Two severe economic crises since the collapse of the banking system in 2001 have led to an economic and political transformation in Turkey.
Thanks to single-party rule, European Union-bound reform agendas, strong partnership with the International Monetary Fund (IMF) and independent local agencies such as the central bank, Turkey successfully tamed inflation from 60 percent to single digits and public debt from 95 percent of gross domestic product (GDP) to 35 percent while tripling GDP. This success released billions of dollars that had been spent on interest, which the government was then able to use. Generous health care reforms, social policies that funneled lots of money to low-income households, high-growth infrastructure projects and flexible land development led to procurement policies that generated high growth, new jobs and a successful economic outcome. Even the global financial crisis was weathered successfully thanks to sound fiscal and monetary policy management and a strong banking system. New infrastructure generated a strong Anatolian middle class and powerhouses all around the country.
However, nowadays, since becoming an upper-middle-income country, attaining an average $11,000 income per capita, with more than 20 powerhouse cities in Anatolia, Turkey is facing a middle-income trap. Structural reforms are essential, especially in tax regulations, institutional structures and the judicial system. Most of the local investment is directed at real estate and construction, which can generate problems in the long term. A more export- and innovation-driven economy must be encouraged.
The Turkish economy needs around $55 billion in annual international funds to close its current account deficit. Government debt (35 percent of GDP) is quite low, so there is not that much of a problem there, but the private sector debt is worrisome. Turkish corporate debt is, at around 60 percent of total assets, one of the highest among emerging economies. That's why companies and contractors responsible for major infrastructure projects are facing financing issues. In order to solve the problems of government-friendly contractors, even greater preferential treatment, such as government guarantees and tax amnesties, are awarded to those friendly businesses. In the case of mismanagement, the government guarantees all losses, which might generate big burdens on the budget in the future.
A preferential and biased approach to the business community is limiting new investment in the country. Transparent institutional structures are undermined, while favoritism and political connections have become widespread in working with the government. Public tenders and land development require the prime minister's direct approval. At the expense of meritocracy, clientelism and crony capitalism are on the rise. The prime minister micromanages to such an extent that he often personally decides who is going to build what and where.
The Federal Reserve is coming to the end of its quantitative easing and expansionary policies. Turkey, like other emerging economies, is affected by this trend. The recent exchange rate depreciation and the interest rate hike decision from the central bank in January eased the immediate effects. However, some ruling party officials' interventionist attitudes may hamper the independence of the central bank, thus having a detrimental effect on the economy in the long run. It is good to see that the economic management team in the central bank generally understands these concerns.
Turkey's growth model is heavily dependent on international capital flows and foreign energy resources. Policy makers need to put the current account deficit back on track towards a downward trend, which has already started after a significant depreciation in the Turkish lira, and control inflation as well as credit growth. Energy policies will have to focus on more renewable resources and alternative sources, such as Azeri and Iraqi gas, and a more transparent licensing system to encourage more investment. The regional crises in Iraq and Syria present big trade challenges for the Turkish economy.
Another worry for investors is problems with the rule of law and the erosion of economic and political checks and balances. Emboldened by a 58 percent vote in the 2010 referendum for constitutional amendments and a 49 percent general election victory in 2011, Prime Minister Recep Tayyip Erdoğan opted for the monopolization of power instead of continuing with the EU-bound reform agenda. Having tamed the military and crushed political opposition, he consolidated his power by suppressing media and dissent. His authoritarian tendencies were first evident with the disproportional use of force and harsh rhetoric against Gezi Park protesters in June 2013, which sparked an outcry inside Turkey and abroad. Erdoğan has presented the Gezi events as an international conspiracy to undermine his government, portraying the dissenters as traitors.
A similar pattern was observed during the corruption scandal of last December, which implicated the sons of three Cabinet ministers, high-level bureaucrats and government-friendly businessmen. Among the suspects are Reza Zarraf, a 29-year-old Iranian businessman in the gold trade, and Yasin al-Qadi, a businessman who was on the UN terror list for 10 years due to his connections with al-Qaeda affiliates.
