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Further Reading

The Turkish economy has been stable for seven years since reforms were implemented after the 2001 economic crisis. Turkey's economy grew an average of 6 percent per year from 2002 through 2007--one of the highest sustained rates of growth in the world. Inflation and interest rates have fallen significantly and government debt has been reduced to more supportable levels, and business and consumer confidence have returned. At the same time, booming economic growth earlier in the decade has contributed to a growing current account deficit. Though Turkey's vulnerabilities have been greatly reduced, the economy could still face problems in the event of a sudden change in the investor sentiment. The high value of the Turkish Lira threatens export industries and increased dependence on foreign capital coupled with high unemployment (9.9 percent in 2006) and a rising income gap could lead to economic instability. Continued implementation of IMF dictated reforms, including tight fiscal policy, and securing independent Central Bank monetary policies are essential to sustain growth and stability.

Turkey has taken steps to improve its investment climate through administrative streamlining, an end to foreign investment screening, and strengthened intellectual property legislation; however, many institutional impediments remain: a recent Constitutional Court ruling cancelled a law allowing sales of property to companies established by foreign investors or joint ventures involving foreign firms.

The agricultural sector continues to play a key role in Turkey's economy, employing 27 percent of the workforce in 2006 and generating most of the rural income, but accounting for only 10 percent of GDP in 2007. The agricultural sector, not including textiles, contributes about 5.8 percent of exports. Agriculture continues to decline relative to the industrial and service sectors, and is strongly in need of market-based reforms.

Turkey has bilateral investment and tax treaties with the United States, and has a Customs Union with the EU. Foreign direct investment (FDI) has soared from $1 billion in 2004 to nearly $21.9 in 2007, with a total of nearly 4,000 new companies with foreign capital in 2007, 135 of which are from the United States. In the last five years total exports have increased from $47 billion to just over $97 billion. The largest export-driven sector is textiles and clothing, which accounts for 8 percent of GDP. The global phase-out of textile quotas in 2005 hurt the Turkish textile sector, increasing competition both domestically and globally, but the damage was not as severe as some had predicted. Total imports in 2007 increased to $154 billion from $140 billion in 2006, mostly because of rising energy costs. In 2007 exports rose to $97 billion, a 12 percent increase from 2006, resulting in a $57 billion trade deficit.

In 2007, bilateral trade with the United States was about $11 billion: U.S. exports to Turkey of $6.5 billion slightly exceeded U.S. imports from Turkey of $4.6 billion.

Turkey is a large, middle-income country with relatively few natural resources. Its economy is currently in transition from a high degree of reliance on agriculture and heavy industrial economy to a more diversified economy with an increasingly large and globalized services sector. Coming out of a tradition of a state-directed economy that was relatively closed to the outside world, Prime Minister and then President Turgut Ozal began to open up the economy in the 1980s, leading to the signing of a customs union with the European Union in 1995. In the 1990s, Turkey's economy suffered from a series of coalition governments with weak economic policies, leading to high-inflation boom-and-bust cycles that culminated in a severe banking and economic crisis in 2001, a deep economic downturn (GNP fell 9.5% in 2001), and an increase in unemployment. Turkey's economy recovered strongly from the 2001 recession thanks to good monetary and fiscal policies and structural economic reforms made with the support of the International Monetary Fund and the World Bank.

Turkey's economy grew an average of 6.0% per year from 2002 through 2007--one of the highest sustained rates of growth in the world. During this period, inflation and interest rates fell significantly, the currency stabilized, and government debt declined to more supportable levels (39.5% of GDP in 2008). However, booming economic growth contributed to a growing current account deficit (-5.6% of GDP or $41.6 billion in 2008). Growth fell to 1.1% in 2008 and the economy contracted by an estimated 6% in 2009 due to the global economic slowdown and reduced exports, but growth is expected to pick up to 3.5% in 2010. Continued implementation of reforms, including tight fiscal policy, and securing independent Central Bank monetary policies is essential to sustain growth and stability.

After years of low levels of foreign direct investment (FDI), Turkey succeeded in attracting $18.3 billion in net foreign direct investment (FDI) in 2008. Global market conditions reduced foreign capital inflows in 2009, and Turkey is expected to attract around $10 billion in net FDI in 2010. A series of large privatizations, the stability fostered by the start of Turkey's EU accession negotiations, strong and stable growth, and structural changes in the banking, retail, and telecommunications sectors have contributed to the rise in foreign investment. Turkey has taken steps to improve its investment climate through administrative streamlining, an end to foreign investment screening, and strengthened intellectual property legislation. However, a number of disputes involving foreign investors in Turkey and certain policies, such as high taxation and continuing gaps in the intellectual property regime, inhibit investment. Turkey has a number of bilateral investment and tax treaties, including with the United States, which guarantee free repatriation of capital in convertible currencies and eliminate double taxation.

