Turkey’s Gross Domestic Product (by the income approach) in 2016 was ₺ 2,608,525,749.

It
increased by ₺ 269,878,255 (11%) from 2015. The average annual growth rate between 2003
to 2016 has been 5.6%.

source: turkstrat.gov.tr

The drivers of Turkey’s exceptional growth have been numerous, e.g. customs union
agreement with the EU, free trade agreements with several countries, the stable government
in power, etc.

Turkey’s membership in the the Customs Union of Europe has been a strong pillar of its
growth. Most of the countries produce is exported to Germany and the United Kingdom.
Turkey is also an important partner of the European Union in security. The bloc has signed an
agreement with Turkey to expedite Turkey’s application to join it in exchange for security
favors. The agreement with the Union has also been a fillip for the technological advancement
of Turkey. The membership needed Turkey to comply Europe’s high quality requirements and
thereby forced them to modernize their production techniques. The agreement is also partly
responsible for the FDI inflow to Turkey from the EU.

The trouble with the agreement however is that the Customs Union does not cover
agriculture and services. Agriculture enjoys a high degree of protectionism in both Europe
and Turkey. Agriculture contributes to 10% of Turkey’s GDP while services is responsible for
60% of it. If Turkey agrees to the European Union’s common external tariff for agriculture its
protection for some products would take a hit which could result in higher unemployment in
farms. Certain countries in the union are likely to oppose the inclusion of agriculture under
the Customs Union as availability of Turkey’s agricultural products such as tomatoes and oils
would affect their trade. Another problem with the Customs Union agreement between the
EU and Turkey is that the agreement wasn’t meant to last forever, it was intended to act as a
makeshift while Turkey moved ahead with its application to join the union. This has forced
certain obligations upon Turkey, as a result Turkey is not involved in decision making but only
to facilitate shaping of the implementation. The lack of a functional mechanism to dispute
trade disputes has not permitted trade to reach it’s maximum.

The expansion of the European Union to the East has increased competition for Turkey’s
exports into the bloc. The East Europeans countries have labor that is much less expensive
than that of the earlier members of the European Union and comparable to that of Turkey.
The European countries would also rather trade with a member state than a country outside
the union. This sentiment has hurt Turkey.

Despite the fact that member countries of the European Union have a higher confidence in
Turkey since the agreement, FDI inflow to Turkey has not since reached the peak of 2007 after
the debacle of 2007. At its peak FDIs were $19 billion. The reasons for this are several, lack of
faith in the efficiency of the judiciary, skill gap of the workforce and their demand for high
wages, etc. Turkey’s greatest asset is its geographical location, other major attractions are its
young population and improving logistical networks.

The above graph shows the how the Preferential Trade Agreements the EU have signed has
affected imports from Turkey. Turkey has been losing market share since 2007.

Another threat to Turkey’s growth is the political situation in the country. The government
held a referendum in 2017 which gave sweeping powers to AK party’s Recep Erdogan. The
role of the prime minister has been scrapped and a president will lead in place. The president
now has powers to dismiss the parliament, appoint ministers, choose the majority of judges
and enact laws by decree. These new laws do not instill confidence in investors.

The government hurriedly organized the referendum in the aftermath of the failed military
coup against the Erdogan government in July 2016. After the attempted coup, the Turkish
government declared a state of emergency and arrested tens of thousands of suspects. Many
government servants were removed from their jobs for their alleged support/involvement in
the coup.

The political developments in Turkey has caused the European Union to reconsider Turkey’s
accession into the bloc. The union does not believe strong democratic institutions exist in
Turkey. The arbitrary manner in which the president may curb rights people should have in a
democracy is another area of concern. The top two markets for Turkish products, who are
member states of the EU, have been vocal opponents of Erdogan’s regime.

The political situation has also been responsible for the Turkish Lira falling to a record low in
comparison to the dollar. Fitch downgraded Turkey’s sovereign rating to BB/negative in July
2018 as a result of macroeconomic instability.

The inflation in Turkey has risen as a result of the plunging Lira pushing up cost of essential
goods. The cost of food and beverages increased by 19.4% while cost of household goods
increased by 20.32%. Inflation in Turkey is now close to 16%.
The corruption scandal in 2013 that involved then Economic minister, Interior minister and
two other ministers also seriously dented faith in the institutions of Turkey. Turkey is now
ranked 81 out of 180 countries on the Corruption Perceptions Index.

Turkey’s Gini coefficient decreased from 2011 to 2015 and was even lower 0.4 for two years
straight, but in 2016 it rose to over 0.4 again. This is correlated with the country’s fall in the
CPI ranking.