The majestic Aya Sofya … Turkey is a G20 member nation and the 20th biggest economy in the world by GDP. Modern-day Turkey was founded on the principles set by Mustafa Kemal Atatürk, who implemented social, political as well as economic reforms. Ataturk, who served as the first president from 1923 until he died in 1938, guided the fate of the country towards a parliamentary and secular system. For a country with a huge number of mosques and a majority of the Muslim population, this secular status was quite a contrast as well an important factor.
In recent times, starting from the early 2000s, Turkey showed increased economic growth marked by investments, increased income levels, and improved employment rate, which transformed it into an upper-middle-income country. Poverty rates decreased from 44% to 18% between the years 2002 to 2014 and extreme poverty reduced from 13% to 3%. The country not good with giving directions was headed towards the right course. Urbanization, strong macroeconomic & fiscal policies, opening the economy for foreign trade, etc. were some of the factors that contributed to the social and economic progress during this time. Turkey, which sits at the crossroads between Asia and Europe was even hoping to be included in the European Union. However, the recent events have threatened to diminish all these economic gains. But what went wrong?
Ranked 36th biggest by area and 18th largest by the population of over 80 million, Turkey is a big country! In some sectors, it is self-sufficient. In other sectors it exports goods. And, in many other areas, it is dependent on imports. When a country’s imports exceed its exports during a time, it creates a “trade deficit” also known as a “negative balance of trade”. Economists argue over the idea of whether trade deficits are good or bad. Usually, both advantages and disadvantages of deficits are discussed. Probably because there are too many factors involved and it's not a zero-sum game. More than half of the countries in the world have a trade deficit and some countries can correct their deficit over time. But most economists believe that deficits, in the long run, could hurt the economy.
And Turkey has a history of recording trade deficits.Deficits can occur if a country is heavily reliant on foreign capital inflows while not producing enough. Turkey, in recent times, remained heavily dependent on investments and loans. Back in 2013, a financial analysis firm highlighted a group of countries, coined as “The Fragile Five”, that were too dependent on foreign investments for their growth. These countries included Brazil, India, Indonesia, South Africa, and Turkey.A majority of these investments and loans, mostly in foreign currency, were injected into the construction sector. Also, easy borrowing from the banks on lower interest rates fueled this even further. This construction boom was one of the reasons behind Turkey’s economic growth after the early 2000s. Now you could say that It's all good because the construction industry prospered, and the unemployment went down and the living standard got better. And the answer is yes! BUT, investments of any sort are good only if they bring any profits.
Turkey invested in the wrong item. The real state market has been offering discounts as the country has around 2 million unsold houses. The country built a lot of skyscrapers, in fact, Istanbul has more skyscrapers than many advanced cities around the world. The country is still not a net exporter. Don’t get us wrong, the country does have an export industry like automobiles, machinery, etc. but Turkey is no Germany or Japan. Trade deficits can put pressure on the country’s currency. That's how Turkey’s currency Lira witnessed a devaluation over time. This puts pressure on consumers who reduce their consumption or may incline towards domestically produced products. This inflation was a call of trouble for three groups. One, the less affluent people of the nation who witnessed the price of everything rising, making it hard to make both ends meet. Second, the people who have savings.
They witnessed the value of their savings decline with the devaluation of the currency. This group of people even started exchanging Lira into US dollars, which is called Dollarization. Many people even turned towards cryptocurrencies to protect their money from losing its value. The third group was the borrowers who owed money in U.S. Dollars and discovered that the cost of servicing its foreign debt became much more expensive. Their debt was in dollars while their profits were declining due to the devaluation of the Lira. Many people called this a crisis, and technically speaking it is a classic case of “Debt-Currency-Crisis”, the devaluation of the currency was something quite expected.The unexpected thing was how the government and political leadership handled this situation. Turkey’s president, Recep Tayyip Erdogan seems like a smart politician but a horrible economist. He also happens to be good at creating public enemies both inside and outside the country and putting the blame of any crisis on these enemies, especially on the western countries.