Instead of complying with prosecutors, Erdoğan presented the investigations as a political conspiracy led by domestic and international actors such as US Ambassador Francis Ricciardone, influential preacher Fethullah Gülen, The Wall Street Journal, the BBC and the "interest lobby." In a clear attempt to obstruct justice, thousands of police officers and hundreds of prosecutors were purged. Subsequently, the Turkish Parliament, dominated by the ruling Justice and Development Party (AKP), passed legislation that seriously threatens the independence of the judiciary. Since the AKP has tight control over both the executive and legislative branches, it is highly unlikely that members of the Cabinet and Parliament implicated by the corruption scandal will be impeached. This would be a huge setback for the rule of law and government accountability in Turkey.
Due to government pressure and intimidation on the independent media, the Turkish nation was kept considerably in the dark about some of the crucial details of the corruption scandal. In order to hide the inconvenient truth from the people, YouTube and Twitter were banned until this move was overruled by the Constitutional Court. It takes real courage for media organizations to run stories on corruption scandals or question government actions in any other sphere. The prime minister personally chastises media bosses and intervenes in the editorial process. Those who do not comply are subjected to smear campaigns by the government and pro-government media. Media owners either have to fire journalists or face the consequences -- for example, Akın İpek, the owner of the Bugün newspaper and Kanaltürk television channel. In apparent retaliation for the coverage of the corruption scandal by his media, the government revoked three mining licenses belonging to Mr. İpek. The chairman of the Turkish Industrialists and Businessmen's Association (TÜSİAD), one of the largest business associations in Turkey, was declared a "traitor" after he said a country cannot draw foreign investment when there is no respect for the rule of law. He faced pressure to keep quiet and finally had to quit his job, citing business problems. Ambassador James Holmes, CEO and president of the American-Turkish Council, a prominent Washington, D.C.-based non-profit business organization, had to offer his resignation due to pressure from the Erdoğan government and government-friendly businessmen.
Lately, at the epicenter of Prime Minister Erdoğan's conspiracy theories, smears and discriminatory practices is the Hizmet movement (aka the Fethullah Gülen movement). The Gülen movement is a transnational, faith-inspired civic movement that developed in Turkey in the late 1960s. Inspired by prominent religious scholar Gülen's peaceful ideas and dedicated to the traditional Turkish Sufi tenets of modesty, mutual understanding, respect, spirituality and intellectual enlightenment, Hizmet (meaning "service" in English) appeals to people from diverse backgrounds. Participants in the movement have been active in all walks of life, including education, business, media and charity work. They run successful private schools in Turkey and more than 150 other countries, focusing on science and foreign languages. With its anti-violence, globalization-friendly, pro-EU-accession, pro-democracy and non-confrontational outlook, the Gülen movement offers an antidote to political and radical interpretations of Islam.
Although until recently many sympathizers of the movement had voted for the AKP due to a lack of credible alternatives, there have always been underlying differences between the two groups. Prime Minister Erdoğan's ambition to design and subordinate civil society has exacerbated tensions between the government and independent groups such as the Gülen movement. Mr. Erdoğan started to question the loyalty of Gülen movement sympathizers in the bureaucracy to him and his party as well. With those prejudices in mind, he was quick to accuse Mr. Gülen and his movement of planning a "coup" against the Erdoğan government through the corruption investigations. Prime Minister Erdoğan was not shy of publicly admitting his antidemocratic actions against the Gülen movement, which are tantamount to a “witch hunt.” Thousands of bureaucrats from various government offices were discredited, demoted or reassigned due to perceived ties or sympathies with the Gülen movement. Guilt by association has become the norm, but no single act of wrongdoing has been legally proven so far. Mr. Erdoğan is also pressing the US government to extradite Mr. Gülen, who lives in Pennsylvania as a legal resident, without any indictment, court case or charge. The White House had to issue a rare correction after Erdoğan suggested that Barack Obama had agreed to comply with his unlawful request. Mr. Erdoğan's inflammatory rhetoric includes calling Gülen movement sympathizers viruses, assassins, leeches, traitors, spies and vampires. The media affiliated with the Hizmet movement, which maintains its independence, has also been a constant target.
