparison with other countries show that Turkey undertaxes income and wealth
while overtaxing goods and services. (Figure 23) During the last twelve years, no serious effort
to undertake a serious tax reform was shown, as AKP’s constituency operates in the gray
economy and ensures to keep their accounts and transactions below the tax radar.
There is
ample room to broaden the tax base, even lowering rates, more effective use of the tax
administration by collecting taxes instead of harassing taxpayers who are considered political
Total personal income tax collected was 79 billion lira (5 percent of GDP). Of this, 58 percent (46 billion
lira) was collected from wages and salaries by deduction at source for approximately 8 million taxpayers.
Income tax on interest income deducted at the source by the banks account for about 10 percent of
income tax revenues. In 2013, 631,866 corporate income tax returns were filed. Of these, the top 100 paid
about 36 percent of the total corporate income tax collections. The average tax payment for the remaining
companies was 30,000 lira in 2013. Of the top 100 companies, the top three and half of them are state-
owned corporations and 32 were banks or other financial companies.
Employment and Labor Markets
This is not an area that the government has been able to boast success. In a meeting with the
Federation of Chambers of Commerce and Industry (TOBB) in 2010, Erdogan told the audience
that “you claim that you have 1.3 million members. If every one of you hired a person, the rate of
unemployment would come down by three percentage points. If you don’t do this, we will talk you
into it.”
Because the growth has been consumption and import driven, it has not been employment
friendly. During the 2003-2014 period, the labor force increased on average by 900 thousand
people, while the employment increased by an average of 650 thousand jobs. The rate of
unemployment was 10.9 percent in December 2014, non-agricultural rate was 12.9 percent and
youth unemployment rate was 20.2 percent, the highest rates for all since February 2011.
The unemployment rate has been on the rise since the mid-2012 when it bottomed out at 7.3
percent following the steady decline from its peak of 14.8 percent in February 2012 during the
global financial crisis. Given the large rural underemployment, the overall unemployment rate is a
not a terribly useful indicator. The rate of unemployment in the non-agricultural sectors is a much
better indicator of the labor market developments. (Figure 24)
With the active labor force nearing 30 million, there were about 3.1 million unemployed workers
in December 2014. (Figure 25) Employment increased by 6.2 million since 2002. The largest job
creation was in the service sectors, followed by manufacturing and construction. (Table 1) The
recent construction boom created about 500 thousand jobs since 2009 but the sustainability of
these jobs is closely linked to future of the construction sector. Given the slowdown in housing
sales and construction, it is likely that construction would be the first sector starting to shed labor
in 2015.
Since 2003, the government hired 574 thousand new employees mainly to provide jobs to the
graduates of religion based preacher (Imam hatip) schools or the party faithful, increasing the
size of the central government employment by 45 percent to 2.6 million employees. Anectodal
evidence suggests that many government departments hired large numbers of people, not
necessarily commensurate with their business needs or volumes. Had it not been for this
massive recruitment drive, the rate of unemployment would have been 12.8 percent and the non-
agricultural rate, 15.1 percent. A significant number of jobs were also created by the new private
companies established to subcontract services with the government agencies, mostly at the
municipality (local government) levels. Leaving the contracting process aside which is designed
to favor companies owned by individuals politically and personally close to the ruling party
officials, there are questionable practices like farming out critical emergency services, like the fire
department, with little or no accountability.
Regional breakdown of unemployment rates shows significant and stark differences. (Map 1)
Ten provinces in the East and Southeast had non-agricultural unemployment rates exceeding 20
percent in 2014, accounting for 12 percent of the unemployed and 7 percent of the labor force in
Turkey. Employment rate in the region which includes Mardin, Batman, Şırnak and Siirt was
28.2 percent compared to the country average of 45.5 percent. These areas where Kurds live
predominantly also suffer from high rates of poverty and income inequality.
The expansion of employment seems to have taken place at the expense of productivity
increases since 2007. The (partial) labor productivity in non-agricultural sectors is estimated at
an annual average rate of 0.1 percent, practically remained flat during 2006-2014. Comparison
with other emerging economies shows a rather erratic pattern since 2007. (Figure 26)
Decomposition of growth
show that the contributions
of labor quantity and labor
composition have been
much lower than
contribution of non-ICT
capital services
. (Figure
27) It also shows that ICT
capital services contribution
growth which played an
important role during 2004-
2007 seems to have
disappeared. Total factor
productivity growth
measured as Tornqvist
index was negative for six
out of the last 13 years and
significantly below than the
estimates for China. (Table
While returns to capital
seem to be significantly
higher than that of labor,
the manufacturing sector
has utilized only three
quarters of its capacity
since 2009 when it
declined to 65 percent.
The average for capacity
utilization was 80 percent
during the 2003-2007
period. (Figure 28)
High labor costs are also
among the factors that
adversely affect Turkey’s
competitiveness. In
addition to relatively low
labor productivity (Table
3), employment taxes
income tax withheld at
Estimates of simple Cobb Douglas production functions show decreasing returns to scale for agriculture,
manufacturing and the economy as a whole, and negative elasticity for labor.
Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs (i.e. labor and capital)
used in production. As such, its level is determined by how efficiently and intensely the inputs are utilized in
production. TFP growth is usually measured by the Solow residual.
source and social security premium) add a large
burden on labor costs for the formal sector. For
the public sector workers, the wedge between
the labor cost to the employer and the worker’s
take home pay has gone up from 1.69 in 2000,
1.85 in 2003 and to 1.87 in 2014. For the private
sector workers, it went up from 1.78 in 2000 to
1.90 on 2014. High employment wages also
contribute to the large unrecorded informal-
employment without any social security
coverage. In 2013, the estimated size
unrecorded employment was 9.4 million or about
37 percent of total employment.
Relative Unit Costs of Labor (RUCL) for Turkey
are high among the OECD countries on account
of lower productivity and high wages. The share
of wage bill in value added ranges from 20.6
percent to 53.3 percent depending on the skill
mix and composition of labor in a particular
industry. Calculations based on minimum wage
and average wages shows that per worker per
hour GDP in 2003, expressed in current US$PPP was $29.3, the second lowest in OECD after
Chile. Against this, minimum wage per hour expressed in current US$PPP was $5.99 and
average wage as $15.63, higher than many of the countries in the lower income ranks of OECD.
Wages and Labor Costs
In 2013, Erdogan said that purchasing
power of the population has increased so
much and asked his audience to
calculate how many eggs or kilograms of
bread they can buy with their their income
now compared to pre-AKP years. To be
factual, the number of eggs that minimum
wage can buy declined from 2511 in 2002
to 1601 in 2013 and, for bread, 226 kg to
201 kg.
“Increasing the minimum wage to 1,500
liras is torturing workers.”
April 22,
Mehmet Şimşek, Minister of Finance
After a precipitious decline in real wages
during 2000-2002, take home pays for
public and private sector workers in
constant 2014 liras are still below their
2000 levels. The minimum wage and civil
service salaries, however; increased
about 34 percent in real terms between
2002 and 2014.(Figure 30)
Since more than a third of the employed
are not registered in the social security
system, they are paid significantly below
the minimum wage, particularly in sectors
with cyclical labor demand (e.g.
construction, tourism) and the increases
in the minimum wages are not
necessarily reflected in their own pay.
Most of the firms that hire workers from
the informal labor market find it easy to operate below the official radar (e.g. tax administration)
enjoy an unfair competitive edge against the firms operating under legitimate rules. Even some
employers in the formal sector manage to pay less than the minimum wage, although the records
may show that payments were properly made.
Asgari ücreti 1500 liraya çıkarmak işçiye zulümdür.
For instance, some employers keep the ATM cards belonging to workers of accounts where paychecks are
deposited. At the pay time, employers withdraw cash from the ATMs and pay the worker a smaller amount, keeping
the difference. There are several other methods where the employer pays the worker less than what is legally
The second and third phases of the AKP rule decimated labor unions in Turkey. The number of
labor union member declined from 3.2 million in 2009 to slightly more than a million by 2014,
bringing the rate of unionization to less than 10 percent. The hardest hit was the DİSK, a leftist
confederation which once boasted more than 1.5 million membership. There has been an active
push by the AKP-held municipalities to force the companies which are awarded subcontracting to
get their workers to shift to Hak-İş.
On the other hand, the
government encouraged
unionization of civil servants under
quasi-yellow unions, but with no
rights to strike. The rate of
unionization among the civil
servants went up to 70 percent in
2014. Similarly, active/forced
recruitment by the central
government departments and local
government under AKP resulted in
Memur-Sen doubling its
Turkey also witnessed a significant deterioration in the workplace safety in recent years. Turkey’s
rate of work accident fatalities with respect
to labor force and GDP have been
significantly higher than most other
countries, including emerging economies.
(Figure 32) Recorded work accident
fatalities reached its highest level of 1,886
in 2014. Average number of deaths was
1,214 during 2003-2014 compared to 1,160
during the previous ten years. There are
two factors to note here. The first is that
data for Turkey is compiled from the Social
Security Organization and cover only
registered/insured workers. Considering
that a third of the labor force is unregistered
and the environment they work under is
most likely less secured than workplaces in
the formal sector, the actual number of
fatalities should be significantly higher than
what the official data suggest. The second
is that fatalities from work accidents have a
declining trend in most of the countries,
reflecting better production and
safety technology and more
rigorous reinforcement of
regulations. Unfortunately, the
trend in Turkey is on the rise.
Privatization of coal mines to
companies without any mining
experience, lax safety
inspections have led to frequent
mine accidents. While there
were no casualties in mine
accidents between 1995 and
2002, 463 miners lost their lives
in nine different accidents
between 2003 and 2014.
Erdoğan response to criticism
was “dying in accidents is in the
fate (nature) of miners.
Social Protection
“They [Opposition] say that you bought votes by giving away coal and macaroni to [poor] people.
If you think that’s the case, why don’t you do the same?”
June 21, 2013
This is an area where AKP managed the
optics well and earned significant political
support. Although the opposition parties
looked down on AKP’s distribution of
“coal, macaroni and lentils” to the poor, it
seems to have had a large political pay--
AKP took over a “green card” system –
providing free outpatient care and
presciptions - which was widely abused
with no serious means testing with 13.2
million cardholders. In 2004, the number of
“active” cardholders were reduced to 6.7
million. In 2005, access to other social
assistance programs were linked to green
card holdership. Between 2004 and 2012,
the number of active cards climbed to 9.1
million while health expenditures for green
card holders increased 267 percent in real
terms. In 2012, the green card system was
replaced by the General Health Insurance
scheme with the government paying the
premium of those with less than a third of
the minimum wage.
According to the means testing carried out
in 2013, there were 11.2 million qualified
to receive health benefits. In addition, 6
million individuals from 2 million
households receive social assistance in
direct and indirect aid from the central
government and AKP-controlled
While the composition of the social protection expenditures changed only a little between 2008
and 2012, budgetary transfers to social security institutions jumped from 2.8 percent of GDP in
2002 to 4.6 percent in 2013, more than doubling in real terms. (Figure 34) Interestingly, the
Makarnaya, kömüre oy sattınız diyorlar. Madem öyle sen de makarna, kömür dağıt.
For instance, the municipality of Metro Ankara was reaching 400,000 families with food, cleaning supplies and coal
in 2008, compared to 37,000 families receiving assistance in 2001.
pattern of social assistance expenditures show spikes for the years prior to or during the local or
national elections, supporting the view that social protection expenditures has been used to
strengthen political loyalty of poor beneficiaries.
To large extent, AKP followed
the Muslim Brotherhood
model, similar to that
implemented in Gaza by
intertwining state social
protection programs with
religion-based charities that
was able to create high
dependency among the
poorest segments of the
society to aid and political
. A significant part of
the social assistance
resources go to the Eastern
and Southeastern provinces.
In 2010, 57 percent of the
population were green card
holders in the Ağrı province,
53 percent in the Van province
and above 50 percent ın Bitlis
and Bingöl provinces
compared to Bursa province
with 4.0 percent, Bolu with 4.2
percent and Antalya 5.2
This is probably the main
reason for improvements in
income distribution measured
by Gini coefficients in the impoverished regions observed between 2002 and 2013, as discussed
later. (Figure 38)
There are a number of studies which suggest that “the shift from employment based social
security in Turkey is being replaced by income based social assistance” in part because ruling
parties see the informal labor force as more significant than the formal labor force as “a source of
political threat and support” and direct these welfare programs to contain grassroots political
activism, especially of the Kurds.
