Turkey's Shift to a More Open Economy

Applying for EU membership has sped up reforms, and that has helped the country weather the current crisis

PepsiCo's Beba: "The whole EU process affects business positively" Eilon Paz

By Stanley Reed

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Turkey cannot escape the ravages of the global recession. But this time it may avoid the pains that often afflict this promising country in a downturn. For the Turks, a recession usually goes like this: A wild boom triggers high inflation, the currency collapses, and the poorly managed banking sector, hooked on speculative trading and foreign debt, has a near-death experience. Turkey has a well-educated workforce, proximity to Europe, and a shrewd management class. But financial fragility, including a meltdown that sparked riots in 2001, has kept it from entering the first rank of emerging market economies.

In the current turmoil, to everyone's amazement, things have been different. The economy has been dealt a body blow as exports have stalled. While structural problems still exist, in both the political and regulatory spheres, the financial system has held firm even as U.S. and European banks have hovered on the brink. "This is the first recession in which we didn't have a crisis," says Murat Ulgen, chief economist at HSBC (HBC) in Istanbul. Credit goes to reforms, backed by the International Monetary Fund, that curbed inflation and forced banks to bolster their balance sheets. The increased presence of foreign banks also spurred locals to improve their game. Most important, Turkey has welcomed investment and stepped up efforts to become a real player in the global economy.

This change in attitude has raised Turkey in the eyes of multinationals. Foreign direct investment surged from $1.1 billion in 2001 to $22 billion in 2007, before dropping back to $18 billion in 2008. Even though the figure is expected to fall to $9.1 billion this year, executives seem confident Turkey will bounce back. With a population of 76 million, Turkey is an attractive consumer market, and all those youthful workers at Europe's doorstep have turned the country into a workshop for export industries such as cars, aerospace, appliances, and textiles. "We put Turkey in the same category as Brazil, Russia, India, China, and South Africa," says Ali Faramawy, a vice-president of Microsoft International (MSFT) in Istanbul. Microsoft's software sales in Turkey are growing at 20% to 30% a year. "It's not difficult to see Microsoft Turkey doubling in size in a relatively short time," Faramawy adds.

Two things have made Turkey more of a player. The enforced discipline of applying for European Union membership has worked wonders. And Prime Minister Recep Tayyip Erdogan, who has headed a moderately Islamist government since 2003, has pushed largely pro-business policies. Building on the ideas of Kemal Dervis, the former World Bank official who took charge of the Turkish economy during the 2001 crisis, Erdogan has slashed corporate taxes, tightened intellectual property protections, and set up an investment promotion agency. He also launched Turkey's EU negotiations. While the talks have been tortuous, they have pressured Turkey to make changes in a wide range of areas—from improving women's rights to easing protectionist policies. "The whole EU process affects business positively," says Umran Beba, Istanbul-based president of PepsiCo (PEP) for Southeast Europe.

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