Turkey Economy

Turkey's economy has weathered some spectacular pratfalls in the past, with a major economic crisis in 2001 almost bringing the country to its knees. What's different in 2004 from the previous "recoveries" is how committed Turkey is to establishing firm economic footing once and for all. The government is swallowing the International Monetary Fund's painful economic medicine, making tough choices for fiscal discipline.

Turkey's financial wunderkind, the 37-year old Minister of State for Treasury Ali Babacan credits a strong, popular and unified government with having both the clout in Ankara and the backing of the people to administer badly-needed shock therapy.

"During the last decade, stability has been a problem," Babacan concedes. "We had coalition governments and [frequent] early elections.

"But after the 2002 elections," which ushered his faintly Islamic yet pro-Western Justice and Development Party to power under Prime Minister R. Tayyip Erdogan, "we have a stable government, one the people have confidence in, which provides a much-needed base for economic recovery."

Erdogan came to Ankara under heavy suspicion due to his past in radical Islamist politics. But as mayor of ungovernable Istanbul he won grudging praise from political opponents for his hard work on civic issues and muted Islamic rhetoric. As Prime Minister he has focused on bread-and-butter issues, leading with gusto the country's drive to join the European Union.

Indeed, the JDP's acceptance of fiscal reform and pro-EU stance has rebuilt confidence in Turkey's ability to manage its finances once the IMF decamps. "Our economic program was declared in detail before the election," Babacan, a graduate of the Kellogg School of Management notes. "We're doing what we promised."

It was only during the 1980s that Turkey ditched its closed command-economy, replete with Soviet-style Five Year Plans and huge state-run monopolies. The result was a roller-coaster of boom and bust, with hyperinflation and a Wholesale Price Index at 160% by the end of 1995 and a Nominal Interest Rate of 320% at one point.

Such shenanigans were offset by production in overdrive - growth through the turbulent '90s averaged 5% per year. But in the late '90s the Asian crises and the collapse of the Russian economy cost Turkey valuable export markets. Foreign exchange sought calmer waters, leaving the government to resort to offering 140% interest on its T-bills to finance its deficit. Annual inflation ran at a Weimaresque 102%.

The IMF stepped in with a three-year stabilization program and a $4 billion jump start. But the proposals embraced by Turkish leaders at the time promised quick gain with little pain and led - surprise, surprise - to an economic freeway crash in 2001, exacerbated by rising global energy prices and the massive 1999 earthquake in the Marmara region, one of Turkey's most productive, which sucked $10 billion out of the economy.

Turkey's Central Bank Vice-Governor Dr. S. Fatih Ozatay says when the wheels fell off the Turkish economy in 2001, it was a wake-up call. "After the crisis there were problems to be attacked - lack of credibility, and a floating rate regime which nobody was familiar with. [Exchange rates] had been managed before that."

Determined to attack the root of the problem, Ozatay says, Ankara decided to make the independent central bank "as transparent as possible to the markets. We released long press releases each month to explain that month's inflation. In the background there were the new discipline and reforms, supported by the IMF, but a highly indebted country is vulnerable to the market."

"By August 2001 we had made some progress, then September 11th happened," Ozatay says. "Since then we've been moving in the right direction, the markets realize that