Zencirci, Gizem, Neoliberal Islam and Emergent Forms of Social Service Provision in Turkey - See more at:
Yoruk, Erdem.The politics of the Turkish welfare system transformation in the neoliberal era: Welfare as mobilization
and containment. The Johns Hopkins University, Dissertation 2012
Income and Regional Inequalities
“[Among the OECD countries] Turkey is an exceptional country where the income distribution
improves and among those, it is the country where the improvements are the fastest.”
12, 2014
Ali Babacan
The above the statement is simply incorrect. (See the Box I below)
“Şu anda OECD ülkelerinin hemen hemen tamamında gelir dağılımı hızla bozulmakta. Türkiye, istisnai şekilde gelir
dağılımının iyileştiği bir ülke, gelir dağılımının iyileştiği ülkeler içerisinde gelir dağılımını en hızlı iyileştiren ülke.”
Box I
The changes in the income distribution since 2003 reflect the distinct phases of the AKP rule.
During the first phase until 2007, there were visible improvements in income distribution which
seem to have stalled since then.
Both Turkstat and OECD figures show
relative improvements in income distribution
between 1994 and 2005. (Figure 35) After
worsening from 0.43 in 1987 to 0.49 in 1994,
the Gini coefficient declined to 0.44 again in
2002 and to 0.38 in 2005.After 2005, the Gini
coefficient bounced back and forth between
0.428 and 0.4. (Figure 36)
The ratio of the tenth (highest) decile to the
first (lowest) decile declined from 15.4 in
2003 to 13.1 in 2007, but turned around and
increased to 14.1 in 2011 towards the end of
the second phase. While this ratio was
among the highest in OECD, it was
significantly lower than that of Mexico
(around 30), Chile (26) and slightly lower
than that of the U.S. (16). In 2011, the ratio of
the highest quintile to the lowest was 8. The
top quintile received almost half of the
disposable income.
There are also significant variations in per
capita value added across regions. Istanbul’s
average per capita gross regional product
which has been the highest with 22,932 lira
was more than three times that of the poorest
region, the Southeast Anatolia region with
7,557 lira in 2011. (Map 2) The two poorest
regions, however, had the highest GDP
growth rates during the 2004-2011 period.
Istanbul alone has accounted for more than
quarter of gross value added since 2004 and
on average, 28 percent of industrial value
added. The second highest income was in the Eastern Marmara region with 20,970 lira
accounted for about 16 percent of GRP and 23 percent of the gross industrial value added. In
other words, half of the country’s industrial value was generated by Istanbul and East Marmara
regions. These two regions accounted for 27.5 percent of the 2011 population. If the Aegean
region is added, the three regions produced, on average, 57 percent of gross value added
between 2004 and 2011. (Figure 38)
According to the Global Wealth Databook 2014 published by Credit Suisse, global household wealth
totaled $263 trillion in mid-2014, equivalent to $56,000 per adult, more than two and half times the
average for Turkey estimated at $20,347. World average per adult wealth grew 77 percent between
2000 and 2014 while average per adult wealth grew 65 percent from an estimated $12,324 in 2000
to $20,347 in 2014 in Turkey.
Behind the point-to-point to growth rates, there are important developments to note. Average per
adult wealth grew very rapidly from $11,141 in 2002 to $36,542 in 2007. The increase was in part
due to appreciation of the lira. After a sharp decline in 2008, average wealth continued to decline
along with per adult wealth to per adult income* ratio. (Figure B)
As the pattern of the median wealth per adult show, Turkey’s distribution of wealth has become
extremely skewed during the last fourteen years. The share of wealth held by the top percentile
went up from 38.1 percent in 2000 to 54.3 percent in 2014 in Turkey (Figure D) while the share of
top decile shot up from 66.7 percent to 77.7 percent (Figure E) respectively. Both of these indictors
imply a massive shift of wealth to a very small group. About three quarters of the adults had assets
less than $10,000, 22.3 percent had between $10,000 and $100,000, 1.8 percent between $100,001
and $1 million, and 0.2 percent more than one million dollars. The estimated Gini coefficient for
Turkey was 0.842 in 2014, one of the highest in the world.
* calculated by dividing current GDP to number of adults (15+)
Comparions of Gini coefficients between 2003 and 2013 across different regions show an overall
improvement except for the Northeastern Anatolia and Istanbul regions.(Figure 38) The largest
improvement was in the East Marmara region which received industrial plants migrating from
Istanbul as well as greenfield investments. The seond largest improvement, not surprisingly, was
in the East Black Sea region where Erdoğan comes from.
Poverty Alleviation
When I was the mayor of Istanbul, we were the first municipality which purchased Mercedes-
Benz buses to use in public transportation. But I said, this is not enough. Let’s take another step.
We should use Mercedes hearses for those who were not able to drive a Mercedes when they
were alive. We started making hearses out of Mercedes vehicles.”
June 18, 2005
Erdoğan on the poor while visiting
a Mercedes bus plant
Poverty rates, measured by national or international standards declined rapidly from their peak in
2001. According to Turkstat data, absolute poverty (below $2.50 a day) declined from 3 percent
in 2002 to 0.06 percent in 2013 while poverty (below $4.30 a day) from 30.3 percent in 2002 to
2.06 percent in 2013. Relative poverty calculations by OECD, however, show that increased from
16.9 percent in 2007 to 19.3 in 2009 and remained at 19.2 for the next two years.
Clearly, there has been an improvement in poverty rates after the 2001 crisis as unemployment
rates declined and GDP growth was 6.9 percent between 2002 and 2007. Social assistance
programs have played an important role lifting the very poor out of poverty. But both Turkstat and
World Bank statistics seem to have exaggerated improvements and conflict with other
information on living standards, such as the means testing for social assistance programs.
Poverty rates calculated by World Bank’s Povcal show that 4.9 percent of the population lived
under PPP $2.5 a day and 13.9 percent below PPP $4 a day in 2011. (Figure 31) They
correspond to 3.5 million and 10 million people respectively. Turkstat’s calculations based on a
national poverty line show much smaller poverty rates, 2.79 percent in 2011 and 2.06 percent in
2013, corresponding to 2 million and 1.5 million people respectively.
A means testing carried out in 2013 identified more than 11 million people who had incomes
below a third of the minimum wage.
A more reliable tool to examine poverty in Turkey is the income based relative poverty rates
published by OECD. They are calculated as the share of population who are earning less than
50 percent of the median disposable income, both before and after taxes and transfer payments.
They show that relative poverty (at 50%) increased from 16.9 percent in 2007 to 19.3 in 2009
and remained at 19.2 for the next two years. (Figure 40) Youth poverty (under 18) went up from
24 percent in 2007 to 27.1 percent in 2011. Although the latest available OECD figure is for
2011, it would be reasonable to assume that poverty worsened in the subsequent years, or at
best remained unchanged, since the average GDP and private consumption growth rates
between 2011 and 2014 were only 3 percent and 2.4 percent a year respectively.
Yıllardır bu ülkede bu otobüsler kullanılıyor. Öyleyse bir adım atalım, artık benim vatandaşım Mercedes otomobile
binmeye başladı. Ama hepsi bunu yakalayamıyor, hiç olmazsa Mercedes-Benz otobüslere binsin. Türkiye'de ilk defa
bir belediye olarak 500 civarında otobüs aldıklarını vurgulayarak, "Dedim ki, bu da yetmiyor. Bir adım daha atalım.
Artık hayatlarında Mercedes otomobil kullanmayanlar, hiç olmazsa şu cenazelerini Mercedes araçlarla taşıyalım.
Mercedes araçlardan cenaze araçları da yapmaya başladık"
OECD Social Indicators for 2014
the following points:
Disposable household income in
Turkey is about 45% of the OECD
average. Turkey also has the 3rd
highest level of income inequality and
the 3rd highest level of relative
poverty in the OECD area. One in
every five Turks is poor, compared
with just above one in ten on average
across the OECD.
One out of three Turks report that
they cannot afford to buy sufficient
food, compared with an OECD
average of less than one out of
Public social spending in Turkey at
12.8% of GDP is substantially lower
than the OECD average of 21.8%.
Most of the social spending is related
to health, old age and survivors
benefits, while support for the
working-age population is very low.
Public transfers (pensions, social
assistance programs) play an
important role in improving the living
standards of the pension age (65+)
people for whom the poverty rate
would have been 53.7 percent
instead of 18.4 percent in 2011.
Public transfers account for almost
half of their mean income compared
to 19 percent for total population.
In 2011, Turkey had the third highest
relative poverty rates among the
OECD countries, after Mexico and
Israel, and almost twice the OECD
average. (Figure 41)
According to results of the
Gallup survey used by OECD,
the percentage of people
surveyed who replied “yes” to
the question "Have there been
times in the past 12 months
when you did not have enough
money to buy food that you or
your family needed?" went up
from 26.6 percent in 2006/7 to
32.7 percent in 2011/12.
(Figure 42)
A recent study carried out by
shows that inflation
faced by low income groups is
higher than that was faced by
high income groups. The study
found that the average annual
inflation during 2003-2014 faced by the lowest quintile was 9.3 percent compared to 8.5 percent
faced by the highest quintile.
Society at a Glance 2014 OECD Social Indicators
Seyfettin Gürsel and Ayşenur Acar, Yoksul ile Zengin Arasındaki Enflasyon Farkı Rekor Seviyede, Bahçeşehir
Üniversitesi Ekonomik ve Toplumsal Araştırmalar Merkezi (BETAM), Araştırma Notu 15/177, 2 Mart 2015
SME Development
One of the political tools that AKP has very effectively used is the declared Small and Medıum
Enterprıses SME-friendly policies and close links with business associations representing SMEs.
AKP benefitted from its close attention to SMEs and used SME policies to create a new capitalist
class with total loyalty and support to Erdoğan.
AKP’s appeal to voters was built on the premise that they had been ignored and abused by the
secular establishment since the establishment of the republic. AKP’s message was very similar
to “come, poor huddled masses yearning to breathe free, I lift my light bulb beside the golden
The same message resonated
even more strongly among the
business owners, mostly small
and medium scale, who felt
excluded from the “establishment
bourgeoisie” represented by
TÜSİAD. AKP’s win of the
majority of the parliamentary
seats in the 2002 elections
energized religiously
conservative business
associations such as MÜSİAD
established earlier in reaction to
TÜSİAD. This was followed by
plethora of business associations
and NGOs loyal to AKP. Two
notable among them were
TUSKON, representing Gülenists
and ASKON, a splinter from
MÜSİAD, dubbed itself as
Anatolian tigers.
While most of Erdogan’s support
to SMEs were lip service, a
number of concrete actions were
taken. Annual meetings of these
associations have become well-
orchestrated political shows for
Erdoğan. KOSGEB, a
government agency for SME
support, became very active and
visible. A set of incentives
providing tax exemptions, reduced tax rates, capital grants were put in place and more authority
was devolved to local governments
. There is also a number of technology development zones
(TDZs) in Turkey where entrepreneurs are given assistance in commercializing business ideas.
Turkey’s Scientific and Technological Research Council (TUBITAK) has special programs for
entrepreneurs in the technology sector, and the Turkish Technology Development Foundation
(TTGV) has programs that provide capital loans for R&D projects and/or cover R&D-related
Buğra, Ayşe and Savaşkan, Osman New Capitalism in Turkey: The Relationship between Politics, Religion and
Business. Edward Elgar Publishing, 2014
Aggregate data do not,
however, show a significant
impact of SMEs on the
economy. While SME’s
share in employment,
turnover, value added and
investment in all sectors of
the economy after increasing
slightly between 2003 and
2006, declined consistently
since 2006 (Figure 43), a
number of business
credit from state
owned banks, allowances
and exceptions made for
violating land use,
environmental regulations,
building codes or whatever
comes between profits and
businesses. They are
probably no longer classified
as SMEs.
