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A Decade-Long Ascent to Economic Power

Wednesday, 15 Aug 2012 | 9:58 AM ET

Honda, Hyundai, Renault, Toyota and Ford Motor are increasing vehicle production in Turkey, while Cummins just launched its diesel-filter production plant.

Source: Bloomberg | Getty Images

No wonder, then, that Turkey produces more vehicles than any other country in Europe, the most visible industry in a diverse manufacturing sector that drove a tripling of the country’s GDPin less than a decade — to $772 billion in 2011, 17th in the world.

“The government commitment to the free market is quite solid, and it understands the importance of foreign investment,” says Gareth Jenkins, an expert on Turkey at the Central Asia-Caucasus Institute, affiliated with Johns Hopkins University. “There’s still a lot of potential for further growth.”

Turkey has absorbed $110 billion in overseas investment in the past nine years, and it is now the 13th most-attractive destination for foreign investment, according to A.T. Kearney’s 2012 FDI Confidence Index .

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Capital inflows have helped fuel an outflow of goods and services: agriculture, autos, chemicals, foods and beverages, machines and pharmaceuticals. Turkey’s pharma sector ranks sixth in Europe and 14th worldwide; its auto sector has climbed to 16th. Such diversity contributed to a 275 percent increase in exports between 2002 and 2011, according to Turk Stat.

Unlike other export-powered economies, Turkey’s biggest companies and products are largely unfamiliar to most consumers in the U.S. The only exceptions: dried figs and apricots, raisins and hazelnuts, which Turkey produces more of than any country.

Nevertheless, four of the nation’s top 10 exporters are auto companies, while the machinery sector, which has grown at a 20 percent annual rate since 1990, accounted for 8.3 percent of imports as of 2011, according to Turk Stat.

Textiles and apparel have been overtaken by autos and others on the export front, according to according to the CIA’s World Fact Book.

Turkey’s decade-long ascent has a lot to do with the government of Prime Minister Recep Tayyip Erdo?an, who is also chairman of the ruling, center-right Justice and Development Party. Since taking power in 2003, the government has pushed through a wave of economic reforms, revived a struggling economy deep in debt to the International Monetary Fund and sidelined the once-powerful military establishment.

“There is better regulation, greater transparency and less political influence,” said Andy Birch, senior economist for IHS’ Europe division. “They have been very supportive of an evolution to better business practice, less corruption and more integration in the global economy. They started cleaning up barriers for international investment.”

Technicians works on a section 18 panel for an Airbus aircraft at the Turkish Aerospace Industries Inc. plant in Ankara, Turkey.
Bloomberg | Getty Images
Technicians works on a section 18 panel for an Airbus aircraft at the Turkish Aerospace Industries Inc. plant in Ankara, Turkey.

The government also reduced corporate and personal income tax rates.

Most recently, the government has liberalized laws for foreign investment, including an array of tax benefits and incentives, and accelerated its privatization program, which targets $7.03 billion in state assets in 2012.

Despite such significant progress, political and economic experts on Turkey say the government needs to do more to liberalize its economy, which still faces significant risks.

Because its exposure to the European Union sovereign debt crisis is relatively small, Turkey has been attracting its share of hot money from investors looking for a safe haven. Stock prices have soared, and yields on government debt have plunged. That, in turn, has pushed down commercial interest rates and fueled what some consider excessive lending and consumption.

In May, the International Monetary Fund said Turkey's economy was at a "critical juncture," and that Ankara needed to attack a current account deficit and inflation (forecast by the Organization for Economic Cooperation and Development at 8.9 percent and 9.2 percent, respectively, in 2012).

According to the OECD, Turkey’s foreign funding needs will “remain large in the near term” at some $150 billion for 2012, or 18.2 percent of GDP. (The Turkish economy is forecast to grow by an average of 2.75 percent in 2012-2013, according to the IMF.)

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“From the outside it looks great,” says Bulent Aliriza of the Center for Strategic and International Studies. “But what the government is trying to do is keep a high growth rate based more and more on domestic consumption and credit, tied to hot money coming into the system. It’s eager to portray all as interrupted success.”

