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23/01/2006 | Turkey: Image is Everything

WMRC Staff

Prime Minister Recep Tayyip Erdogan has embarked on a mission to improve Turkey's image in 2006, the key to which should be an acceleration of reform.

 

The year 2005 proved to be a rather icy dip in European Union (EU) waters, and a wake-up call for the Turkish government. After the long-awaited decision by the EU in December 2004 to start accession talks with Turkey, relations failed to warm as expected. Both parties felt injured by new demands, and by the time talks began they were more of a damp squib than a blaze of glory. The European Commission was quickly disappointed with the slowing pace of reform. Given the close call in opening talks, and the long winding road ahead, Turkey has resolved not to count on EU membership. However, it is pragmatic enough to know that it should embrace the best facets of the accession process - namely structural reforms - as they are in its best interests, whether inside or outside of the bloc. Greater stability and economic resilience will indeed allow Turkey to reduce its dependence on well-meaning outsiders such as the EU and the International Monetary Fund (IMF). Even more importantly, reform progress should also play well for the ruling Justice and Development (AK) party ahead of the 2007 parliamentary election.

A Fair Assessment?

The View from the EU

Prime Minister Recep Tayyip Erdogan spent much of 2005 in defensive mode. The European Commission signalled in its Progress Report that reform had slowed to an unacceptable pace, and that it expected things to pick up. It lamented in particular the lack of progress on the grey economy and the obfuscated privatisation processes.

This is not to say that there were no bright spots, however. Turkey was awarded coveted market economy status, and the Commission praised some aspects of progress. These included the fast-paced approval of the controversial Penal Code (albeit subject to further revision) and some business-related reforms. Progress has been made on company law relating to accounting and auditing, intellectual property rights alignment is advanced, and competition regulations have improved. Moreover, the Commission believes that medium-term priorities relating to the free movement of capital, and on energy, justice, home affairs, taxation, and economic and monetary union, are being met. Significant legal reforms to be implemented in 2006 include a new Commercial Code. Other measures - such as alignment with veterinary, phytosanitary and environmental standards - will inevitably take some years to achieve (as evidenced by new member states).

The whole reform process should be helped along over 2006 by the start of the formal legislative screening process. This determines how far Turkish law is already aligned with EU directives, and what needs to change. More than one million pages must be sifted through in all. The laws are divided into chapters, several of which will be started on as soon as possible with the opening of the accession talks.

The View from the IMF

The Commission is not the only international institution pressing for more action over 2006. The IMF grew exasperated with the government for misleading it over the 2005 budget, and then for delaying reforms required for a new standby agreement: overhaul of the banking sector and social security. Come mid-year, there was some progress on the former, after a presidential veto was overcome (although a constitutional court challenge may follow). The structural reforms should introduce greater transparency and open up the market to more competition and foreign involvement. This should spur several areas in an already consolidating market, including the development of a largely absent mortgage market. On social security reform, proposals were said to be imminent at the time of writing; these will unify three bodies into one, and hopefully start to address a looming pensions crisis (after a previous government-sanctioned, widespread early retirement policy that is unsustainable in its current form).    

Moreover, there are other signs that economic progress should pick up over 2006.

·         The 2006 budget should further cement the stabilisation of the economy after financial crises in 1999 and 2001. The package continues to press liberalising reforms and cuts corporate tax in an attempt to lure investment. 

·         Also in the 2006 budget are economic measures that should ensure Turkey is well prepared to adopt the single European currency. This includes policies that mean this point could be reached well before the country is permitted to join the union itself. 

·         The Turkish Union of Chambers and Commodities Exchanges (TOBB), a powerful business lobby, has recently begun coaching its members on how to apply for EU funds. The Turkish government was allocated 300 million euro in EU funds in 2005, rising to 500 million euro in 2006.

  • Ratings agencies have upgraded their risk profiles on Turkey as a result of the increased political and economic stability. In 2005, Turkey won a 40-year battle to drive inflation into single digits - a remarkable turnaround, and one capped with a central bank move to inflation targeting in 2006.

Legal Hurdles

Turkey is certainly becoming more appealing to investors on the economic and regulatory fronts, but the EU and North America still have major demands in the field of human rights, religious freedom, and toleration of minorities. These will be quelled only with real progress in changing embedded attitudes. In essence, this must reduce the gap between the spirit and letter of the law. A test case for progress over 2006 will be the trial of author Orhan Pamuk, who faces prosecution for calling into question the refusal by Turkey to discuss the mass killings of Armenians between 1915 and 1918. This episode has been labelled genocide by some. Under the much-vaunted Penal Code that was reformed last year - and the main thrust of which is new EU-friendly freedoms and enhanced equality for women and minorities - there are, ironically, new constraints on editorial and journalistic freedom.

Meanwhile, the European Court of Human Rights (ECHR) has issued numerous judgments against Turkish court rulings, and the EU has warned that there is still enough evidence that the use of torture persists. However, there are several potential repeals of sentences of 'non-violent' members of the rebel Kurdistan Workers' Party (PKK). With security concerns again increasing, this is an area that remains highly sensitive, and worries persist that any softened attitudes towards separatists will inflame nationalist tensions. Erdogan has caused controversy by first acknowledging the existence of a 'Kurdish problem' in mid-2005, before saying in December 2005 that Kurds were no better or worse off than Turks. Reports carried in late December 2005 claimed that in a meeting with his lawyers, jailed PKK leader Abdullah Ocalan had renounced aims for a separate Kurdish state, saying that he had only ever wanted to operate freely within the Turkish state. Considering that Ocalan had refused to converse with his lawyers – even to discuss the possibility of a retrial after an ECHR judgement that his trial was unfair - as he claimed that he was not allowed free and fair access to them, this statement may have been 'doctored', and could be linked to a resurgence in Kurdish protests in the southern provinces that turned violent in late 2005. Erdogan is likely to restart his appeal to external states for assistance with rebel groups, particularly those in northern Iraq, and this is a good reason to ensure that foreign relations are healthy.

Expanding Horizons

Erdogan has noticeably stepped up his efforts internationally, earning him criticism at home for the scant time he spends in parliament. This action was not just a diplomatic offensive to secure more support within the EU; it was also to establish Turkey's pivotal role in any Middle Eastern peace process, and to make the most of ties with Russia. Whatever it is that the EU imagines Turkey will bring to the bloc, it could well be at odds with Turkish ambitions. Turkey believes that it can become a gateway, allowing the West to gain a better understanding of the Middle East, and providing an example of a model Islamic nation under a secular state. Turkey has also been lobbying for a non-permanent seat on the UN Security Council in 2009-2010, which will be determined in 2008. Trade with Iran and Iraq is being boosted, despite contractual problems in a number of cross-border operations. Bilateral trade with Iran in 2005 was expected to exceed US$5 billion, and for Iraq that figure is expected to be doubled within two years. Inflows of foreign direct investment into Turkey in 2006 are expected to be almost US$15 billion; although the largest proportion will come from EU countries, there are good reasons why Turkey wants to widen its appeal. 

Should reform pick up as expected over 2006, there are promising opportunities: labour costs remain low and the workforce is youthful; resources are plentiful; and the country occupies a highly strategic position. It is these factors that Erdogan hopes will drive investment levels sky high, and he unashamedly pursues this goal. This investment is needed for a number of reasons, not least to help cover a massive current-account gap that has widened worryingly over 2005. Nonetheless, there is no reason to believe that the economy will not be able to withstand this pressure, or that the country's appeal will not continue to grow.

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com

 

WMRC (Reino Unido)

 



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