The SME sector is
dominated by manufacturing,
followed by trade. The share
of trade has been on the
decline, most likely due to
rapid expansion of shopping
centers and supermarket
chains and decline in the
number of mom and pop
stores. (Figure 44)
In manufacturing, a number of cities such as Denizli, Gaziantep, Kayseri, Konya and Manisa did
very well. These provinces have also been AKP’s strongholds. AKP saw significant increases in
its vote, particularly between the 2002 and 2007 elections in this provinces. (Figure 45)
The share of SME credits in total banking system credits, in fact, declined after 2007 and rose
again in 2011 just before the elections, remaining at about 25 percent of total banking system
credits. The distribution of SME credits by the enterprise size shows that the share of the micro
There have been a number of cases of state-owned banks like Halk Bankası or Vakıf Bank lending to businesses
without adequate collateral and in violation of other prudential rules on instructions from high up. One flagrant example
are the two loans totaling $750 million from Halk and Vakıf Banks to the Çalık Group for the purchase of Sabah-ATV
media group in 2008. The collateral that the borrower put was booked for $975 million in the form of seven properties.
These properties were later assesed at $102.1 million by the Supreme Audit Board of the Prime Ministry. This body
was abolished and its responsbilities were moved to the Court of Accounts in 2010. (also see footnore 3)
and small enterprises decline over time while the share of medium enterprises (with 50-249
employees) has gone up from 28 percent to 40 percent in 2014.
By 2014, most of the
companies which benefited
from the AKP shelter were
probably no longer
classified SMEs and
employing significantly
more than 250 workers. In
a way, this was the desired
outcome for Erdoğan who
had large number of loyal
business at his beck and
call. He was now ready to
take on TÜSİAD and wage
war against the duchy of
An increasing number of
billionaires from Turkey in
Forbes’ annual list are
Erdoğan’s nouveaux riches.
Their share is even larger in the Fortune-100 list for Turkey. It is almost impossible to find a TOKI
subcontractor which was in construction business before November 2002.
Incentive Framework
Consecutive AKP governments have been heavy on investment incentives, more for as a tool of
doling out resources than for their ability to mobilize investments in targeted areas. Incentive
frameworks were revised a number of times in 2004, 2005, 2009 and more recently in 2012.
There is a convoluted investment framework in place, providing incentives by regions, by
sectors, by strategic importance, by R&D expenditures at varying degrees of exemptions from
corporate income tax, VAT, customs duties and employers’ social security premiums. In certain
cases, land is allocated for free and interest on loans are partially subsidized. Regional
incentives are scaled by six regions identified by their socioeconomic development levels.
It is not clear how much these myriad of incentives play a role in channeling investment to the
targeted regions or sectors. The government only publishes information about the number of
incentive certificates issued, the volume of planned investment and employment creation, but
there are no monitoring reports available to assess the impact of these incentive measures.
A number of studies have concluded that the regional incentive framework targetting “Priority
Regions for Development” has resulted in increasing income inequalty between the “supported”
regions and others
and has not contributed to the human development dimensions of these
There are a number of issues related to incentive policies as they have been implemented in
When the coverage is broad, although differentiated at the margin, one ends up
supporting everything and, in reality, supporting nothing.
By definition, incentives for new investments place existing investments at a
disadvantage. The goal of investment incentives is to create new investments or expand
existing ones. But in their desire to attract new investors, policymakers may neglect
existing investors. Much can be gained by addressing the issues facing existing investors
in expanding their investments. Indeed, if existing investors are not taken care of, new
investors will be less likely to invest.
Regional incentives, mostly determined by political factors, could put a business in a
neighboring province at a disadvantage if they are categorized differently.
Excessive investment incentives will erode the tax base by putting more pressure for
revenue on the smaller base of existing investorsincreasing their tax burdens and
creating distortions.
In April 2015, the government announced a new set of incentive measures to revive investment
and create 120,000 new jobs at an estimated cost of 7.5 billion lira (roughly $2.5 billion) which
include the government paying the minimum wage for the first six months of the workers hired
through the State Employment Agency, increased rates of exemption from corporate income tax,
increased percentages for the government payment for employers’ social security contributions,
improving colateral requirments for SMEs, extending maturities for loans for women
enterpreneurs and special assistance program for R&D activities yet to be defined.
It is not just coincidence that this “package” was announced two months before the elections.
None of these measures, however, seem to be sufficient to allay investors’ concerns about the
lack of rule of law, uncertainties surrounding the macroeconomic framework and basic variables
such as the exchange rate - often generated by the highest echelons of the government, faltering
demand for exports and the overall tense political environment.
Sarı, R. and Güven, A. Kalkınmada öncelikli yöreler uygulamasının iller arası gelir dağılımı üzerindeki etkisi - ODTÜ
Gelişme Dergisi, 2007
Erdölek, Özge, Barbaros, Funda, Erdoğan, Akın. Türkiye’de Bölgesel Kalkınma Eşitsizliği ve Yatırım Teşvikleri,
Coğrafyacılar Derneği Uluslararası Kongresi Bildiriler Kitabı: 4-6 Haziran 2014, p.660
James, Sebastian, Incentives and Investments: Evidence and Policy Implications, Investmenr Climate Advisory
Service of the World Bank Group, December 2009 p.20
Governance and Investment Climate
“Confidence in Turkey’s economy has risen due to the political stability, as well as the structural
reforms and business-friendly policies implemented during the last decade. Turkey has come a
long way in terms of predictability since the ruling Justice and Development Part (AK Party)
came to power in late 2002. The economic confidence and stability we have built are the greatest
gains in our economy. Well-defined, timely declared and resolutely pursued policies are vital to
business confidence.”
Erdoğan (with a straight face), speaking at the 8th
meeting of the Investment Advisory Council of Turkey
in 2013
After AKP came to power in 2002, the international financial community wasted no time in
declaring Turkey as the poster child of liberal economy. For the first couple of years, they were
not wrong. Macroeconomic balances were maintained. The government was seemingly
implementing reforms at least in the letter, if not in the spirit. Progress was made in EU acquis
process. IFIs were planning to write a success story. Investment funds were getting high returns
from Turkish treasury papers and no Fund manager wanted to be seen without Turkish assets in
their portfolios.
From many angles, Turkey is an ideal country for foreign direct investment. It has a large
domestic market, a central location for exports to four directions, a dynamic population, if not at
OECD standards, a relatively well educated labor force. FDI flows during 2004-2006 reflect, in
part, these factors. Even though most privatized of large state corporations ended up with
investors from countries which are indifferent to foreign corrupt practices, there were also
investors from countries which are signatories to OECD. While the 2008 global financial crisis
dampened FDI flows, significant but invisible entry barriers became more binding. These barriers
work at all levels of business, foreign or domestic, from small municipal contracts to very large
infrastructure contracts. But an entrance fee doesn’t assure entry. It needs to be accompanied by
a commitment of servitude to Erdoğan. The other side of the entry barriers coin is being forced to
exit. There are ample examples of businesspersons from the Istanbul duchy who incurred
Erdoğan’s wrath ended up being harassed by his siloviki (tax inspectors in many cases) or losing
contracts they were awarded such as the Koç Group
. Another media group which vacillates
between loyalty and mild criticism ended up paying huge fines to settle with Treasury. During the
During the Gezi events, the Divan Hotel, “facing Gezi Park, opened its doors to the fleeing crowd, and the hotel
briefly became a makeshift place of refuge where people received medical care. Briefly, that is, because the police
later that night charged the hotel. When it fired tear gas straight into the hotel lobby, people fled downstairs to the
ballroom. For hours, the police prevented ambulances from collecting people from the hotel. Divan hotel’s decision not
to turn away protesters was apparently made by the hotel management, but supported by its owners, Koç Holding,
Turkey’s largest industrial group. On October 8, citing its actions during the Taksim protests, the German organization
PKF Hotelexperts awarded Divan hotel its “Hospitality Innovation Award” for displaying “civil solidarity, courage and
hospitality in crisis situations.” On June 17, Erdogan accused “hotel owners” of sheltering “terrorists”; on June 25,
speaking to his parliamentary group, Erdogan stated that far from helping peaceful protesters fleeing police violence,
the Divan hotel welcomed “criminals” that had fought with the police. “You know there is a law against harboring
criminals…. On September 27, the government canceled a tender to build several warships for the Turkish navy that
had originally been won by RMK Marine, a Koç Group enterprise. And by September 30, a long-standing land dispute
between the state and the Istanbul-based Koç University heated up again, with the state threatening the University’s
eviction from its campus over disputed rent payments. Turkish media reported that over 200 inspectors had been
assigned to examine the records of Tüpraş. Aygaz and Opet.” For details. see Svante E. Cornell, Erdogan versus Koç
Holding: Turkey's New Witch Hunt, (vol. 6, no. 18 of the Turkey Analyst).
Gezi events, most of the media, notably TV channels feared broadcasting events. Since then,
the controls on media have been increasingly tightened and those who do not obey “news bans”
are prosecuted. During the heat of the Gezi events while several foreign new organizations were
broadcasting live from the Taksim Square, CNN Turk chose to show a documentery about
penguins, which became a symbol of self censorship of the media in Turkey.
There are exceptions among the İstanbul establishment who submitted totally to Erdoğan and
were rewarded accordingly such as a large group with banking, automotive and media interests.
A fairly respected TV news channel that the group owns became a mouthpiece of unadultered
Erdoğan propaganda. The rewards included other TV channels which were “auctioned” off by the
Banking Resolution Agency, several new contracts, such as the management of motor vehicle
inspection services, permits to build new marinas in prime locations and so on.
Corruption, as in many countries, is not new in Turkey. In a country where there are no
campaign financing rules, it will be naïve to expect that politicians will not be corrupt. What is
new is the depth and breadth of high level corruption. Regardless of how Erdoğan is trying hard
to rewrite history, the events of December 17-25, 2013 would be the basis for convicting any
politician involved with several centuries’ imprisonment in any country where the law of the land
is respected
. While four ministers charged with corruption resigned their cabinet positions, they
Ehud Olmert, former mayor of Jerusalem and prime minister of Israel was sentenced to six years for taking bribes of
about $160,000 from a construction company. Bob McDonald, former governor of the state of Virginia in the US was
sentenced to two years in prison, followed by two years of supervised release for accepting bribes, gifts. Loans for
more than $130,000. Former Romanian prime minister Adrian Nastase was sentenced to two years for corruption.
Former prime minister of Thailand Thaksin Shinawatra was also sentenced to two years imprisonment in absentia over
a corrupt land deal.
were exonerated by the parliament where AKP holds the majority
. Further prosecution of these
cases were dropped by AKP deputies vote in the parliament.
With a simple parliamentary majority, it was relatively easy for AKP to change the laws to fit their
needs. The Public Procurement Law which was pretty decent when adopted in 2002 was revised
36 times since then to grant exceptions several categories conducive to corrupt practices
According to the Corruption Perception Index published by Transparency International, Turkey
has always ranked between 50th and 70th among 180 so countries. (Figure 46) While Turkey’s
scores and rankings have improved between 2003 and 2008, they have deteriorated since then
with a major drop in from the 53rd place in 2013 to the 64th place in 2014. It is very likely that the
2014 index has not fully captured the December 2013 revelations and would also suffer a
significant drop in 2015.
Turkey ratified the OECD Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions in 2000, but has finalized only two foreign bribery cases,
both of which resulted in the acquittal of the defendants. A monitoring report expresses serious
concerns about Turkey’s low level of enforcement and that there has not been one foreign
bribery conviction in the 11 years since the entry into force of the Convention in Turkey, despite
the size of Turkey’s economy and its geopolitical importance. Of the ten allegations of foreign
bribery that have come to light since 2003, Turkish authorities have taken limited investigative
steps in six cases.