Observers add that the 58-year-old Erdo?an — popular because of his ability to bring investment and growth to the eastern part of the country — has shown autocratic tendencies. There are also rumors that he is ill, which could lead to succession problems.

On a more practical basis, corruption and cronyism are still present enough to stifle investment and growth, experts say. In addition, the legal system is not free of political influence.

The government, for instance, likes to say that its takes just six days to start a business—the same amount of time as in the U.S. But critics say after that the process slows dramatically, with permits taking weeks or months to get. For foreign investors, working with a well-established local partner is critical.

Those wrinkles, however, haven't deterred the U.S. Trade and Development Agency, whose goal is to spur economic development abroad, from creating export opportunities for American companies.

“It’s been a priority country for the past three or four years, and increasingly so,” says Carl B. Kress, the agency’s regional director for the Mideast, North Africa, and Europe.

Turkish Prime Minister Recep, Tayyip Erdogan
Adem Altan | AFP | Getty Images
Turkish Prime Minister Recep, Tayyip Erdogan

Two of the agency’s focuses are the energy sector and transportation, both big items in the government’s privatization offering.

Energy is a growth industry in Turkey, which imports 70 percent of its energy needs, according to the Turkish EU Accession Delegation report. It is reliant on crude oil from the Mideast and Russia.

Because of that, the government is aggressively pursuing alternatives, including plans to build up to two dozen nuclear reactors and four power plants. A Russian consortium has already secured the contract for the first plant.

Given its large land mass and population, especially its middle class, Turkey’s demand for energy, like other goods and services, is growing quickly, say economists.

Among the market’s other enticements: Per capita GDP is $10,444 (double a decade ago); and there are 50 million Internet users and 65 million mobile phone subscribers in 2011, according to the prime minister’s Investment and Support Promotion Agency.

Demographics and a large number of small- and medium-sized businesses mean opportunities for joint ventures and consumer sales. Even the auto industry must still import a lot of parts, so there are “incentives for foreign companies to come in and fund low-level production,” said Birch.

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The auto sector, which is supported by 4,000 sub-industry companies, is already well-represented by the global giants: In addition to Honda, Hyundai, Renault,Toyota, and Ford Motor, General Motors, Nissan and Mazda operate there.

The U.S. currently ranks fourth in exports to Turkey; trade between the two countries hit a record $20 billion last year, according to government data.

U.S. foreign direct investment (FDI) is not as large as might be expected for a fellow member of NATO and OECD, and a country that saw Ford, General Electricand Pfizer first enter its market a half century ago.

FDI was a modest $1.4 billion in 2011, putting the U.S. squarely behind Germany, France and the Netherlands.

The reasons, say experts, are complex.

For one, the U.S. chose to focus on the bigger markets of China and India, both of which have active immigrant business communities in the United States.

“From the American perspective, Turkey was below the radar. We don’t invest a lot in the Middle East,” said Jack Goldstone, a professor at George Mason University. “I think it was a grave strategic error not to recognize Turkey as a geographic bridge, as a trade center.”

Secondly, many U.S. players saw uncertainty in the power struggle between the Erdo?an government and the once dominant military. “It’s always been a problem with Turkey: Which direction Turkey is heading,” said Jenkins of the Central Asia-Caucasus Institute. “They’re [companies] reluctant to come in, but once they did they made money.”

The investment trend appears to be changing.

The number of U.S. companies registered in Turkey increased by 50 percent to 1,200 in the past three years through 2011, according to the Turkish Industry and Business Association.

Amgen, Baxter International, Eaton, GE and Goldman Sachs have either announced or undertaken a major investment in in 2012. Chrysler and Caterpillar say they are considering it.

Though the Turkish economy is set for a slowdown in 2012-2013, according to the IMF, it’s expected to be the fastest-growing one in the OECD during the 2011-2017, with an average annual GDP growth rate of 6.7 percent.

“It is indeed a force to be reckoned with economically and geopolitically,” said George Mason's Goldstone. “Turkey has fabulous potential."

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