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Please cite the paper as:
“Turan Subaşat, (2013), THE POLITICAL ECONOMY OF TURKEY’S ECONOMIC MIRACLE, World Economics Association (WEA) Conferences, No. 4 2013, Neoliberalism in Turkey: A Balance Sheet of Three Decades, 28th October to 16th December 2013”



This article focuses on the second part of the liberalisation epoch in Turkey which started in 2001 and heightened in 2002 with the establishment of the AKP government and deals with the above counterarguments. In order to assess Turkey’s performance under the AKP government, we first investigate Turkey’s GDP and export growth performance by comparing Turkey with four income groups which are high, upper-middle, lower-middle and low income countries. We show that, while Turkey grew faster than the high income countries under the AKP period, it grew slower than the low and middle income countries. In terms of exports, however, Turkey fell behind of all the income groups. We then deal with the current account deficit and external debt. Our analysis shows that Turkey is one of the leading countries in the world in terms of the increase in current account deficit. Although external debt to GDP ratio indeed declined between 2003 and 2012, external debt signifies only a small portion of the total resources that Turkey externally borrowed. The International Investment Position (or “net external debt stock” which covers the entire resources borrowed externally) to GDP ratio has, in fact, increased very rapidly since 2003.

2 responses

  • Sedat Aybar says:


    Sedat Aybar∗


    The Turkish economy was caught by the global economic meltdown of 2008 with a high growth rate, a high current account deficit and a declining Public Sector Borrowing Requirement (PSBR). Economic growth came to a halt at the end of the third quarter of 2008. Soon after that unemployment climbed to eighteen percent, while the inflation rate rose to more than 10% in 2011—from 5.5% in 2007. Aggregate demand declined while bankruptcies of small and medium sized enterprises increased; the Turkish currency depreciated by forty percent and the stock market took a nosedive.

    But, the recovery of the economy has been rapid, reflecting high levels in growth rates. Turkish foreign trade increased by 30% from 2008 to 2009. Trade openness led to an increase in Turkish exports but import dependency has become an important destabilizing element. The Turkish GDP growth rate hit 8.9% in 2010. Since then economic growth rate slowed down but still, Turkey is presented as one the high growth countries.

    Thus, such a performance gave opportunity to the managers of the economy to boast publicly about the economic success. For them this was due to a comprehensive disinflation program (which was incidentally adopted at the beginning of 2000s) with tight fiscal and monetary policies, ambitious structural reforms, and the use of a pre-determined exchange rate path as a nominal anchor. This high growth performance it is further argued, that it actually came from the rise in Turkey’s productive capacity, foreign trade performance, and increased competitiveness in international markets. Additionally, easing up of the regulatory framework has attracted inward FDI in the mid-2000s which in turn helped initiating Turkey’s outward FDI (OFDI); adding to the cacophony of the success story. Monetary policy was conducted under a currency board type arrangement with liquidity expansion being strictly linked to foreign currency inflows (Aybar, 2012). The disinflation program had a major impact on banks’ balance sheets. The sharp initial decline in market interest rates led banks to reduce their deposit and lending rates. On the other hand, the pre-announced exchange rate path and the real appreciation of the Turkish lira meant lower cost of funding for foreign currency liabilities.

    Critique of the Economic Miracle Claims

    Turkey’s so called economic miracle has been questioned widely by growing number of literature. Aybar ve Dogru (2013), Ekzen (2011), Boratav (2010) and Yeldan (2010) are some to mention. More recently, Turkey’s “successful” trade performance has been scrutinized by Subasat (2013) which has concluded that it would be hard to claim it as a success story.

    Subasat’s investigation on the external balance of Turkey highlights some of the important structural weaknesses. Subasat questions the success story by drawing some international comparisons that are organized around six criteria: GDP/Exports ratio; current account deficit; economic performance; sustainability of success; periodization (i.e. success of successive periods is based on the performance of previous periods); accounting for statistical fallacies. Having established these criteria Subasat sets forth to deal with some of the counter-arguments the government circles developed against their critiques. He considers three of them that can be taken seriously: Turkey’s economic performance has been successful in relevant terms when compared with the EU and the world; current account deficit is not merely a Turkish problem but it is a global phenomenon; Turkey’s debt might be growing but debt to GDP ratio is declining. The paper establishes comparisons with a range of countries located in between “high income” and “low income” clusters.