Turkey also ratified the United Nations Convention against Corruption (“UN
Convention”), which is the first global convention on corruption aiming at preventing corruption in
both public and private sectors in November 2006 and became a member of Group of States
against Corruption (“GRECO”) upon ratifying Council of Europe’s Civil Law Convention on
None of the corruption cases which have been investigated and prosecuted abroad involving
politicians and governments officials in Turkey were prosecuted in Turkey. The Tyco,
Delta&Pine, Daimler, Meditronics, Micrus, Siemens, Deniz Feneri cases were deliberately not
followed up by the judiciary in Turkey. It is ironic that one of the priorities of Turkish Presidency of
G20 this year is anti-corruption. This would be akin to making women’s rights as a key priority for
Saudi Arabia’s G20 presidency.
In December 2013, [four] cabinet members resigned in a scandal involving money laundering and government
contracts. In February 2014, an audio recording was posted on YouTube in which Erdoğan and his son appear to
discuss hiding millions of dollars in cash. While Erdoğan claimed the recording was a montage and that he had been
subject to illegal wiretapping by elements of a “parallel state,” opposition parties said the recording was genuine. In
March further recordings suggested, among other things, that Erdoğan had interfered in judicial cases, ordered media
to run pro-government stories or silence the opposition, and approved the leak of a sex video featuring the former
leader of the CHP. In addition to denying the authenticity of the tapes, the government passed a series of laws to more
tightly control information, particularly on the internet.(Source:
“… a sophisticated rent-seeking system reigns over public procurement bids, both at the local and central
government levels. Local AKP officials reportedly encouraged donations to be made to handpicked NGOs like
TURGEV, which is run by Erdogan’s son, Bilal Erdogan, or for future “projects” of the party. These “donations” usually
range between 10 percent and 20 percent of the bid amount. Interestingly, some theologians even issued religious
edicts that justify these “donations.” A. Kadir Yıldırım, “Clientelism 2.0 vs. democracy in Erdogan’s ‘New Turkey’”,
Washıngton Post, March 13, 2015
Of these six cases, one led to an acquittal, two investigations are ongoing pending outstanding MLA requests, and
three were terminated at the investigative stage when foreign authorities failed to supply sufficient evidence. Turkey
has taken no investigative steps in two cases and was unaware of a further two allegations, although these were
publicised in both Turkish and foreign news. Phase 3 Report on Implementing the OECD Anti-Bribery Convention in
Turkey. October 2014
Another measure of corruption is the Global Corruption Barometer also published by
Transparency International. In its 2013 version, those surveyed indicated that political parties
were the most corrupt institution in Turkey. Table 5 provides a comparison of global score
compared with Denmark, one of the least corrupt countries and Sudan, one of the most corrupt
A recent survey by the
Transparency International shows
that 67 percent of those surveyed
believe that corruption has
increased in the last two years and
54 percent believe that it will get
worse in the next two years.
While 55 percent think that efforts
to stem corruption have been
ineffective, 18 percent indicated
that they have been very effective.
Among the reasons of corruption,
8.1 percent identified
parliamentary immunities and lack
of punishment, 8 percent
business-politics relations, 8
percent procurement systems, 8
Uluslarası Şeffaflık Derneği, Türkiye’de Yolsuzluk Neden, Nerede, Nasıl? Kamuoyu Araştırması Sonuçları, İstanbul.
Nisan 2015
percent media-business relations and 7.9 percent lack of social consciousness.
There are several comparative indicators about the investment climate and business
environment in different countries such as the World Bank’s Doing Business. Turkey ranked the
55th in the Doing Business 2015 behind Bulgaria, Armenia, Romania and Hungry and ahead of
Belarus, Russian Federation and Moldova, not exactly a place for the “Empire of the Universe”
that Erdoğan thinks he is ruling. (Figure 47) In the Index of Economic Freedom 2015 by the
Heritage Foundation, Turkey ranked the 70th just after Kazakhstan and before Ghana.
Inefficient government bureaucracy and policy instability top the list of the most problematic
areas doing business in Turkey provided in the Global Competitiveness Report of the World
Economic Forum (Figure 48) The same report shows that judicial independence in Turkey
ranked 101th out of 144 countries, just ahead of Nigeria and 130th place in female participation in
labor force ahead of Libya and
Saudi Arabia.
Serious questions about the
independence of the judiciary,
almost daily violation of the
law of the land by the highest
echelons of the state,
increasing restrictions on
freedom of speech,
harassment of the media,
allegations of wiretapping in
massive scale, a dysfunctional
government, constant
bickering among policy
makers about economic policy
as articulate as the town
musicians of Bremen,
uncertainties about
macroeconomic policies, a
total political mess with the
“Kurdish Initiative” pretty much
sums up the investment
climate in Turkey today. An interesting aspect of the efforts to build the “New Turkey” that
Erdoğan is advocating all seem to be taken straıght out of the “standard handbook of
authoritarian rule” that sits on every dictator’s desk.
rough translation of “Cihan İmparatorluğu” * one of titles of the Ottoman Empire during its rise. Cihan, a Farsi word
interchangibly translates as Universe or World
Health Care
There have been visible improvements in the delivery of healthcare services in terms of access
and activity. Most of these improvements resonated with voters when AKP used them in its 2007
and 2011 general election campaigns. In 2012, Erdoğan had the audacity of claiming that he
advised Obama how to do the health care reform
, not to mention how clueless his statement
One of the things that the incoming AKP government inherited was the blueprints of a health
care reform dubbed as “Health Transformation Program (HTP)” prepared by the World
Bank(WB) together with its willingness to provide financing. The program proposed to shift the
focus to primary care with creation of family physicians (GPs) and introduction of a single-payer
health insurance system. The government implemented the program religiously.
The key outcome of the HTP was to improve the access to health services and increase the
activity. The fragmentation in healthcare service providers and people covered were reduced,
multiple coverage schemes that had diverse entitlement rules into a single-payer, improving
pooling and redistribution. It also changed the perception among the population that they had
better access to service delivery.
While Turkey’s key health indicators have continued to improve, they are significantly worse than
the OECD averages. (Figure 49) These improvements as illustrated by statistics on life
expectancy at birth, neonatal mortality, maternal mortality and infant mortality has kept pace with
the previous trends and improvements in the health indictors of other upper middle income
countries. But the claim that HTP has resulted in better outcomes than other upper income
countries or Turkey’s own record during the period prior to 2003, in most cases, is statistically
untrue. (Table 6) For many of the indicators, the rate of change during the 1985-2002 period
was higher than the rate of change during the 2003-2012 period. In other words, the impact of
HTP on key health indicators was hardly material
For most of input and performance indicators, Turkey ranks the 34th among the 34 OECD
member countries or a close second lowest. In terms of behavioral risk factors, Turkey ranks the
lowest in per capita alcohol consumption by a big margin (1.6 liters per capita per year)
compared to the OECD average of 9 liters. But Turkey ranks high in tobacco use (eighth out of
34) and rapidly increasing obesity.
Along with the implementation of the HTP, there were significant increases in the government
health expenditures. The share of total health expenditures in GDP rose from 5.4 in 2002 to 6.8
percent in 2008 but declined to 6.3 percent in 2012, following the same pattern of changes in
A number of media outlets close the government reported the following statement by Erdogan. “After the Friday
prayer at the Blue Mosque, a large group of tourists waved at us and came by. I learned that they were Americans.
They asked me “how did you manage undertaking your [such a successful] health care reform” They had heard about
my upcoming visit to the US. They said, “Since you are going to the US, please tell Obama how to do it. When I went
to US, I told Obama. It was difficult but the senate also approved this reform.” Turkish original: "Sultanahmet
Camii’nde Cuma Namazı kıldık arka tarafta yoğun bir turist grubu. Görünce el salladılar yanımıza yaklaştılar.
Amerikalı olduklarını öğendim. Bana dediler ki bu sağlık reformunu nasıl yaptınız? Bu arada ABD seyahatim
var bunu da öğrenmişler. Amerika'ya gideceksiniz bunu Obama’ya anlatın dediler. Gittim sayın Obama’ya da
anlattım. Zor oldu, ama Amerika’da senatodan da bu reform geçti."
It is still too early to have a full impact assessment of the HTP - a point that external partners such as the World
Bank and WHO need to remember in their reporting.
AKP’s public expenditure priorities. (Figure 50) Per capita government expenditures on health
increased from PPP$ 314 in 2002 to PPP$ 845 in 2012, corresponding to an annual average
growth rate 5.8 percent in real terms, slightly faster than the real GDP growth for the same
. The share health expenditures in total government expenditures went up from 9
percent in 2002 to 13 percent in 2008 and remained at that level since then.
Turkey’s health expenditures
as a percent of GDP was the
lowest among the OECD
members in 2012. (Figure
52) Turkey ranked the
second from the bottom in
terms of per capita public
expenditures on health, just
above Mexico.
One of the key elements of
the HTP was to consolidate
public sector health (and
pension) providers under the
Social Security Institution
(SGK) with an objective to
achieve universal coverage.
In November 2014, there
were 11.8 million people
registered with the SGK, of
which 4.2 million paid their
own premiums while the
government paid the
premiums of the remaining
7.6 million. Our estimate is
that about three quarters of
the population (58 million
out of the 77.7 million) have
health insurance coverage.
Those who are not covered
include workers in the
informal economy,
unemployed who are not
receiving unemployment
benefits, farmers and self-
employed who failed the
means test, but are unable
to the premiums and unemployed females who are over the age 18. In other words, the system
The data used in this paragraph and Figure 38 come from WHO sources. According to OECD data on health
expenditures, per capita public expenditure in 2012 was PPP$ 756, the second lowest among OECD countries after
is far from being universal and excludes vulnerable groups.
Since a third of the labor force are in the informal sector, a
large majority of the workers in very small enterprises are
not covered. More than half of the workers in firms
employing 1-9 workers and about 20 percent in firms
employing 10-19 workers are not registered and considered
informal. (Figure 51)
OECD Health Statistics 2014 also shows that the supply of
health workers in Turkey has increased over the past
decade, but remains low by OECD Standards. (Figure 53)
The number of doctors per capita in Turkey has risen
considerably since 2000, going up from 1.0 doctor per 1000
population in 2000 to 1.8 in 2012, but this is still the lowest
rate among OECD countries and well below the OECD
average of 3.2. Similarly, the number of nurses and midwives stood at 1.8 per 1,000 which was
the lowest and significantly below the OECD average of 8.8 in 2012. National averages,
however, veil large variations across the 81 provinces of the country. The number of doctors per
1,000 varied between 0.86 in Hakkari to 3.2 in Ankara in 2013. While the five largest provinces in
terms of population had 2.15 physicians per 1,000, the smallest ten provinces had an average
ratio 1.21 of physicians to 1,000 population. The number of nurses also showed large variations
from 0.99 in Şanlıurfa and 3.16 in Trabzon. The numbers for dentists and pharmacists are also
significantly below the EU averages - 30 dentists per 1,000 in Turkey vs 68 in the EU and 35
pharmacist vs 74 in 2014.
At the university level, there were 86 medical schools in Turkey, 73 of which granted MD degrees
and 60 of which had specialization programs in 2014. In addition, 59 hospitals and institutions
managed by the Ministry of Health also provided specialization programs. The quality of
education in some of these medical schools are dubious as there was spree of establishing
universities in every provincial center during the second phase of the AKP rule. Part of the
problem is the education system has not been geared to provide quality graduates to meet the
needs of the healthcare sector, particularly nurses and technicians for which the shortages are
acute. In recent years, the problems of medical education has become more to do with the
quality than quantity.
At the upper secondary level, public vocational high schools which train nurses and nursing
assistants, had 105,000 students compared to 474,000 in the religion based preacher school in
the 2013/14 academic year
. (Figure 54) The disproportion of resources allocated in education
to the human resource needs of the country has been appalling and will be discussed further in
the next section of this report. Realizing the shortages, the government initiated a program for
providing incentives
to private sector to open upper secondary health professional schools in
2009. By 2013, there were 160 private schools, mostly in Istanbul and other large cities opened
up by pretty much
anybody who had a
building and wanted to
take advantage of the
government subsidies.
