The Turkish Post-Crisis Recovery Program

The key to the Turkish post-crisis recovery program was tight fiscal policy. In a way, this was necessary. Public debt jumped 50 percentage points, from 54 to 104 percent of GDP, when the state cleaned the banking sector, which was both the cause and victim of the crisis, by recapitalizing state banks and paying the Treasury’s debt to them. There was widespread concern that this rise in debt was unsustainable, and government bond real interest rates were around 30 percent in 2002.

Fiscal consolidation reduced this risk, and with the help of the newly independent Central Bank, inflation and interest rates plunged, reducing interest expenditures and improving banks’ balance sheets. The real sector recovery meant banks’ nonperforming loans fell sharply, and the freshly minted independent banking regulator prioritized strengthening banks’ balance sheets. Banks were ready to lend again, and the rise in confidence meant consumers and businesses could borrow again. The subsequent surge in credit was instrumental in the revival of domestic demand.

Social impact of the program

In sum, Turkey managed to achieve macroeconomic stability, which has made it the darling of foreign investors. But how did this economic strength affect the average Turk and especially the poor? Poverty did indeed fall sharply in the early years of the ruling Justice and Development Party (AKP), but then rose in 2007-2008. It has more or less stayed constant since then. Similarly, inequality has followed a “wavy” path during the last decade.

The 2001 Turkish and 2008-2009 global crises render an objective evaluation of the AKP’s “social performance” nearly impossible. Turkey managed to survive the last few years “with only a few scratches” despite its dependence, at least at the onset of the crisis, of its exports to the Euro Area. The strong banking sector, a direct result of the recovery program, helped, but it is impossible to argue that the country was completely unscathed. After all, seasonally-adjusted unemployment hit 15 percent in April 2009. Therefore, one may argue that the downward path of poverty and inequality would have continued uninterrupted had the world not been hit by a global crisis.

As noted above, there has been significant urbanization during this time period. While some of the urbanization is a natural result of development, it also reflects migration from the troubled Southeastern Turkey to metropolitan areas, as detailed below. It is important to note that the impact of this migration on social indicators is ambiguous. On one hand, people move to the big cities because they don’t have adequate job opportunities in the region. However, their wives and female relatives, who used to work the fields, end up sitting idly at home in the cities. A significant part of the decline in female labor force participation in Turkey since 1980 is because of this migration.

It is unclear how this process has affected the social impact. While official poverty and inequality figures may have improved as a result of the husbands finding work in big cities, household consumption may have suffered, as household-produced food is not available anymore. This is an area that requires further research.

Distribution of Household Income

More interesting than the actual level of poverty and equality is the distribution of household after-tax income. The richest 40 percent of Turkish households have seen their share in total income fall since 2006. And while the poorest 20 percent have increased their share a bit, the largest gains have fallen to the next 40 percent. In sum, it has been the middle classes that have benefited the most from Turkish reforms. Driving in Istanbul’s booming neighborhoods such as Güngoren and Ümraniye, which are unsurprisingly bastions of the AKP, would confirm this result.

While it is tough to support this argument with data, the middle classes’ share of consumption and wealth may have increased more than income, and even more than what the official statistics are telling us. For example, the low interest rate-environment has enabled many to buy a home or car for the first time.

On the other hand, the country’s dependence on indirect taxes, a result of wide income tax evasion, limits these emerging classes’ consumption power a bit. But many of these nouveaux bourgeois don’t pay income taxes anyway, especially if they have their own small and medium-sized enterprises.


Regional Disparities
While acknowledging the improvement in Turkish social indicators, it is important to also realize the regional disparities.

Despite the improvement in poverty and inequality, there has been less improvement in alleviating regional disparities. For example, only a few of Turkey’s large firms are from the country’s troubled East and Southeast. Unemployment rates are the highest in Turkey in some cities of the region; other cities fare better, but only because labor force participation is very low and because there is a lot of migration from the region to metropolitan areas such as Istanbul, Izmir and Adana, which unsurprisingly have the highest unemployment rates in the country.

It is often speculated that the recent peace initiative with the Kurdistan Workers’ Party (PKK) will attract a lot of investment, domestic and foreign, to the region. Peace is likely to bring in significant economic benefits, but I doubt it is the binding constraint that is preventing investment. After all, the intensity of the conflict decreased significantly in the last few years. We can get a sense of what is holding the region back from survey and regional data.

There weren’t any firms from Diyarbakır, the main Kurdish city in the Southeast, in the 2005-2007 World Bank Investment Climate Assessment I led during my stint at Ankara think-tank TEPAV or the same survey’s 2008-2010 iteration. After all, with only one firm among Turkey’s top 1,000 industrial companies, they are a rare breed. But firms from the nearby towns of Kahramanmaraş, Gaziantep and Malatya noted access to electricity of as a major constraint. The cost of the fuel to run a generator is substantial for a firm in the southeastern town of Batman.

Another important constraint is the region’s very low human capital- even compared to the rest of the country. I am not sure how peace would solve this problem- unless the PKK decided to use its drugs and extortion money on schools rather than weapons.


Even then the region would not attract FDI. After all, even if you can produce, you’ll have trouble shipping your goods to anywhere other than Northern Iraq. Gaziantep and Şanlıurfa are on the highway route to the nearby ports of Mersin and İskenderun and therefore should actually benefit more from the peace than Diyarbakır.

Conclusion
Even though official statistics could be distorting the real picture in either direction, the stable economic environment following the post-crisis recovery program has improved poverty and inequality. Turkey now needs to tackle its regional disparities by solving the investment bottlenecks in Southeastern Turkey. Smart policies designed to increase job creation in the region, such as regional minimum wages, would help in reducing poverty and inequality. Such policies would also alleviate regional disparities, not only directly but also indirectly by decreasing migration.