Turkey’s recent trade and foreign direct investment performance

Abstract

Over the last decade there have been significant changes in Turkey’s external economic relations. The process of integration of the Turkish economy into the world economy has gained momentum following the Customs Union with the EU in 1996, the economic crisis of 2001 and the EU’s decision to start accession talks with Turkey in December 2004. Current figures on foreign trade, foreign direct investments and other capital flows prove the case. Both internal and external factors contributed to accelerating integration of the Turkish economy with the world economy. Thanks to the persistence in the implementation of macroeconomic and structural reforms, the Turkish economy recovered rather quickly after the 2001 economic crisis. The increased confidence in Turkey’s ability to sustain economic reforms led to a surge in capital inflows. While the increased domestic demand has been the domestic pull factor behind the faster growth performance, the availability of abundant foreign capital since 2003 has been the external push factor behind it. The best way to characterize the Turkish growth experience since 2002 is to emphasize that Turkish growth is domestic demand (consumption and investment) driven. However, the rapid expansion of the domestic demand during this period implies that domestic savings were insufficient to finance the everexpanding domestic investment. When domestic savings are not sufficient the only alternative left to finance the expanding domestic demand is the foreign savings. Actually, this basic characteristic of the Turkish economic growth has been observed since 1980s. Turkey’s growth episodes over the last three decades are almost always financed by capital inflows. This was also the case in the post2002 era. The availability of abundant international capital ready to flow into emerging markets and therefore Turkey led to the real appreciation of the Turkish lira since 2002. This in turn further fueled the demand for imports, worsening the current account deficit. In addition, the secular upward trend in the international price of oil and other raw materials since 2003 contributed to the rapid deterioration of the current account balance, as two-thirds of the country’s imports are raw materials and other intermediate goods.