After four years and 30
thousand students who
paid very high tuition
and fees, regulations
were tightened and
graduates of these
schools would be
qualified only as nurse
aides rather than
A recent study on the quality of education and training at Anadolu Sağlık Lycees concluded that Anatolian
Vocational Health High Schools are inadequate in physical infrastructure and number and quality of the teachers, have
leadership that cannot fully meet expectations, cannot motivate students well enough, have shortcomings in the
educational programs and testing and evaluation, and have lack of school-family-community support.” Vatanartıran,
Sinem and Eren, Abdul Kadir., Anadolu Sağlık Meslek Liselerinin Etkili Okul Boyutları Bağlamında İncelenmesi,
Adıyaman Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, Yıl:7 , Sayı: 16, Nisan 2014
Initially it was a subsidy of 1,000 lira per student.
In contrast to many countries which has been downsizing their hospital capacities as the
emphasis shifts to primary care, Turkey has seen a rapid increase in its hospital capacity. The
number of hospital beds increased from 140 thousand in 2001 to 202 thousand in 2013. 40
percent of the new capacity was added by private hospitals number of which doubled to 550
during the same period. Not unlike the private nursing schools, hospital ownership became a
growth industry, particularly by those who have “good” political connections
and access to
incentives provided by the government, such as land in protected areas which then can be
converted into uses other than a hospital. The government has also built new hospitals and
added 14 thousand beds. Another 10 thousand beds were added by universities as they opened
new medical schools. Given that occupancy rates in hospitals in Turkey, in general, low and
even lower for private hospitals, excess capacity may pose problems for cost management of
hospital sector, possibly leading to unnecessary hospitalizations. (Figure 55)
It has been reported in the press that the current minister of health, Mehmet Müezzinoğlu, owns one or more private
hospitals in Avcılar area of Istanbul and he told a parliamentary commission that he has not been involved in day-to-
day management since he was elected to the parliament in 2007. There is no indication or evidence that he has
divested his ownerhip interests in these healthcare providers which are regulated by his ministry. Conflict of interest is,
unfortunately, an unfamiliar term and concept in AKP’s vernacular.
An OECD report expresses the concern that
“in the hospital sector, patients’ propensity for
visiting emergency hospital services even for
minor ailments and payment incentives that
encourage volumes of in-patient care create
the risk that patient safety and care
effectiveness are not prioritized enough.” For
instance, data on the number of caesarean
sections in Turkey which are the highest in the
OECD, may suggest ineffective use of hospital
capacity. “Between 2006 and 2011 the number
of caesarean sections increased from 297 to
462 per 1 000 live births, which is the highest
rate of growth in the OECD. (Figure 56) A high
rate of caesarean section can increase the risk
of mortality and morbidities for both the mother
and the child, or lead to risk of complications
for future deliveries.”
Additional expenditures
on new hospital capacity also poses the
question whether it has been a sensible use of
budget resources or an instrument of political
OECD report also indicates that “payment
systems have rewarded structure and activity
very well; however the link between increased
activity and quality of care can in no way be
assumed, and there is a risk that productivity
might lead to higher cost without necessarily
improving outcomes.”
Transfers from the
government to the Social Security Institution
has grown rapidly and reached 5.5 percent by
2009 and it averaged 4.5 percent during the
last five years.
The OECD Review highlights two other
important points.
“Few indicators of quality are collected, and those that exist, point to poor quality of care
by OECD standards. For example, mortality within 30 days of hospital admission for
acute myocardial infarction in Turkey 10.7 per 100 patients is 35% higher than the
OECD average of 7.9. Similarly for stroke, case fatality within 30 days of hospital
admission is the third highest in the OECD (11.8 per 100 patients), following Mexico and
Slovenia. These data signal the need for prioritizing monitoring and improvement
OECD (2014), OECD Reviews of Health Care Quality: Turkey 2014: Raising Standards, OECD Publishing.
Ibid. p.17
initiatives. There is still insufficient collection and public reporting of quality measures,
including from the private sector.
Import and operation of diagnostics equipment is ill regulated and little supervised.
Reports of diagnostic equipment being operated by people without the necessary
technical qualifications and training abound. Most facilities rely heavily on contracts with
social insurance organizations and there is a significant tendency to over-prescribe high
technology diagnostic examinations. Although illegal, some private diagnostics centers
are known to give referring public sector physicians a commission. The import of
diagnostic equipment, particularly second-hand, has boomed. Diagnostic equipment is in
significant oversupply compared to needs.”
A comparison of the causes of death show that while the health care system has been
able to reduce deaths from communicable diseases, the rate death from non-
communicable diseases have gone up during 2002 and 2012 in Turkey, supporting the
OECD’s view about the quality of care. (Table 7)
Imports of medical equipment grew at an average annual rate of 14 percent in dollar terms
during 2002-2013 period. Readily available data in this area are scant but there are reports of
excess and unnecessary imaging by the diagnostic centers and private hospitals. Turkey ranked
the highest among the OECD members for Magnetic Resonance Imaging exams per 1,000
people in 2012. (Figure 56) The rate with which the imaging equipment is used in Turkey shows
clear pattern of waste of resources, public or private.
Little data are available for international comparison of pharmaceutical use in Turkey, probably
due the fact that it is one of the avenues of resource transfers without any serious checks and
balances. The estimates of the size of the domestic pharmaceutical market was about $11.2
billion in 2011. A rough estimate by EPA puts the per capita pharma spending in Turkey in PPP$
terms at $244, below the OECD average of about $480. This estimate also puts Turkey at the
third lowest level among the OECD countries.
ibid. p. 18
AKP saw altering the education system as one of the key means to undo the basic tenets of the
Republic to instill their brand of religious values on the younger generation. Erdoğan summed up
his government’s policy very succintly: “We want to raise a vindictive and devout youth”
Education is an area where AKP’s policies have resulted in catastrophic results. The damage
created is likely to require several generations to restore. Like the other areas of reforms, AKP,
again by dissimulation tried to sell “Islamization of education” as reforming the education system
and even managed to get the support of international institutions, until 2013. In the name of
extending compulsory education to twelve years from eight years, a system of 4+4+4, breaking
up the period into three distinct phases, effectively decreasing the elementary education period
to four years, and paving the way for different curricula in the second four-year period -and
especially for the secondary education of Imam hatip Schools (Religious Vocational High School)
and an intensive religious education. A year after 4+4+4 was introduced, a massive conversion
of schools providing the second and third four year phases into Imam hatip schools from general
education. This would also allow keeping girls at home after the first four years under the guise
of home schooling. The start of the compulsory schooling was pulled a year earlier to 60-66
months instead of 72 months of age
During the last meeting of the National Education Council
, a number of proposals such as
ending coed education, instituting religion classes for the 1-3 years of primary education the
compulsory religion classes currently start at year 4, obligatory commemoration in schools of
“Holy Birth Week,” April 14-20, to mark the birth of the Prophet Muhammad were put on the
table. While the ending the coed education did not make it in the end, many of the proposals
were accepted by the Council and are in different stages of adoption. Another proposal tabled at
the Council meeting was to introduce compulsory Ottoman-language courses in high schools
was not accepted.
The major problems of the education system at all levels is its low quality and increasing
inequality. While the eight year compulsory basic education has helped increase schooling rate
in the last two decades, it success, in part, was the continuity of the curriculum for eight years,
breaking the chain at the fourth year will further deteriorate the already low quality. This is partly
reflected in the rapid performance improvement in PISA assessments
of mathematics (between
2003 and 2009) and science (between 2006 and 2009). But AKP saw the eight years
In a speech to AKP’s youth organization on 19 February 2012 in Istanbul, he quoted Necip Fazıl’s from “Address to
the Youth” and said “I am underlining. I am talking about a youth who are modern and devout Muslims. Who would
protect [their] religion, language, brain, science, virtue, home, hatred and heart?” “Altını çiziyorum; modern, dindar bir
gençlikten bahsediyorum. dininin, dilinin, beyninin, ilminin, ırzının, evinin, kininin, kalbinin davacısı bir gençlik”. In the
original poem, Necip Fazıl used “vengance” instead of “heart”, Erdoğan seems to change it. After the speech, media
was pressured to edit out “hatred” in their reporting.
It looks like the Ministry of Education is backtracking on the school start age. A new decree provides for more
flexibility if the parents petition for delaying it.
It is the highest advisory body to the Ministry of National Education, bringing together stakeholders but dominated by
those close to the government.
The Programme for International Student Assessment (PISA) is a triennial international survey which aims to
evaluate education systems worldwide by testing the skills and knowledge of 15-year-old students. To date, students
representing more than 70 economies have participated in the assessment. The most recently published results are
from the assessment in 2012. Around 510,000 students in 65 economies took part in the PISA 2012 assessment of
reading, mathematics and science representing about 28 million 15-year-olds globally. Of those economies, 44 took
part in an assessment of creative problem solving and 18 in an assessment of financial literacy.
compulsory education as a secular trick to put more girls through the primary schools and keep
children out of the Imam hatip track from early ages.
15-year-olds in Turkey have achieved lower-than-average scores in the PISA in all three
components reading, science and math. (Figures 58 and 59) Among the 34 OECD countries,
average scores for Turkey were the third lowest (after Mexico and Chile) in the PISA 2012
results. (Figure 60) Comparison with 65 other countries shows that Turkey is ranked 42nd
for maths, 41st for reading skills and 45th for science skills. PISA results also highlight the
inequality in the education system. Top performers in math accounted for only 5.8 percent in
Turkey in contrast to 12.6 percent in OECD, while low performers accounted for 42 percent and
23 percent respectively. For science and reading, the share of high performers is lower than the
OECD average while the share of low performers are about double the OECD average.
A major weakness of education in Turkey is very low priority accorded to early childhood
education. Only 4.6 percent of age 3 children are enrolled in early childhood programs in Turkey
compared with 70.2 percent OECD average
. For the age 4, enrollment ratios are 19.5 percent
and 84.5 percent respectively. Spending on early childhood education per student in PPP terms
was less than third of the OECD average in 2012. During the 2013/14 academic year, there were
total early childhood enrollment was slightly more than a million, of this 14 percent were in
private schools. Of the 205 thousand new classrooms built during the 2003-2013 period, only 8
percent were for early childhood program. Only 0.3 percent of the 2014 investment program was
allocated to for preschool education.
OECD research on early childhood education and care suggests that home learning environments can affect
children's cognitive skills if parents are less involved or lack resources to provide the appropriate environment.
The quality of higher education is equally problematic in Turkey. There was a very rapid increase
in the number of universities in Turkey. It jumped from 70 in 2003 to 181 in 2015, in part,
resulting from Erdoğan’s “at least a university in every province” policy and, in part, from an
increased interest by private foundations to open a university.
Since 2006, 98 new universities were established, 51 of which were state universities. Most of
the foundation universities are located in the large urban centers. Three quarters of the
foundation universities are in the three largest cities (Istanbul, Ankara and Izmir) while these
cities host only a fifth of state universities. (Figure 61)
The opening of new universities brought about a significant increase in the number of students in
two-year programs which increased by 148 percent from 803 thousand students between the
2006/7 and 2012/3 academic years. The increase in the number of four-year programs were
modest even with the large increase in the second program night and weekend classes which
admit students with lower entrance exam scores and charges a higher tuition. The share of
female students increased from 42 percent to 46 percent for all programs, but the increase in
their shares was impressive for the four-year programs which reached 50 percent in 2012/3.
While the number of teaching staff
(including faculty and assistant level)
doubled during the same period, the rapid
increase in the number of universities
placed a heavy burden on the quality of
education. Most new universities in
smaller cities were opened with two-three
full time professors who ended up
undertaking administrative duties like
chairpersons of several departments and
deans of a number schools, not
necessarily in their own fields. The result
of opening universities like corner grocery
stores may have been politically
attractive, but is leading to under
education of at least one generation.
In addition to quality issues, there are
concerns about the skill mix that the
universities provide and market demand
and needs of the economy. If there are
more schools of theology with 28
thousand students compared to 24
agriculture schools with 26 thousand
students that should be a cause of
concern to sensible policymakers. But the government’s hiring policies in recent years basically
disregard previous education and acquired skills. Priority is given to the graduates of Imam hatip
education and they hired to pretty much into every position regardless of their ability to perform
the job. Then the close and remote relatives of the AKP nomenkulatura, followed by party hacks
are hired. As mentioned earlier, the government hired 574,000 employees since 2003 and
bloated many agencies with excess personnel. Most of the new hires were employed into the
“specialist” or “assistant specialist” status which pay significantly higher than regular civil service
A major problem for higher education in Turkey is its governance. A centralized agency, Higher
Education Council, controls budgets, number of faculty slots, curricula, granting academic ranks
and pretty much everything else related to management of a university. This is a perfect example
of how the regulator and operator combined in one agency brings out the worst. The current
government which had the higher education reform, including the dissolution of the Higher
Education Council in its election platform, made a complete turnabout and started using the
council for political control of the university system. Since academic recruitment and promotions
are solely handled by the council, academic cadre is now determined by AKP rather than merit.
