Turkey’s Emergence as a Regional Powerhouse

By Burak Tansan and Aslı Kurbay

Between 1991 and 2001, Turkey had nine different coalition governments and three major economic crises. The period following that decade of volatility and low growth, however, has been a prosperous one for Turkey. Political stability and financial reforms, combined with declining interest rates and declining inflation, powered real annual GDP growth of 5 percent from 2002 through 2013. And this hot streak is likely just the beginning.

On the eve of the World Economic Forum meeting in Turkey in September 2014, it is clear that the nation is poised to emerge as a regional economic powerhouse. Turkey's ascendance will be driven by a host of strong fundamentals, including:

  • A Uniquely Advantageous Geopolitical Position. Turkey's location—within five hours by air to countries with a combined population of 1 billion and total GDP of more than $21 trillion—is a critical advantage. Sitting at the crossroads of Europe and Asia, Turkey is not only a bridge between rapidly developing economies and the developed world, but also a link between countries with large supplies of oil and natural gas and countries with high demand for those resources.
  • Macroeconomic Strength. Turkey's public-sector debt and deficit levels as a percentage of GDP are among the lowest of the world's major economies. While private debt has surged in recent years, the Turkish financial system is sound thanks to banking industry reforms that followed the 2001 crisis. That fact should help drive future upgrades of Turkey's credit ratings, lowering borrowing costs. Moreover, two elections in 2014 signaled continued political stability: the ruling party won 44 percent of the vote in municipal elections, while Prime Minister Recep Tayyip Erdoğan was elected with 52 percent of the vote in Turkey's first general election for president.
  • Favorable Demographic Trends. Turkey's population of 76 million, growing by more than 1 percent annually, is the youngest in Europe, with 25 percent under the age of 15. Moreover, the middle-class and affluent population is expected to reach almost 50 million by 2025, a 50 percent increase from 2011 levels. This will be a significant driver of continued robust consumption without the "developed-country curse" of a shrinking and aging labor force.
  • A Robust Workforce. As of 2012, Turkey's working age population of 38 million was the second largest in the EU, just behind Germany with 42 million. (In several years, Turkey is expected to lead in this measure.) And the country's current workforce of 28 million includes 5 million workers with university-level degrees, more than many EU nations, including Italy and the Netherlands. Moreover, productivity increased 3.9 percent annually from 2001 to 2012, putting Turkey's labor costs per hour far below those of other countries in the EU. This explains why many multinational companies are looking increasingly at Turkey as a future regional production base.
  • Expanding Trade. With a strong export position in industries such as automotives, textiles and apparel, and agriculture, Turkish export volumes grew at a robust 14 percent per year between 2002 and 2013. Moreover, Turkey's export activity is becoming more diversified, with 59 percent of exports flowing to non-EU countries in 2013, up from 43 percent in 2002. And the government's 2023 target of $500 billion in exports indicates that Turkey will continue to promote exports and will provide incentives to companies that invest in more "export prone" industries.

Certainly, despite these strong fundamentals, Turkey also has some very real challenges. The country's proximity to the multivariant volatility of the Middle East is one such challenge. Its current account deficit, while declining, continues to be another major concern. The government has taken solid steps to incentivize exports and private investments in industries that have import substitution potential. And the government is also taking measures to make private pension investing more attractive (it is still very low, at 15 percent of GDP), an effort that will support a more appropriate source of funding for the current account deficit.  

There is opportunity to do more, of course. The value of Turkish exports is only $1.50 per kilogram, very low compared to other developed countries. In order to develop a truly export-focused economy and decrease its current account deficit significantly, Turkey must boost high-value exports. To this end, it should increase R&D spending, which currently equals only about 1 percent of GDP—one of the lowest levels among similarly developed countries with aspirations to become global economic leaders.

In addition, there is room for progress when it comes to the role of women in the workforce. Female labor-force participation in Turkey is only 30 percent (it is even lower in rural regions of the country), well below that of other developed countries. Finally, there is a clear need to speed up the reforms that started with the EU accession process and to invest more in infrastructure, especially railways and ports. Addressing this latter issue is critical to support Turkey's expected trade growth and to fully exploit the unique geostrategic position of the country.

As Turkey assumes the presidency of the G-20 and hosts the Business 20 (B-20) Summit next year, the country's economic role will be in the spotlight more than ever. And this will not end with the summit. With powerful fundamentals at work and continuing structural reforms, Turkey's prominence on the world stage will only grow in the decade ahead.