    The paper points out that Turkey’s GDP performance has not been as successful as claimed by the government, neither its export performance calls for praise. He highlights some of the problems that are looming behind the economic performance primarily by focusing on the GDP and Export ratio in current and constant prices. He then compares these with a selected group of countries to highlight that Turkey’s trade performance has changed as a result of changing external demand conditions that came about after the 2008 economic crisis. However when scrutinized even further it is revealed that GDP growth performance of Turkey has been only better than high income countries. Other income clusters has done better than Turkey which makes government’s claims of success much questionable. Subasat’s work makes some interesting observations about financing of the current account deficit. However, there also exists some shortcomings of the paper to which we now turn.

    Subasat’s Methodological Problems

    Firstly, Subasat referring to Dogruel and Dogruel (2009) agrees that the impact of oil prices on the size of the Turkey’s current account deficit is minimal (p. 14). This definitely levels against the argument based on blaming the energy prices for the size of the current account deficit. Turkey heavily relies on oil and natural gas for heating and electricity generation. By this token, the impact of price movements of oil and natural gas should be studied more fully using expanded and detailed data. High growth performance led to an increased oil and natural gas consumption per capita under the AKP government when compared to the pre-AKP periods. This is in line with Subasat’s consumption vs. investment argument further down in the paper whereby he argues that the inflow of foreign capital led to increased aggregate consumption rather than investments. However, energy consumption is a very large part of Turkey’s imports therefore it needs a more careful treatment. Subasat dedicates couple of sentences to explain this matter which is apparently insufficient to give a nuanced picture.

    Secondly, Subasats’s comparison of the export growth pace with the imports between two periods; the pre-AKP (1988-2002) and AKP (2002-2011), need further scrutiny. According to Subasat (2013), the main reason for Turkey’s growing trade deficit in the AKP period, is not because imports grew much faster than the exports but export growth under the AKP regime slowed down while import growth remained the same as pre-AKP period. This comparison is made using real growth rates and it shows that the difference of the average growth of imports between two periods was a negligible 0.1%, whereas the average growth of exports in real terms under the AKP slowed down from 9.0% to 5.3%, a difference of 3.7%. This is an interesting finding indeed. However Subasat’s explanation for the slowdown of export growth that it merely came from undervalued USD against world’s currencies needs further elaboration. Subasat, does not get into the details of how that undervalued USDs directly affected the growth of exports while apparently did not affect the import growth. One would expect that an undervalued USD would have some kind of an impact on imports as it did with the exports. In order to find a meaningful answer to this one needs to look at the composition of exports and imports and price elasticity of their demand. This might lead to the discovery of more fundamental structural problems of the economy. It seems that Subasat (2013) needs to develop an analysis, which sheds light to both the susceptibility of exports and resilience of imports to the movements of the USD.

    Third point in question relates to the International Investment Position (IIP). Subasat suggests that the IIP is a more appropriate measure for establishing the true nature of external financing in Turkey, when compared to the external debt concept. IIP includes categories which external debt calculation does not. For Subasat:

    External debt, therefore, does not reflect the true risks associated with “sudden stops of capital inflows” and “current account reversals”. The “International Investment Position” (IIP) which shows the difference between a country’s external financial assets and liabilities is a useful alternative concept. The IIP is a broader category than external debt and covers more entries. As opposed to external debt, which only covers liabilities, IPP also covers assets. (p. 17).

    Subasat introduces IIP as a broader measure as he aims to understand the `true risks associated with sudden stops of capital flows`. This is reasonable to consider, however Subasat does not develop a scenario that might necessarily leads to a `sudden stop of capital flows`. These can also come from some exogenous factors that go beyond the jurisdiction of control of the domestic monetary authorities. Subasat’s criticism of the CBRT on the basis of non-transparency of its calculations while calculating IIP triggers suspicion that a;

    relatively mild increase in IIP to GDP ratio in a country where the Current Account deficit to GDP ratios increases radically

    requires more transparent calculations.

    Fourthly, is a critiques based on a more fundamental and broad question concerning the methodology of measuring the success of an economy. It may be true that there are several ways to measure success using a variety of tools available. This boils down to the question of choice of measurement technique. In evaluating the success of trade performance of an economy, scrutinizing variables like resource allocation, income distribution, purchasing power and welfare creation might produce a better picture about the successes of policies implemented. The outcomes can then be subjected to international comparison. Obviously, questioning the success story on a “relevancy” of international comparison does not produce tangible conclusions about the welfare, income distribution and purchasing power; neither does it tell much about the shifts of the allocated resources between sectors. Be it as it may, we should bear in our mind that a shrinking trade performance might lead to increased welfare of a society or vice versa. Also, a declining current account deficit might worsen income distribution in an economy and might lead to increased unemployment.