Almost all of the university rectors are appointed by the president on the basis of their loyalty to
AKP regardless of the results of elections held by the universities governing bodies such as the
senate. Not unlike every other institution in the countries, universities are now completely under
Erdoğan’s control.
There is a clear need for reforming higher education in Turkey, but it is probably better for
everyone that AKP does not touch it under the guise of reform which probably end up converting
universities in medreses
. A serious reform would involve much greater autonomy to universities
in managing their schools, possibly with a board of regents representing stakeholders (students,
faculty, alumni, and locality) and turn YÖK into an accreditation agency.
An underlying cause of low quality in Turkey’s education system is gross underfunding,
particularly when compared to other members of OECD. In 2011, Turkey ranked the lowest
among the OECD countries, in terms of share of education expenditures in GDP, and, for
expenditure per student, at all levels of education except higher education where Turkey ranked
the fourth from the bottom. In the case of higher education, per student expenditures (including
R&D expenditures) was 60 percent of the OECD average while it was less than a third of the
OECD average for the lower levels of education. (Figures 62 and 63)
Recently, Erdoğan started to call university campuses as “külliye” which was an Ottoman architectural concept - a
complex of buildings, centered around a mosque and managed within a single institution, often based on
a vakıf (foundation), and composed of a medrese (religious school), darüşşifa (clinic), kitchens,
bakery, hamam (bathhouse), other buildings for various charitable services for the community. In a strict sense, it
would be a misuse of the word since it implies being centered around a mosque. But misuse of concepts, words,
quotes, and statistics has never stopped him before making egregious or misleading statements...
The priority in education should be given to enhancing the quality and reducing inequalities. It
would mean investing heavily in early childhood development to level the playing ground for
children from different socioeconomic backgrounds. This would also mean using limited
resources for quality enhancement and not opening new half-baked universities. Investing in
quality would also mean less spending on construction and more on software. Since the current
government feeds on, in part, kickbacks from the construction sector, it may not be that easy to
change the mix of the investment spending.
The government should also stop tinkering with the lower secondary education and stop
redesignating them as imam hatip schools
. There are already 1,628 lower imam hatip schools
(IHOO)converted from regular lower secondary schools (or upper basic education or the
Without going into underlying psychological reasons, Erdoğan is the key force behind expanding imam hatip
education. He takes pride in being the first president with imam hatip background, paving the way to others with imam
hatip origins to rise and hiring staff to Presidency almost exclusively with imam hatip backgrounds.
second 4 in the 4+4+4 configuration). Students are arbitrarily assigned to religious education if
the neighborhood school is converted into an IHOO. The same issue arises for the last 4 years
(upper secondary). Students are force placed in schools again with a lot of dissimulation into
Imam hatip Lycees (IHL) which now number 1,001
. Even if one is assigned to a regular lycee,
there are four `elective` courses (Basic Islam, Koran, Life of the Prophet and Arabic) students
are expected to take.
There has, however, been a number of positive developments. First, a high proportion of females
graduate from mathematics, sciences, computing and engineering schools of universities. In
2012, 54 percent of the graduates in sciences were female compared to an OECD average of 41
percent and in engineering, the ratios were 32 percent and 23 percent respectively. Second, the
percentage of 15-29 year olds who are neither employed nor in education has declined from 44
percent in 2005 to 29 percent in 2012, although it is still significantly higher than the OECD
average of 15 percent. Third, returns to education in the Mincerian sense, are significantly higher
in Turkey than OECD averages.
In 2012, adults with a tertiary education earned 91 percent more on average than an adult with
an upper secondary education, compared with the OECD average of 59 percent
An adult with
an upper secondary education also earned 37 percent more than an adult with a below upper
secondary education, compared with the OECD average difference of 22 percent. The difference
in relative earnings is most marked for women. In 2012, 25-64 year-old women with a tertiary
education earned 99 percent more than those with an upper secondary education, while women
with an upper secondary education earned 53 percent more than those without one. Across
OECD countries, on average, differences for women were 62 percent and 25 percent
respectively. In addition, compared with men, young women with a tertiary education in Turkey
tend to earn less than their male counterparts whereas on average for the OECD the opposite is
The objective of the education system in a country to bring up the population’s educational
attainment levels commensurate with the needs of its economy. Turkey’s population has low
levels of educational attainment compared to the average of the OECD countries. (Figure 64)
More than two thirds of the 15+ population in Turkey has less than upper secondary education
compared to the OECD average of 23.5 percent. Percentage of people with tertiary education at
15.3 percent is less than half of the OECD average of 33.5 percent. Unless these levels are
brought up significantly, talking about moving Turkey among the ten largest economies in the
world will at best be a dream. Turning secondary schools into imam hatip schools would only
help developing technologies like the rekat-counting seccade
or the Islamic bicycle
to hide the
butts of the female riders.
Last year, a grandchild of the Chief Rabbi Isak Haleva was assigned to an IHL!
OECD, Education at a Glance 2014: OECD Indicators Turkey, DOI:10.1787/eag-2014-75-en
Other Sectors/Issues
There are a number of other areas that were not covered in this report such as energy,
environment, white elephant infrastructure projects but only the key issues wıll be touched upon
very briefly below:
"Are there any risks? Of course there are risks. But are you not going to use LPG for
cooking because it could explode or use computers just because there is a risk of
radiation?" March 27, 2011
Erdoğan on the risks of Nuclear Power Plants
Power sector is saddled with excessively high priced contracts with private generators
under an ineffective and politicized regulatory framework and sector governance. The
recent country-wide blackout was a warning sign of how lax the system management has
With half of the power generated by gas-fired thermal plants using almost all imported
natural gas from two (soon to be three) key suppliers, Turkey faces serious vulnarabilities
in energy supply security. Efforts to become a gas hub puts on additional responsibilities
for the security of infrastructure but is not a panacea for over dependence on imports.
What is happening in Ukraine which once was a gas hub should not be taken lightly.
While supply diversification by LNG imports has been a good start, there are still issues
with dealing with problems that could arise during the winter peak-demand periods. Gas
contracts should not be seen as a good source side income by the politicians.
There is still a lot of room to expand generation from renewable sources, but with proper
care to minimize environmental degradation. Declaring every valley in the country open
season with a lot of latitude to investors has led to serious environmental damage. A
balance with increased participation water users and conservationalists could be struck.
Coal-fired generation accounted for 16 percent of electricity generated in 2014. But
Turkey has a bleak track record of mine safety. As discussed earlier, rapid privatization of
mines to firms without requisite capacity to manage mines has led to failures to invest
enough in the safety of their workers in favour of larger profit margins. The Global
Methane Initiative, an international partnership aiming to reduce global methane
emissions, highlighted Turkey's "lack of investment and uncertainty over privatisation
policies" as the main challenges for the industry in Turkey.
A few weeks before the
Soma mining disaster which took 301 lives, the Republican People's Party (CHP) tabled a
motion in parliament calling for a thorough inspection of coal mines in the country. The
motion was rejected mainly because members of the ruling Justice and Development
Party (AKP) voted against it. In his speech at the site of disaster, then the Prime Minister
Erdoğan described that motion as "an effort to block main issues of the parliament".
Nothwithstanding the exorbitant costs and highway robbery associated with the planned
NPPs (Akkuyu deal has a clause guaranteeing TETAŞ buying power @12.35 us
cents/kWh + VAT for fifteen years
), there are serious concerns about the capacity of
this government to provide the regulatory and safety framework for nuclear power plants,
if its track record for mine safety is any yardstick. There were reports were scuttled later
that the seismic investigation reports had fake signatures, etc. These are enough to
create suspicion of potential wrongdoings well within the realm of today’s politics in
"It does not have 1,000 rooms. It has more than 1,150 rooms. They criticize its size and
cost only out of jealousy. It is not Erdoğan’s palace. It is the nation’s palace. They
[People] will be entertained here." December 6, 2014
Erdoğan on his palace
What is known as the “edifice complex” in political literature has been in full bloom since
Erdoğan’s move to the presidency. A grotesque palace reminisicent of Ceaușescu’s
People’s Place with more than 1,100 rooms, costing $602 million (as of December 6,
2014) officially, estimated between $1.5 billion to $2.0 billion unofficially was built in
Ankara. Several Ottoman area mansions in Istanbul are being renovated or inaptly
replicated for presidential use.
A contraversial project labeled as the “insane project” by Erdoğan himself to built a water
canal running parallel to the Bosphorus strait, connecting the Black Sea with the Sea of
Marmara, periodically pop up on the agenda. With cost estimates rannging from $30
billion to $40 billion and no obvious economic benefits, this project would be an
environmental and financial disaster in the making.
Turkey ranked the 51st out of 144 countries in the infrastructure pillar of the Global
Competitiveness Report 2015
. The report identifies speficially quality of roads (40th
rank), quality of railroad infrastructure (49th), quality of port infrastructure (57th), quality of
electricity supply (72nd). Clearly, there are areas for improvement in the infrastructure
which would require substantial resources. Given the constraints on availability of
external financing, it makes a lot more sense to focus efforts on “sane projects”.
Gender Equality
Mothers' only career should be motherhood
January 1, 2015
Mehmet Müezzinoğlu, Minister of Health
In 2013, average cost of NPP generation in the US was 2.3 cents, including fuel and O&M costs. NPP capital costs
are usually recovered over periods much longer than 15 years.
“You cannot bring women and men into equal positions; that is against nature because their
nature is different.”
November 24, 2014
Erdoğan on gender equality
Turkey ranked the 125th out of 142 countries according to the World Economic Forum’s Global
Gender Gap Index in 2014. This is by far not only the worst among the OECD countries but also
among many emerging economies. In a cynical way, this is an area where the AKP rule has
made the most progress towards the objectives of “New Turkey”. Turkey is only 5 rungs away
from the Saudi Arabia (130th/142), and 17 rungs from Yemen (at the bottom of the list).
Female labor force participation rate which is the lowest among the OECD members
decline from 36 percent in 1988 to about 24 percent in 2007, but has gone up since then
to about 30 percent as a result of urbanization and increasing needs for second income
for low income families.
Turkey ranks the 133rd in terms of women in ministerial positions. Erdoğan has not
bothered to go beyond appointing a token woman minister
(usually the minister of
family) out of 25 ministers, a tradition that Davutoğlu honors.
Women are grossly underrepresented in the parliament for all the parties with only 14
percent of deputies. The highest rate is in HDP with 31 percent which also has a woman
One of the reasons this government does not want to spend on early childhood education
is to keep the mothers at home and out of the labor force as long as they can.
Underage marriages are on the rise. While this is not borne by statistics of official
marriages, most of the underage marriages are not recorded.
Violence againist women (and/or their reporting) are on the rise. The rate of women
murders skyrocked during the last six years, growing at a rate lof 30 percent a year. The
number of who were murdered during 2010-2014 is three times the number for the
previous five years. Many women also die while under official government protection.
Reports from Mor Cati (the most prominent Women’s Shelter Foundation in Turkey) show
the government’s support for women’s shelters is minimal.
Most of the crimes are
committed by husbands, ex-husbands, boyfriends or family members for jealousy or
“saving the family honor”. Current legislation allows reduced sentences for “honor” or
“provocation” crimes. Many perpetrators believe their hate crimes are sanctioned by
For a brief period between 2009 and 2011, there were two women ministers which obviously was one too many.
Tremblay, Pinar.