The witch hunt has taken a toll not only on the bureaucracy but also on civil society, the business community and the media. Canceling public tenders, rezoning existing structures, revoking business permits and deploying tax inspectors are among the common practices. Members of the Turkish Confederation of Businessmen and Industrialists (TUSKON), a leading business NGO, face government retribution if they do not give up their membership. Bank Asya was nearly bankrupted due to orchestrated defunding efforts by the government. Private tutoring centers for the national student placement exams will be closed starting from June 2015 because of the 25 percent stake of the Gülen movement in the sector. The Erdoğan government has lobbied heavily against the movement's educational institutions abroad. Several countries have had to comply in order not to lose their investments in Turkey. Despite court orders, the pro-government news outlets continue to run fabricated stories about the Gülen movement on a daily basis.
The Erdoğan government's controversial tactics are not limited to Gülen circles. Businessmen, associations and the media from different ideological backgrounds are under intense pressure to either comply or face the consequences. According to press reports, 100,000 small and medium-sized businesses have been profiled based on their donations, flight arrangements and other private data.
The AKP leadership has tried to justify its recent anti-democratic practices by pointing to their electoral victories. However, National Defense University (NDU) Professor and Brookings Institution scholar Dr. Ömer Taşpınar describes this overturn as the transformation from the tyranny of the Kemalist minority to the "tyranny of the majority." Erdoğan thinks his election victory of 43 percent in the March 30 municipal elections in the immediate aftermath of the corruption scandal has cleared him and his party associates of the corruption allegations as well. He is now running for the presidency and does not hide his ambition to use his constitutional powers in a way that will make the executive and legislative branches, if not the judiciary, subservient to him if he wins. Both opposition candidates, Professor Ekmeleddin İhsanoğlu and Mr. Selahattin Demirtaş, reject the notion that Turkey will be better off with a de facto presidential system without the necessary checks and balances, as Mr. Erdoğan suggests. Many observers think that establishing one-man rule and a party state in Turkey will compound the political and societal tensions, leading to instability.
Despite the generally negative trends in freedoms and democracy over the last few years, the Turkish government deserves credit for its continued commitment to the resolution of the Kurdish question. Prime Minister Erdoğan has spent a considerable amount of his political capital on negotiations with the leadership of the Kurdistan Workers' Party (PKK), a terrorist organization, including Abdullah Öcalan, who is serving a life sentence in a Turkish prison. Whether or not both sides eventually make serious concessions on political and security grounds remains to be seen. Critics claim that Erdoğan might abandon the nationalist Kurds after he takes their votes in the presidential elections. In that case, a return to armed conflict, which cost Turkey more than 30,000 lives over three decades, might be inevitable.
Despite some improvements, reports by international and domestic human rights groups still point to continued problems for Turkey's religious and ethnic minorities, women, journalists and others. Alevis, Kurds and Christians seek more rights. The source of many lingering rights issues is the 1982 Turkish Constitution enacted in the post-military-coup period. There is a consensus on changing the Constitution but not an agreement on how to do it. The polarization in politics and society doesn't help either.
All that said, one must not lose hope or optimism for the future of Turkish democracy. Despite occasional downturns, Turkey has historically found ways to recover and improve. Turkey is a relatively successful democratic, free-market experiment in a volatile but strategically important region. Turkish Sufi interpretations of Islam represent a powerful alternative to violent extremism. Hence, it's imperative for friends and allies of Turkey in the West to support and engage with Turkey on its democratic and economic journey. As one of the major intellectual forums in Turkey, the Abant Platform has recently declared that Turkey's continued EU accession path is essential for reforms. On the economic front, making Turkey part of the Transatlantic Trade and Investment Partnership (TTIP) process might open a new and important gateway for anchoring Turkey to the West. Turkey's value as a security partner in NATO can only be reinforced by further economic integration with the EU and US.
In his latest book "Why Nations Fail," MIT Professor Daron Acemoğlu emphasizes the importance of institutions, the rule of law and freedoms and their effect on the sustainable development of nations. A developed democracy, with a free press, flourishing civil society and independent courts also ensures a powerful economy. Therefore, Turkey's leaders and international friends should never waver in their support and investment given to Turkey's democratic and economic success, which go hand in hand.
*This text is the testimony of TUSKON USA director Hakan Taşçı before the House Committee on Foreign Affairs Subcommittee on Europe, Eurasia and Emerging Threats: “The Future of Turkish Democracy," July 15, 2014.
Published on Sunday's Zaman, 20 July 2014, Sunday