    Subasat (2013) prefers cross country comparisons using variables like percentage change in GDP. This would only provide information about relevant success of an economic administration in comparison to another country or a cluster of countries in terms of aggregated data. One might also consider to measuring the extent of unemployment reduction, income distribution, welfare improvement, accumulation and transformation of the organic composition of capital. If performance of an economy is judged on these basis success of the economic administration can be better established. Subasat needs to attend this methodological weakness of the paper.


    Subasat (2013) adds to an increasing literature that questions the economic success claims of the AKP government. He attends the task at hand by looking at some of the aggregate data and draws some international comparisons. He does not scrutinize the composition of Turkish exports and their geographical destination. It is true that Turkish exports came to a halt at the start of 2009 despite depreciating the TL but the crisis in the European Union, the destination for most of the Turkish exports, has not been a cause of concern for the exporters. This is due to the fact that Turkey’s exports to the EU, mostly electronics, are supplied to the lower end price markets for which demand did not suffer much. These are insular tendencies that need to be addressed.

    Some of the methodological weaknesses highlighted above, plus a recent surge in unemployment, rapid credit expansion, and the sharp devaluation of the Turkish Lira, can potentially undermine the fast growing Turkish economy. Subasat’s paper however, does not address present domestic structural weaknesses nor does it shed light to the challenges the economic management face; which comes from the foreign currency fluctuations in the presence of high level current account deficit and hazardous credit markets that make Turkey vulnerable to international swings.


    Aybar, S. (2012), ‘Turkish Economy and the Development of Its Financial Sector’, in Turkey on the Doorstep of Europe, (eds. Aybar ve Charalambides), Athens: Panteion University.

    Aybar ve Doğru (2013), Finansallaşma ve İktisadi Sonuçları: Türkiye Örneği, Maliye ve Finans Yazıları, Yıl 27, Sayı, 100, pp. 9 -31.

    Boratav Korkut (2010), Üç Krizde Dış Kaynak Hareketleri (Foreign Resource Movements in the last Three Crisis), BSB: Ankara;

    Dogruel, F. and S. Dogruel (2009), ‘Türkiye’de cari açık: temel sorunlar ve dinamikler’, in Subaşat, T. ve H. Yetkiner (eds.), Küreselleşen kriz çerçevesinde Türkiye’nin cari açık sorunsalı, Ankara: Eflatun Yayınları.

    Ekzen Nazif (2011), 2023 Hayaller ve Gerçekler (2023 Myths and Realities), BSB: Ankara;

    Subasat Turan (2013), Political Economy of Turkey’s Economic Miracle, WEA.

    Yeldan Erinc (2010), Ekonomi Tıkırında mı?;

  • Bilge Erten says:

    Subasat’s paper examines various criteria for the recent success of Turkish economy, and shows that many indicators point out an unsustainable trajectory. The paper does a very nice job of comparing different views on the relative success of the Turkish economy vis-à-vis other countries, the reasons behind the widening current account deficit, and the measurement of net external borrowings compared to the net external debt stock. Here are some points that would strengthen the main results of the paper:
    1. Subasat argues that, when examined in constant dollar prices, the export growth slowed down by 3.8 percentage points in the 2003-11 period compared to 1988-2002 period, while the import growth barely increased by 0.1 percentage points, which points out that the main reason for the current account deficit to increase in the post-2003 period is the slowdown of export growth instead of the rapid rise in import growth. This seems to be an interesting finding, which requires some careful examination. In Figure 1, I plotted the data series for real exports and imports in constant 2005 USD prices from the same data source, WDI. This figure tells a different story from the picture we get from Figure 6 of Subasat’s paper. It shows that up to the year 2000 the real exports were growing at a very similar pace to real imports. With the 2001 crisis, imports get a big hit due to contraction of domestic income while exports continue to grow. After 2001, the imports begin to grow at a much faster rate than exports, which continues until 2007. The annual average growth rate of imports from 2002 to 2007 is 15.8% while it is only 7.8% for exports. The growth of imports is also much faster than the previous period (the annual average growth rate of imports from 1988 to 2001 is 9.8%). This can also be seen by the upward shift in the slope of the imports line in this period vis-à-vis the steady slope of the exports line in Figure 1. Hence, Subasat’s calculations mainly result from the contraction of imports in the crisis episode, which was faster than the contraction of exports. In the post-crisis episode, we see again that imports took off much faster than exports. What increases the current account deficit in this aggregate period over 2002-12 is the fact that in the boom episodes the real imports grew much faster than the real exports, as Figure 1 clearly indicates.
    2. The second question is whether this deterioration in the trade deficit was a function of growing import dependence of exports, or whether it is the undervaluation of the USD with respect to Turkish lira. Subasat argues that the second factor is more important because of the misleading indication of Figure 6 that import growth did not increase in post-2002 period. Looking at OECD data (STAN Input-Output database) import content of exports has increased from 14% in mid-1990s to 22% in mid-2000s (unfortunately whole time series is not available), and in the manufacturing sector the import content increased from 20% to 29% of exports in the same period. The high/medium high tech manufacturing has a much higher import content (rising from 24% to 33%) than low/medium low tech manufacturing (rising from 19% to 28%) in the same period. Since the time series data is not given, it is difficult to see how much of the rise in import growth can be explained by the rising import content of exports. When we look at the energy imports as a share of total energy use, Figure 2 shows that there has been a rise from about 50% in early 1990s to 70% in 2003; however, it has been more or less constant since 2003. As total energy use rises, Turkey has increased its domestic production of energy, keeping the imported share constant around 70% of total energy use. However, the rising price of energy, particularly oil, may partly account for rising energy imports as a share of total imports.
    Apart from these compositional effects, the price effect is likely to account for rising net imports over 2002-2007, and after 2009, as indicated by the appreciation of the real effective exchange rate over this period. However, Figure 3 shows that the rate of appreciation over 2002-2007 is not necessarily faster than the rate of appreciation in 1994-2000 period. From May 1994 to December 2000, the real exchange rate appreciated by 87%, whereas from July 2002 to December 2007, it appreciated by 60% (if we take the trough of October 2001, it appreciated by 76%). In fact, the global financial crisis was a major factor that slowed down the appreciation due to large net capital outflows, however, the volatility of the real exchange rate significantly increased in the post-crisis period. Overall, both the composition and price effects seem to have played a role in the rising growth of real imports relative to exports, and the resulting widening of the current account deficit. Obviously, the stagnant upgrading of exports towards higher income elasticity sectors has been a structural reason for the chronic current account deficits in Turkey, as well as many Latin American countries that suffer from the same lack of dynamism in industrial upgrading and the lack of long-term strategic planning.
    3. The calculations of Subasat comparing IIP and IIPBP are very interesting. In fact, the same point applies to the U.S., which would have had a much larger deficit in its IIP if the market valuation and exchange rate effects are disregarded (Figure 4). It indicates that the international assets held by US residents have increased in market value much more than the US assets held by other countries. For example, the US residents have been holding foreign equities, whose value has increased substantially in recent years, whereas the value of US T-bills held by foreigners has been stagnant if not falling. This factor combined with the depreciation of the US dollar, which played a less significant role, has led to a much smaller IIP deficit than would otherwise be. It would be interesting to see how the respective shares of these effects in the case of Turkey. Clearly, in the case of US, the fact that the USD is an international reserve asset explains why investors were willing to make systematic losses, given that such access to liquidity creates much greater crisis resilience. Since there is no such a factor at play in case of Turkey, there is need for further study of why there is such a discrepancy between IIP and IIPBP.
    4. In the conclusion section of the paper, Subasat refers to the recent remarks of the governor of the Central Bank of Turkey, which shows that the governor is evidently aware of the structural problems of the economy, yet seems to suggest that there is little the central bank policy could do to address these problems. In fact, there is a growing literature that shows that a strict inflation targeting regime has asymmetric effects on the real exchange rate, that is, during booms the central banks tend to allow an appreciated exchange rate because doing so generates a lower inflation rate while during busts they tend to prevent depreciation since it generates more inflation. As a result, an overvalued real exchange rate during boom episodes such as 2003-2007 hurts external competitiveness, creating large current account deficits. Despite this evidence, the Central Bank of Turkey keeps on following an inflation targeting program, and does not consider any augmented-form of Taylor rule that would take into account a stable and competitive real exchange rate as an additional target variable. Furthermore, despite the fact that IMF has endorsed the use of capital account policies, the Central Bank of Turkey does not use any capital account regulations that would help counter the appreciation of the real exchange rate, and create space for more monetary policy autonomy. In fact, the non-orthodox macroprudential regulations that it has adopted in 2010 had limited effects on the composition of capital inflows toward longer maturities, and on the rapid expansion of credit growth in Turkey. Such effects would be much stronger if the Bank was willing to complement the domestic prudential policies with capital account policies to directly manage capital account volatility for attaining a more financially stable system overall.
    Figure 1. Exports and imports in constant 2005 USD

    Source: World Development Indicators, World Bank.
    Figure 2. Energy imports as a share of total energy use

    Source: World Development Indicators, World Bank.
    Figure 3. Real effective exchange rate, CPI based

    Source: Global Financial Data.
    Figure 4. Net international investment position of the United States

    Source: Clarida, 2013.