SEYFETTİN GÜRSEL

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SEYFETTİN GÜRSEL
November 01, 2012, Thursday

AK Party decade from a historical perspective

Exactly 10 years ago, the Justice and Development Party (AK Party) came to power following the Nov. 3, 2002 election. At that time, the AK Party won 34 percent of the vote, but as only two parties (the AK Party and the Republican People's Party [CHP]) were able to beat the “very high” electoral threshold of 10 percent, the AK Party won the majority of seats in Parliament. In the following elections, those of July 22, 2007, and June 11, 2011, the AK Party consolidated its one-party government through sizable increases in its electorate.

AK Party rule is the fourth period of right-wing single party rule in the history of Turkish democracy, which started in 1946. The first was that of the Democrat Party (DP), which came to power in 1950 under the leadership of the late President Celal Bayar and the late Prime Minister Adnan Menderes. It was ejected 10 years later, by the May 27, 1960 military coup. The second right-wing single party government was formed by former President Süleyman Demirel's Justice Party (AP) following the 1965 election. Demirel lost power six years later in 1971 through a military intervention. The third arrived in 1983, when military rulers of the Sept. 12, 1980 military coup decided to fix elections to be won by late President Turgut Özal's Motherland Party (MP). It lost power eight years later, in the 1991 election.

I think that it would be interesting to compare the economic performance of the AK Party government with the three other right-wing single party governments, but the space of this column is limited, so I will limit myself to a comparison with DP rule.

When the DP took power, inflation was low and hard currency reserves high, but rather low growth was prevailing. The DP started with hawkish expansionary policies. The foreign trade regime was liberalized to some extent; bank loans flowed to agriculture and big land owners, as well as to rich farmers, who rushed into imported agricultural machinery. The number of tractors in the country went from 2,000 to 40,000 in the space of a few years. As there were large tracts of uncultivated land, crop production literally boomed, encouraged also, I should note, by the impact of the Korean War (1950) on international cereal prices. Considering the importance of agriculture to the economy in this period, one should not be surprised by the growth rates over 10 percent that were realized during these four years.

This was a marvelous time, and the DP gathered the fruits in the election of 1954, getting a 54 percent share of the vote. But then things started to go badly. The Korean War was over, reserves exhausted, inflation up and growth down. The huge external deficit created by domestic demand-led growth became impossible to finance. A stabilization program supported by the International Monetary Fund (IMF) was unavoidable, though the DP rejected it at first. It was obliged to sign a stand-by agreement with the IMF in 1958, when economic conditions worsened. The Turkish lira was heavily devaluated, however, as conditions of the agreement, such as tight monetary and fiscal policies, were not fully implemented and stabilization remained incomplete, only to be completed after the military coup.

The AK Party came to power in November 2002, as Turkey struggled to exit painfully from its worst-ever domestic economic crisis. In 2001, the IMF stand-by agreement, based on exchange rate targeting, was out of order; the Turkish lira was depreciated by 100 percent; inflation reached triple digits; half of the banks failed and, finally, gross domestic product (GDP) contracted by more than 5 percent. The three-party coalition was literally failing, and Kemal Derviş, the World Bank vice president, was nominated for the post of finance minister. He took charge, with the support of the Turkish economic bureaucracy and IMF staff, of the realization of radical economic reforms. In the second half of 2001, a new stand-by agreement was signed with the IMF, thus implementing a new economic regime based on floating exchange rates, an independent central bank and a severe belt-tightening program.

The critical choice to be made by the newly elected AK Party government was whether or not to continue with the IMF program. It preferred to continue, and succeeded in applying strict budgetary discipline to an extent that had not been seen since 1950. Confidence returned slowly but surely. Inflation fell below 10 percent in 2006, as did interest rates. A real consumption and investment boom followed, and GDP growth reached a 6-7 percent level, allowing a decrease in poverty. The domestic-led growth increased the current account deficit (CAD), but it was easily financed by the abundance of international liquidity, as well as by booming foreign direct investment following the start of the EU-Turkey membership negotiations in October 2005.

Aside from the international financial crisis of 2008-2009, domestic-led growth continued strongly until this year without jeopardizing fiscal discipline. But from now on, the AK Party will face the challenges of low growth originating from the urgent necessity of lowering the huge CAD. It will definitely be more difficult for the AK Party to conduct the Turkish economy in its possible second decade of rule than in the first.

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