One of the ways to control inflation was to increase the interest rates. Erdogan, who called the interest rates as the mother and father of all evil, refused to do that. This stance was like a cold breeze and invited quite a controversy. He even fired the head of the central bank responsible for this change in interest rates. This unusual power over the central bank also sparked more criticism. This resulted in the decline of investors' confidence and loss of the most important thing which is trust. Isn’t economics one of the most interesting topics? One thing leads to another and one change is manifested in multiple other changes, sometimes in your control and sometimes totally out of your grip. Anyways! Some say that his views on keeping the interest rates to a minimum were embedded in his religious beliefs. But if that's not the case, then another reason for keeping the interest rate low was to keep the growth rate look good enough while keeping a dead ear towards the rising inflation.
In this scenario, it's the borrowers, savers, and less affluent but patriotic people who pay the price. All this made the economic policymakers appear more like an oligarchy and a semi-dictatorship. You may have heard about having a family doctor but Erdogan once had a family finance minister. Decisions like choosing son-in-law in charge of the economy drew huge criticism. Also, a failed military coup, US sanctions, and political tensions with a handful of other countries did not help either. International media started talking about Turkey’s isolation from the rest of the world. Growing authoritarianism threatened the secular status of Turkey which was supposed to be at its root set by Ataturk. This secular status was also a major trust for European investors who invested heavily in the economy but were exposed to this mess in the process. If we ignore 2020, Tourism is an essential pillar of the Turkish economy. Despite the fluctuations over the years, travel & tourism’s contribution to the GDP was nearly 13 percent in 2019. Istanbul with its busy airport is one of the most visited cities in the world. From bazaars to hammams to museums, the country has a wide range of attractions.
The country that adds yogurt on almost everything, offers diverse food options to the tourists including Turkish coffee, mouth-watering kebabs, exotic colored tea, scrumptious Baklava, and Kumpir. Medical tourism is the kind of market which we don’t hear about very often. Turkey recognizes it as a proper economic opportunity and it's among the top contenders. But, the medical tourists don’t come to get the magic saline or IV injections. The country offers others treatments. The country offers minimal waiting times, affordable and quality healthcare services to foreign individuals. Turkish Airlines, the country’s national carrier, offers discounted rates on flights for medical travelers.
While Turkish Kebabs are quite a thing in the country and also liked by the tourists, you won’t see small businesses becoming fast-food chains like McDonald's and Subway. Probably because Turkish people are not big risk-takers in business. The Turkish don’t merely drink tea, they love it. While the tea warms social connections and long-life friendships among people, It is also sort of a stimulus that keeps the domestic economy running even though the transactions are very small. Turkey consumes nearly 7 pounds of tea per person per year which makes it the most tea-consuming country. The country has a history of high inflation rates that's why Turkish people are not the biggest savers of money. Large homes, gifts, and big fat weddings, and so on. This along with other factors promotes a society of people trying to profit in short term with little effort. Also, religion’s emphasis on the world being temporary plays its role in how people view worldly life.
Turkish people who are described as “hot-blooded” with impulsive reactions are also the most tolerant and hospitable. This is also shown in their generosity when it comes to the refugees as the country hosted approximately 3.7 million people. Among the developed countries, immigration is quite a touchy topic. 85 percent of the total refugees in the world are hosted by developing nations and Turkey is hosting a big chunk of this number. Corruption is a big problem that leaves tons of resources to be wasted by a few wrong individuals. Turkey received 40 points out of 100 and ranked 86th out of 180 countries in the CPI results.While having a big population and huge rural areas gives the country Some of the rural population left their farms and moved to cities in the hope of better opportunities. Decisions related to the import of some agricultural products instead of buying them from their farmers also discouraged the whole sector.
Turkey lacks the blessing of natural resources which has made many other countries rich. The import of oil and natural gas creates a big bill. This expenditure will cost more with more population and if the country starts to focus more on the export-oriented industry in the coming years. New oil discoveries or seeking alternate options could help in the future.The country has a fairly big young population although it has one of the lowest labor force participation rates. The country ranks one of the lowest in tertiary education attainment among the OECD countries. Lack of entrepreneurship and innovation is probably one of the direct results of it. Turkey is in a situation where it could fix some of its issues way more easily compared to other countries in its position, considering it is one of the most developed-developing countries. The Turkish economy is still keeping its chin up, but it needs to spend more on its people and the quality of the workforce by focusing on education, innovation, and entrepreneurship culture.
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