This surge has both supporters and detractors. Some of its supporters have welcomed it for the major macroeconomic benefit, i.e., preferred financing of the country’s gaping current account deficit. Other supporters have interpreted it as a vote of confidence by foreign business in the Justice and Development Party (AK Party) government’s economic policies as well as the country’s future. Some of its detractors have criticized its high concentration in the services sector as well as its dominant mode, mergers and acquisitions, i.e., brownfield as opposed to greenfield. On the other hand, others such as economic nationalists, both on the right and the left, have predictably condemned it for increasing foreign control of the economy. There has been, however, scant analysis of the internal and external causes behind this surge on which I want to focus in this and the next two columns. Whether the surge will last or soon vanish will depend on whether its causes will be long-lasting. The first internal cause unquestionably has to do with Turkey’s increasing economic and political stability, which is indispensable for foreign investors. Turkey began to achieve macroeconomic stability as it experienced sustained real economic growth with lower inflation during 2003-2006. The macroeconomic stability owes much to the political stability and prudent macroeconomic policies provided by the present single-party government of Prime Minister Erdogan that has recognized and emphasized the importance of inward FDI.
Until 2003, chronic macroeconomic instability had deprived Turkey of an attractive FDI environment, regardless of whether the official policy welcomed or discouraged FDI. The 1990s were Turkey’s lost decade in the middle of which it had suffered another major economic crisis. At the end of 1999, Turkey began a comprehensive IMF-supported three-year economic stabilization and structural reform program. In November 2000 the program experienced its first crisis which was mitigated by an IMF emergency package. After its second crisis in February 2001, the program collapsed. In March 2001, Turkey was desperate to have the IMF and the World Bank (WB) continue their support for its economy on a knife-edge facing default. One condition for that was to have Turkey commit explicitly to opening up to FDI, as revealed by close analysis by the IMF and WB documents of that period. Foreign Investment Advisory Service (FIAS), affiliated with the WB, was engaged to study the FDI environment and help with its improvement. Under the last Ecevit government (1999-2002), an odd coalition of three constantly sparring parties, Turkey made tentative and half-hearted attempts to improve its FDI environment. These attempts did not bear fruit. Much of what the Ecevit government had done or tried to do to improve the FDI environment, including the Constitutional amendment in 1999 to allow foreign firms to seek international arbitration in disputes involving the Turkish state, was forced by foreign pressures. That government’s responsiveness to those pressures increased as it lurched from one economic crisis to another, desperately needing foreign financial support to avoid default. It did not genuinely believe in and voluntarily seek inward FDI. It was a government under duress whose major concerns were its own survival and the prevention of the country’s economic collapse.
The pro-FDI program of AK Party that succeeded the unstable Ecevit government emphasizes the importance of inward FDI as an essential factor in the country’s economic development. The AK Party government has proven through its actions that its pro-FDI stance is not just rhetoric aimed to please the IMF and the WB for short-term benefits. In my next column, I will discuss those actions, consisting of several crucial legislative and institutional reforms affecting FDI directly and indirectly before turning to the other internal and external causes of the inward FDI surge, which, if sustained, can have powerful effects on the country’s economic and political future.
