Turkey’s flaws dent claim to be modern economy

Financial Times (USA Ed) 29 May 2014, p. 4

By Daniel Dombey in Istanbul

Poor governance as well as a lack of investment hamper the search for a new growth model, says Daniel Dombey

Amid the shine of a justfinished $511m factory on the outskirts of Istanbul, Turkey’s political and business elite gathered recently to showcase the country’s claim to be a modern economy. After helicopters had finished ferrying guests from the centre of town, the bigwigs took the stage: Recep Tayyip Erdogan , the prime minister, leading members of the Koc family, who control the country’s biggest conglomerate, and Bill Ford, chairman of Ford Motor Company.

The cause for celebration was the beginning of production by the decades-old Ford-Koc joint venture of two new lines: a minivan and a light commercial vehicle, both developed in Turkey at Ford’s third-largest research and development centre. Ford Otosan sells to more than 100 countries and accounts for more than half of Turkey’s commercial vehicle exports.

But a pall hung over the event. Almost every speaker mentioned the fatal fire in Turkey’s Soma mine this month, in which 301 people perished. It was a reminder of the other side of the Turkish economic story – an abundance of low value-added sectors, a lack of investment and a slap-dash approach to applying the rules.

« The Turkish economy has a very broad dual structure, where some regions – Istanbul, Ankara, provincial cities – have very modern firms producing for the middle class and export sector, but where there are also a number of informal, lower-safety, lower-wage firms that are really holding the economy down, » says Turkish-born Daron Acemoglu, an economist at the Massachusetts Institute of Technology.

According to data from the International Monetary Fund and the World Bank, high-tech products have fallen as a proportion of Turkey’s total goods exports over the past decade to a level that, at under 4 per cent, is below many comparable economies. Nor does there appear to have been sufficient investment to reverse that trend: last year, private sector capital expenditure rose by just 0.7 per cent in an economy buoyed primarily by consumer and government spending.

Despite a collapse in the lira at the start of this year, Turkish markets have recovered. Exports rose by 9 per cent for the first quarter and relatively strong industrial production has outperformed the most pessimistic forecasts.

But the picture that Prof Acemoglu depicts is of a Turkey whose economic prospects are clouded by flawed governance and where the rule of law is weak. That could deepen Turkey’s predicament in escaping a middle-income trap – the challenge some developing countries face when they cannot sustain previous rates of growth.

« Businesses in Turkey are very dependent on the support of the state, » said Prof Acemoglu. « As in many developing economies, businesses are continuously aware of uncertainty about tax bills, of contracts and export licences being taken away from them. It makes . . . deepening the economy in terms of investment all the harder. »

Even the relationship between Koc Holding and Mr Erdogan helps make the point. Tensions reached a high point last year when the prime minister scotched a $5.7bn tender partly won by the Koc family, denounced the company for sheltering anti-government protesters at one of its hotels and intervened in a separate €1.5bn deal to ensure it stayed out of the group’s hands.

By contrast, the day after the apparent reconciliation with Mr Erdogan on the Ford Otosan stage, Koc won a $664m tender for a marina privatisation.

Guven Sak, head of Turkey’s Economic Policy Research Foundation, says poor economic management is at the heart of the country’s disappointing investment record and its failure to modernise the economy.

« Because of the way the economy is run, there is too much volatility, » he says. « Because of the volatility, the investment horizon is too low . . . and the best thing you can do is construction, because it is easiest, because all the incentives are there. »

In fact, Turkey has arguably gone through various economic models in recent decades – from competitive advantage based on low wages in the 1990s, to foreign direct investment prompted by EU accession talks in the early 2000s, to largely debt-financed consumption and construction-fuelled growth in recent years. Now the question is what the next growth model will be – and whether it will develop the advances of groups such as Ford Otosan or remain dogged by the flaws exposed by the Soma mine disaster.

« Turkey needs to grow beyond being a middle-income country and the only way to do that is to invest more, import more technology and bring more of the labour force into the economy, » Prof Acemoglu says. « Recently it hasn’t been doing enough of any of those things and that is not a healthy kind of growth. »