Prospects for 2015 and Beyond
Despite declining oil prices, the economy was off to a rocky start as weak domestic demand
continued and exports faltered. In addition to continued weakness in Turkey’s export markets in
EU, Russia, Ukraine as well as the loss of markets in the Middle East and Gulf as a result of
mismanaged relations with its neighbors, real appreciation of the lira through most of 2014. The
first quarter of 2015 witnessed a rapid depreciation of the lira six percent against the basket -
since the beginning of the year, heavily tempered by the depreciation of the Euro during the
same period. (Figure 65)
While inflation has been slowing down since December 2014, in part reflecting the drop in oil
prices, depreciation of lira will work in the opposite direction in the months to come. Other
indicators of the economy, however, have been deteriorating since the third quarter of 2014.
Non-agricultural unemployment a more meaningful measure of the labor market developments
than the overall unemployment rate went up to 13.4 percent in January 2015 the highest level
since January 2011. In March, the consumer confidence index dropped to 5.4 percent from the
previous month and 11.1 percent compared to March 2014.
Exports had a difficult start, declining by 6.8 percent during the first quarter of 2015 according to
the data published by the Turkish Exporters Assembly (TİM). For the first time in five years,
exports experienced a significant decline in the first quarter. Compression of imports was
essentially due to decline in energy prices compared to the previous year. In fact, mineral fuel
imports increased in real terms. The current account deficit for January and February shrunk to
its lowest level since 2011.
The pressure on the exchange rate, in part, fuelled by Erdoğan’s sniping comments about the
Central Bank management and recently about the deputy prime minister Babacan, led a
significant exit of portfolio investment. Between the beginning of the year and middle of April,
about $17 billion ($8.7 billion for the equities market and $8.3 billion from the government
securities and repo markets exited. Central Bank injected $2.4 billion through almost daily
auctions to the foreign exchange market which was fragmented by government’s decision to
provide foreign exchange to energy importing state enterprises directly from the Central Bank by
bypassing the market. Until April 16, Central Bank’s gross reserves and net foreign assets
declined by about $6.5 billion. Net FX position of the banking system which turned red in the
summer of 2014 remained in the red during the first quarter of 2014. In addition, the February
balance of payments data showed inflows of $4.3 billion in errors and omissions category. There
may be several sources of these inflows, not excluding the possibility of some repatriation of
private assets abroad to help rein in the exchange rate.
The Political Landscape
Given the political turmoil that Turkey is experiencing now, including the serious frictions
between factions of AKP and Erdoğan despite large efforts to mask them from the public view,
ten weeks before the elections, it is extremely difficult to speculate how the economy will be
affected for the rest of the year. Aggravating the uncertainty is Erdoğan’s unpredictability and
concerns about the quality of policy advice he is getting. He is surrounded by xenophobic
sycophants with dubious credentials. There are no limits to he would not go to keep his power as
its end would not be a pleasant one
. The absence of rule of law is clearly not an environment
for investors with a long term horizon, but may look attractive to fly-by-night operators out to
make a quick buck. Lenders and investors would exercise a more caution investing in a country
where the president accuses the governor of the Central Bank with treason for not following his
not-so-smart orders.
There are a number of likely scenarios for political developments in Turkey with very different
outcomes. A key determinant will be how the “Kurdish Initiative” will play out. It is widely
believed that there is a quid pro quo between Erdoğan and the Kurdish leadership that Erdogan
will agree to a set of Kurdish demands (that might even include a federal structure with much
greater autonomy at the local/regional level) in exchange for Kurdish support to change the
constitution to allow presidential, more like the Erdoğan rule. In one extreme, the People’s
Democratic Party (HDP predominantly Kurdish Party) would be able to get more than ten
percent of the votes cast nationwide and gain 60-70 parliamentary seats, entering as the fourth
party, mostly at AKP’s expense. In this case, it is possible that AKP’s votes could go below 40
percent and parliamentary representation below the simple majority, depending on how well CHP
and MHP do at the polls, even an AKP/HDP coalition would not have the numbers to change the
constitution without a referendum. If AKP is able to manage the limit the drop in its votes, an
AKP/HDP coalition with two thirds majority is not out of question.
The risk for HDP under this scenario is even if they make it to the parliament, Erdoğan might
backtrack and not deliver his promises as he recently demonstrated by declaring that “there is no
Erdoğan must have realized that he locked himself in the grandiose palace and he feels isolated without any
executive powers. Unless he can install a presidential rule by changing the constitution, he will lose his hold on the
party apparatus and AKP will suffer the same fate as Özal did seeing his party coming apart after he became the
Kurdish problem in Turkey”, a statement widely interpreted as a campaign gimmick to appease
(and perhaps attract) the base of the Nationalist Action Party (MHP) to vote for AKP. If HDP
makes it to the parliament, it is unlikely that a CHP/MHP/HDP coalition could be formed to
sideline AKP.
The second scenario is that HDP falls short of the ten percent threshold and lose parliamentary
representation completely.
Even under this scenario, , it is safe to assume that AKP’s vote will
go below the 46.6 percent compared it won at the 2011 parliamentary elections, and will still be
short of the two thirds majority to push the constitutional amendment to crown Erdoğan
Neither opposition parties, however, has been able to develop a solid platform for the elections
despite the disastrous governance that AKP has demonstrated. If CHP’s proposals to increase
pensions and write-off some credit card debt find some traction among the 43 percent of 11
million pensioners who vote for AKP (based on a recent survey result), it might lead to a non-
significant vote switch and could bring down AKP vote to upper 30 percents. It is possible, but
unlikely that CHP/ MHP coalition could hold the parliamentary majority after the June elections.
In either scenario, political tensions are unlikely to disappear. Greater autonomy to Kurds will be
seen as dividing the country by nationalists who would probably take it out on the streets. Failure
to meet Kurdish demands might spark again PKK action. A weaker AKP will lead to a louder
protests against corruption, notwithstanding the fear and police repression that Erdoğan is trying
to instill. Continued dysfuntion of the parliament will not be conducive to adopt any of structural
reforms to move the country out of the economic mess that it was driven into. If Erdoğan can not
get the constitutional amendment from the parliament, he will push for a referendum, campaign
for it; the political atmosphere will get more tense and polarized and so on. Another year will be
squandered. Even under the optimistic scenarios, Turkey is likely to continue to be preoccupied
with politics for the next eighteen months.
There are a few factors to take into account in assessing prospects for the economy:
First, the lack of policy coordination within the government has become very visible in recent
years. While Babacan, Şimşek and Başçı have managed to work well together so far, some of
the peripheral ministers dealing with the economy (e.g. the current and former Minister of
Economy dealing with trade and incentives) and line ministers (e.g. Transport, Energy) have
been publicly and vocally opposed to the macro management and the conduct of the monetary
policy. Whether they find encouragement from Erdoğan’s vendetta with the team Babacan/Başçı
or they genuinely believe that an expansionary policy what Turkey needs now is difficult to tell.
What is strange is that these differences are not ironed out at the meetings of the council of
ministers and spill out to the public domain, rightfully raising questions about the direction and
sustainability of economic policies.
Second, both the government and the Central Bank suffer from a serious credibility gap as a
result of unrealistic targets and policy “packages”, separate from Erdoğan’s public statements
mentioned elsewhere in this report. Last November, the government announced its structural
transformation program covering the 2015-2018 period which included a GDP target of $1.3
billion for 2018. The MTP for 2015-2017 announced a few weeks earlier has the GDP target of
$971 billion for 2017. As much as the AKP leadership may think that consistency is the mark of a
In previous elections, the current HDP parliamentarians ran as independents and joined the party after they got
small mind, putting out a one third growth of the economy in dollar terms in one year can, at best
be described as sloppy. But one can multiply these examples where politicians talk off their
mouths without realizing how badly they damage not only their own but the country’s credibility
as well. The 2023 target of being among the ten largest economies is another one. Just a back
of an envelope calculation can show that even if Canada (the current #10 economy) stopped
growing altogether, Turkey will have to grow by 10 percent year, or 15 percent a year in dollar
terms if Canada grew at the rate in the latest WEO projections of the IMF. Let’s take the simpler
case of 10 percent a year growth and leave aside the exchange rate effects. It implies, under the
best of circumstances, an investment ratio of 30 percent of GDP. Given that the current savings
rate is about 15 percent, it would either mean that Turkey would have to run up current account
deficits to the tune of 15 percent of GDP every year and borrow more than a trillion and a half
dollars over eight years which is impossible, or raise the savings rate to 30 percent which
would mean steeply declining private and public consumption which would effectively mean the
end of AKP’s political life.
No self-respecting government would announce a policy package which has 1,200 policy actions
even if it is over four-five year period and expect to be taken seriously, particularly when the track
record of delivering on earlier promises are taken into account.
As far as the Central Bank is concerned, the credibility gap mainly arised from inflation targeting
which has been missed year after year and the rather wishy washy minutes of the Monetary
Policy Committee.
Third, most of the public statements on policies are short on substance and specifics but full of
platitudes. In many cases, the most specific information about how a policy will be implemented
is “with God’s help” or “with God’s permission,
used in a fashion and frequency which go way
beyond the figure of speech normally expected of politicians.
Fourth, a number of private sector companies which Erdoğan considers belonging to “enemies”
has been dealt serious blows by essentially illegal actions. They include cancellation of
contracts, holding off official decisions required to implement projects, taking over management,
imposing tax fines and so on. The latest was the efforts to create a bank run and bankrupt Bank
Asya which belongs to disciples of Gülen, former long-time silent political partner of Erdoğan.
Once the efforts to bankrupt the bank failed, the Savings Deposit Insurance Fund (TMSF) was
ordered to take over its management. It appears that the proportion of Bank Asya’s shares that
were freely traded were the highest among Turkey’s 16 publicly traded lenders. Overseas
shareholders include BlackRock Inc., Vanguard and Wells Fargo & Co., according to data
compiled by Bloomberg. Their ability to buy and sell the lender’s shares were constrained by the
government in September when the bank was relegated to a markets watchlist.
There were
rumors a few months ago that a possible Erdoğan raid on İş Bankası
was in the works, but this
In a rare moment of honesty, Erdoğan admitted that the economy was in a crisis at a gathering on April 18, 2015 in
Kocaeli. “We are witnessing the economy spinning its wheels now... This temporary crisis will be overcome with God’s
Bloomberg Business, Turkey’s Erdogan Exerts Power with Seizure of Bank Asya, February 3, 2005,
İşBank is the largest private Bank in Turkey. It was established in 1924 by Ataturk. Majority of its shares are held by
Isbank's own private Pension Fund, 28.1 percent are Ataturk's shares that are represented by Republican People's
was denied and rumors subsided. At a time Turkey needs foreign investment flows, vindictive
action against a business regardless of its owners unless criminality is involved is not the
best way to earn and retain investors’ confidence.
Fifth, dealing with global financial markets are not make-believe war games where one can ride a
hobby horse with 16 warriors dressed in cheap looking period uniforms. The “interest rate lobby
that he has been waging a war is an obscure concept
, often gets redefined as from Israel to
Western Banks to Gulenists whatever the day’s needs are. Rating agencies which issue a
negative report or express concerns about the economy also get their fair share, including a
threat(!) that he will set up Turkey’s own rating agency
It is not in too distant memory that the Capital Markets Board (SPK) was ordered to request
brokerage houses to surrender pretty much everything under the sun in terms of information.
Then, the Banking Regulation and Supervisory Board (BDDK) started investigating banks which
have been purchasing foreign exchange at the daily auctions that the Central Bank has been
conducting to arrest the depreciation of the lira.
Whether one likes their policies or not, institutions like IMF where Turkey is shareholder are the
lenders of last resort when the economy is driven up the hill, particularly because of reckless
spending of its rulers. Statements like “IMF was driven into the sea” or “Kicking IMF out was my
dream” by the Chief Advisor to the President
or “We [Our predecessors] were begging from the
IMF, now we are lending to IMF
” by Erdoğan are not very helpful. It may not be too long before
IMF might have to be called for help. Not that they would feel obliged to answer, but questions
like why are a shareholder in institutions that you are driving into the sea should be asked.
These factors are significant constraints on Turkey’s ability to access global capital markets.