Turkey and the then-European Economic Community (EEC) entered into an Association Agreement in December 1964. Turkey and the EU also formed a customs union in 1995, and in 1999 the European Council granted the status of candidate country to Turkey. Accession negotiations with Turkey were opened in October 2005. So far, negotiations have been opened on 12 of the 33 chapters required for admission, and 12 chapters have been blocked by EU members. Turkey's principal ongoing economic challenge is providing for the needs of a fast-growing, young population. Raising living standards to those prevalent in Europe will require high rates of GDP growth and a well functioning market economy. This will entail continued structural reforms that encourage both domestic and foreign investment. Principal areas for reform identified by international financial institutions include increasing flexibility in the labor market, making the educational sector more responsive to the needs of the economy, and ensuring faster and more predictable operation of the judicial system. As an aspirant to membership in the European Union, Turkey aims to adopt the EU's basic system of national law and regulation (the acquis communataire) by 2014. While implementing some elements of the acquis will be costly and difficult (for example in the areas of environmental protection and agriculture), its adoption will make a significant contribution to modernizing the economy.

Installed electricity generation capacity in Turkey reached 40,000 megawatts (MW) as of 2008. Fossil fuels account for 68% of the total installed capacity and hydro, geothermal, and wind account for the remaining 32%. Electricity demand in Turkey has been above the average rate of GNP growth over the last few years. This, combined with the lack of investment in the sector, mainly due to the Government of Turkey's (GOT) control over prices and slow progress in market liberalization, increased concerns regarding electricity shortages. Official data indicated that Turkey would face electricity shortages as of 2009; however, the Government of Turkey revised its projections after experiencing reductions in demand in late 2008, due to the global economic crisis. The Ministry of Energy declared a 4.5% annual growth in electricity demand in 2009, half the amount of demand growth in previous years. In 2008, the Government of Turkey passed new legislation to encourage investment in the sector, which introduces incentives for companies bringing their facilities online by 2012. Turkey was able to privatize four of its electricity distribution facilities in 2008, and intended to continue these privatizations in 2009. Privatization of the generation facilities is next in line. The speed of these privatizations will depend on investment appetite and availability of financing.

Oil provides about 43% of Turkey's total energy requirements; around 90% is imported. Domestic production is mostly from small fields in the southeast. New exploration is taking place in the eastern Black Sea. In 2004, the Parliament approved a petroleum market reform bill that liberalized consumer prices and would lead to the privatization of the state refining company TUPRAS, which was privatized in 2005. Turkey has a refining capacity of 714,275 barrels per day (b/d).

Turkey acts as an important link in the East-West Southern Energy Corridor bringing Caspian, Central Asian, and Middle Eastern energy to Europe and world markets. The Baku-Tbilisi-Ceyhan pipeline, which came online in July 2006, delivers 1 million barrels/day of petroleum, and in 2007, the South Caucasus Pipeline (from Shah Deniz) started bringing natural gas from Azerbaijan to Turkey. Turkey's interconnector pipeline to Greece, an important step in bringing Caspian natural gas to Europe via Turkey, came online in November 2007. In July 2009, Turkey signed the Nabucco Intergovernmental Agreement, along with Austria, Bulgaria, Romania, and Hungary. Once completed, the 2,000-mile natural gas pipeline will stretch from Erzurum, Turkey to Baumgarten, Austria and will have a 31 billion cubic meter capacity.

Parliament enacted legislation separating telecommunications policy and regulatory functions in January 2000, by establishing an independent regulatory body, the Telecommunication Authority. The authority is responsible for issuing licenses, supervising operators, and taking necessary technical measures against violations of the rules. Most regulatory functions of the Transport Ministry were transferred to the authority, and the regulator is slowly gaining competence and independence. The Electronic Communication Law passed in 2008 gave greater autonomy to the Telecommunication Authority. The authority realized some important projects in 2008. Introduction of number portability was a big step forward, encouraging more competition among the GSM mobile phone operators. The authority also held a 3G License tender in 2008, where all the GSM operators participated and started implementing this new technology in Turkey.

The long-expected privatization of the state-owned fixed-line telecommunications company was accomplished by the sale of 55% of Turk Telekom to the Saudi-owned Oger Group in November 2005. The company remains as a monopoly in fixed lines, but the GSM operators' competition against Turk Telekom has been increasing. With liberalization and growth in the economy, there is growing competition for Internet provision, but Turk Telekom remains the sole provider of ADSL wide band Internet. With the establishment of the Environment Ministry in 1991, Turkey began to make significant progress addressing its most pressing environmental problems. The most dramatic improvements were significant reductions of air pollution in Istanbul and Ankara. However, progress has been slow on the remaining--and serious--environmental challenges facing Turkey.

In 2003, the Ministry of Environment was merged with the Forestry Ministry. With its goal to join the EU, Turkey has made commendable progress in updating and modernizing its environmental legislation. However, environmental concerns are not fully integrated into public decision-making and enforcement can be weak. Turkey faces a backlog of environmental problems, requiring enormous outlays for infrastructure. The most pressing needs are for water treatment plants, wastewater treatment facilities, solid waste management, and conservation of biodiversity. The discovery of a number of chemical waste sites in 2006 has highlighted weakness in environmental law and oversight.

After long years of silence, Turkey's becoming a signatory of the Kyoto Protocol was back on the agenda in 2007, and a focus of Prime Minister Erdogan's speech at the UN General Assembly. Despite the positive approach, Turkey would still like to keep its reservation to get developing country treatment with regard to the emission levels set by the protocol.

The Turkish Government gives special priority to major infrastructure projects, especially in the transport sector. The government is in the process of building new airports and highways, thanks to an increased public investment budget. The government will realize many of these projects by utilizing the build-operate-transfer (BOT) model.