Overcoming them requires behavioral changes on the part of the actors involved and under the
current circumstances, it is not realistic to expect these changes. Under these circumstances, it
is not difficult to say that running the economy in Turkey for the next two three years is not an
enviable task. Turkey is a resilient country and eventually will be able to deal with the mess that
Party and 31.8 percent are free float. In May 1998, 12.3 percent of the shares previously held by the Turkish Treasury
have been sold to national and international investors in a highly successful public offering. Alhough CHP shareholding
is represented at the Board, CHP receives no dividends. In his will, Ataturk bequeathed the shares to CHP but
dividends for those shares to the Turkish Historical Society and the Insitution of Turkish Language.CHP’s shareholding
in the Bank, albeit symbolic, in itself is a plausible reason to believe some truth behind the rumors of attracting
Erdoğan’s wrath.The source of the rumors was Fuat Avni, Erdoğan’s nemesis in social media, whose “heads up”
tweets proved to be correct most of the time.
A cynical explanation is that the term came about from a translator’s mistake who translated “interest lobby` from an
English text to Turkish words to the effect of interest rate lobby and, unknowingly, handed Erdoğan an imaginary foe.
“S&P’yle anlaşmayı iptal ederiz kendi ajansımızı kurabiliriz” May 22, 2012
Yiğit Bulut: IMF'yi Kovmak Benim Hayalimdi. Başbakan Başdanışmanı Yiğit Bulut katıldığı bir televizyon
programında yeni göreve gelişini değerlendirdi. Kendisine atfedilen ' döndü ' sözlerine açıklama getirdi. Bulut ' Bugün
Erdoğan için ölmek gerekirse ben ölürüm. Benim gibi milyonlar var. ' dedi. July 18, 2013
Neither sentences are accurate. Erdogan government borrowed from the IMF more than its predecessors to roll over
the IMF debt between 2003 and 2008. Erdoğan often makes the claim that Turkey lends to IMF. Actually this never
materialized. In 2009, at a G-20 meeting discussing the New Arrangements to Borrow (NAB) for IMF to deal with the
global financial crisis, Turkey was penciled in for a contribution of SDR 5 million to fund a pool of SDR 370 million,
Despite the earlier commitment, Turkey never adhered to the agreement and made its contribution when the NAB
became effective on March 11, 2011.
AKP will hand over at one point. But the damage to political Islam worldwide will probably be
Global Economic Environment
Unlike the early 2000s when the tide of global economic expansion helped lift Turkey’s economy,
external environment now looks very different and difficult. Turkey, coming out of crisis, was able
to recover fairly quickly, making use of underutilized installed capacity and taking advantage of
increasing demand for its exports. The table below compares the growth rates of GDP and
imports for regions releveant to Turkey for the 2003-2007 period and IMF’s projections for the
2014-2018 period with Turkey’s GDP and export growth rates. The growth of the World GDP
which averaged 5.7 percent during the 2003-2007 period is projected to average 3.7 percent for
the next four years while the average growth rates of imports of goods and non-factor services
would decline from 8.5 percent to 4.4 percent repectively. What is more relevant for Turkey is the
projections for European Union which accounts for half of Turkey’s exports. The IMF WEO 2015
projections put the average imports of goods and non-factor services at 4.3 percent, compared to
6.5 during the 2003-2007 period. In addition, Turkey has lost most of the new export markets it
developed in the Middle East and the Gulf region because of the mindless neo-Ottomania that
Davutoğlu concocted which suited well for Erdoğan’s ego trips. It did not take long for the Arab
neighbors to figure out the half-baked strategy which was coined as the “Strategic Depth”
actually an “opportunistic shallowness” as “zero problems with neighbors” became “zero friends”
in no time.
Davutoğlu, Ahmet, Stratejik Derinlik (Türkiye'nin Uluslararası Konumu), Küre Yayınları, İstanbul, 2001
Now, major destinations for Turkey’s exports and countries that the majority of tourists to Turkey
come from are facing a much more difficult environment. In addition to the domestic economic
and political factors affecting capital flows to Turkey, the overall direction and magnitude of
global capital flows have also changed significantly.
Outlook for Turkey
According to the Capital Flows projections
provided by the Institute of International Finance,
foreign direct and portfolio investment inflows to
emerging markets will decline slightly in 2015
and increase slightly in 2016 hovering around
$675 billion.(Figure 66). The share of flows to
Turkey has declined from the peak of 7.8 percent
in 2012 on account of the portfolio flows to 5
percent in 2014. Even if Turkey is able to
maintain the same share as in 2014, it is unlikely
that FDI and Portfolio flows would exceed $32
billion in 2015 and about the same in 2016 under
this relatively optimistic assumption
In the absence of political stability, constraints on
external financing will be more binding than it was in 2014.On the capital account side, Turkey
will have to mobilize about $72 billion to service the principal payments on its short and medium
term external debt, roughly broken down as $3.5 billion public debt, $24.8 billion medium and
long term private debt and $44.1 billion short term private debt. It will also need about $10 billion
to refinance the treasury securities held by non-residents at a minimum. In addition to rolling over
$82 billion, the current account deficit will need to be financed. The fact that the government has
decided to provide treasury guarantees for external borrowing of private contractors which are
awarded large infrastructure contracts such as the Third Bosphorus Bridge and the Third Istanbul
Airport will further weaken Turkey’s creditworthiness, particularly when considering how these
contracts were awarded. If the political situation gets murkier, even the sources of mysterious
“errors and omissions” might become reluctant to deploy funds to Turkey.
Growth in 2015, to a great extent, will depend in the ability of the private sector with external debt
to rebalance their portfolios and mobilize new external financing. Neither of them is an easy feat.
Taking into account the currency composition of the private sector’s external debt, the liability
side of their balance sheets have increased by 17 percent from 687 billion
liras to 802 billion
liras between the end-December 2014 and mid-April 2015. These figures would even get larger
for the companies which borrowed domestically assuming the exchange rate risk. There have
been a number of construction companies which borrowed fx loans and would be unable to do
much to balance the asset side of their balance sheets.
In terms of new borrowing, recent developments resulted in higher risk premium and increase
borrowing costs. Turkey's 5-year CDS premium went up from a low of 155 during the first week
corresponding to $167 billion long-term and $132 billion short term debt, including trade credits.
of December 2014 to 231 in mid-April. Yields on
the two-year benchmark note jumped from 6.69
percent at end-January to 9.44 percent during
the third week of April. Year-to-date data for the
equity market compared to other emerging
economies shows that Turkey was the worst
performer on April 17, 2015 with 18 percent loss
of its value in US$ terms. (Figure 67)
According to EPA’s Current Quarter Model
(CQMT) projections, the first half of 2015 look
very bleak with y-o-y GDP growth rates of 0.2
percent and 0.3 percent in Q1 and Q2
respectively. Unemployment rate would go up to
13.9 percent before before coming down 10.9 in
Q2 with the seasonal summer hiring for tourism,
construction and agriculture.
The EPA’s Current Quarter Modl for the Turkish Economy (CQMT) is based on the Current Quarter Model
methodology originally developed by Nobel Laureate Professor Lawrence R. Klein in the 1980s at the University of
Pennsylvania. The methodology is based on ARIMA forecasts of high-frequency indicators, bridge equations for
components of quarterly GDP (expenditure side, income side, or production side) and the principal components of
monthly indicators. This is a purely statistical system with no personal data adjustment. It is updated, on a weekly
basis, with partial information on the economy from high-frequency indicators, as they become available, and the
current (and next) quarter forecasts are adjusted, on a forward rolling basis. The EPA’s Current Quarter Model for the
Turkish Economy (CQMT), which is developed by Professor Süleyman Özmucur, utilizes the principal components
methodology and high-frequency indicators to forecast quarterly real GDP, GDP deflator, the rate of unemployment,
and the current account balance.
While the CQMT is fairly successful in accurately estimating the outcomes in the current quarter
and, to a lesser extent, next quarter, it is not a medium-term projection tool. Based on the actual
data available and their behavior until April 21, 2015, the latest CQMT run show a GDP growth of
one percent for the year as whole in 2015, an unemployment rate of 11.1 percent, and 8 percent
headline inflation. If the depreciation of lira continues and the year average exchange rate is
assumed at 2.8 lira to the dollar, the projected $54.8 billion current account deficit, corresponding
to 8 percent of GDP is not feasible. What it tells is that short term indicators do not point to the
economy making adjustments to deal with further compression of imports and much smaller
current account deficit than in 2004. (Table 10 and Figure 68) The underlying monthly
projections for key variables for the CQMT results are given in Annex I.
Growth estimates of medium-term alternative models range from 2.1 percent to 3.6 percent for
2015. These projections assume the impact of lower oil prices on imports of oil and gas to the
tune of $ 12 billion in 2015 and a 20 percent decline in tourism revenues in light developments in
the energy exporting former Soviet Union republics. Export projections factor in a likely decline in
shuttle trade with these countries as well as the positive impact of exchange rate depreciation.
Given the factors discussed above, EPA’s best estimate for GDP growth in 2015 at the moment
is somewhere between 1.5 percent and 2 percent. This implies a current account deficit of $36
billion to $40 billion (between 5.2 percent and 5.9 percent of GDP). Slower growth would imply a
higher unemployment rate, estimated at 11 percent for overall unemployment and 13.5 percent
for the non-agricultural unemployment. Slower growth combined with lower import prices for oil
and oil products will also put pressure on budget
revenues. Unless the government was able to refrain
from going on a spending spree before the elections,
fiscal balance could also be unglued by the end of the
year. But the rapid increases in non-interest current
expenditures during the last two quarters (22.5
percent y-o-y in 2014Q4 and 14.4 percent in 2015Q1)
point out to the opposite. Increasing number of
refuguees fom Syria is likely to add pressure on
public finances. The government claims that it has
already spent over $6 billion without much help from
others. Indications are that the number of refuguees
might go up to 2.5 million in 2015. It is not only the
budget, but the urban infrastructures where refugees
end up staying are strained. But in the case of
Turkey, it is only fair that the famous Pottery Barn
rule, “if you break it, you buy it” should apply. It would
be safe to assume that the Syria bill would include
significant amounts for overt and not-so-overt
financing of rebel groups.
Continued political interference on the Central Bank to pump excessive liquidity into the economy
could also result in inflation jumping to low double digits.
Projections by IFIs and other institutions for GDP growth in 2015 from 3 percent to 4 percent and
current account balance to GD ratio from-3.6 percent to -6.0 percent, an indication of the
uncertainties associated with the prospects of the economy. (Table 11)
In view of external financing constraints and without policies to encourage domestic savings, it is
difficult to consider growth rates beyond 3.5 percent to 4.0 percent for Turkey in the medium
term. While it is too early to get a sense how the post-election Turkey would look, EPA would
conservatively estimate GDP growth for 2016 and 2017 at 3.0 and 3.5 percent respectively. The
main reason for the EPA being at the low end of 2015 growth estimates is the poor performance
of the economy since the beginning of the year as illustrated by the results of the current quarter
model. One noteworthy and worrisome indicator is the 75 percent increase in the jobless
applications to the Employment Services Agency (İŞKUR) during the first quarter of 2015
compared to the same period in 2014. (Figure 68) This is the largest increase in applications to
Işkur observed during the last ten years. Poor performance of exports, runaway budget
expenditures are harbingers of difficult days ahead of the economy.
Political developments in the next three months will bring much more clarity to directions of the
economy is taking, not just for 2015 but beyond. Either Turkey is going to be stuck where it is
now or even worse muddle through from crisis to crisis. The savings rate has to be increased
and growth strategy should be built around technology development, not more manufacturing.
Turkey is still paying the price of missing the industrial revolution. More imam hatip schools and
increasing restrictions on information flows on all media forms are the sure recipe for missing the
age of technology. Doing more the same will only drive the economy a deeper crisis and
squander more years of the younger generations. Turkey’s economic policy needs a sea change,
not tinkering around the edges.
Annex Graph 1. CQMT Monthly Projections
Annex Graph 2. CQMT Monthly Projections
ResearchGate has not been able to resolve any citations for this publication.
Turkey's Erdogan Exerts Power with Seizure of Bank Asya
  • Bloomberg Business
Bloomberg Business, Turkey's Erdogan Exerts Power with Seizure of Bank Asya, February 3, 2005,