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Turkey's Evolving Economy
Country Ties Its Fortunes Closer to Global Trade, Putting Pressure on Western Europe

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, June 28, 2005

ISTANBUL -- Only six months ago, the European Union agreed to hold talks aimed at bringing this poor and overwhelmingly Muslim country into its ranks, offering what seemed a sign of Western Europe's grudging acceptance of globalization. Turkey then pressed ahead with reforms aimed at making itself more like the Europe it hoped to join.

Today, however, Turkey's hopes of joining the E.U. are all but dead. In the European conversation, Turkey has devolved from a symbol of the continent's aspirations for a wider community to the primary culprit threatening its livelihood -- a nation stealing manufacturing work while delivering an influx of indigent job-seekers.

Yet Turkey's pursuit of a place in the E.U. has set in motion a process of change that has made this country of 70 million a more market-oriented economy. This process is putting new pressures on Western Europe while revealing Turkey's own precarious position, as it ties its fortunes closer to global trade.

Turkey has attacked chronic problems of inflation and government debt to bring its levels closer to Europe's while moving to privatize state-owned monopolies -- steps praised by the E.U. and the International Monetary Fund while assailed by workers mobilizing against layoffs. It has ended subsidies for agriculture, shrinking government spending by $4.5 billion a year while sending farm incomes plummeting.

In the industrial suburbs of Istanbul, factories churn out goods bound for Western Europe while paying workers one-sixth the wages of workers in Germany and France -- numbers that help explain why French and Dutch voters cited Turkey's entry to the E.U. as a reason for their recent rejection of a proposed European constitution and why Germans seem set to elect a new government that wants to keep Turkey out. Meanwhile, those same factories fret over lost sales to China and India, where production costs are lower still.

Some economists praise Turkey for a stunning economic transformation. Last year, for the first time in more than three decades, Turkey's economy grew by 8 percent and inflation dropped briefly into single digits. This year alone, Turkey has attracted more foreign investment than it did in the past dozen years combined. But others argue that Turkey is paying too high a price for the impossible dream of a place in the E.U., foisting upon farmers and workers ill-fitting economic policies that crimp job growth when unemployment remains above 10 percent.

"Turkey is following an economic prescription that works well in a developed economy such as France but is bad policy in a poor country that needs economic development," said Hasan Unal, an international relations expert at Bilkent University in Ankara who argues that the country is better off outside the E.U.

Pursuit of E.U. inflation targets combined with austerity mandated by the IMF have kept interest rates high and propped up Turkey's currency, the lira. This has made Turkey's goods cost more, limiting exports while diminishing new investment. In the automotive industry, Turkey's largest source of exports, some companies say they would expand faster if not for the high cost of credit.

"In the last five years, my company didn't borrow even one lira because the cost of money was unbelievably high," said Sekib Avdagic, general manager of Avitas Kompozit Plastik Inc., which has a partnership with a French company selling components to Renault SA. His firm is turning down orders from its partner because it lacks funds for a new factory.

Economic tensions and anger over being snubbed by Europe have reinvigorated a powerful nationalism. In Ankara, Turkey's capital, workers at Turk Telecom -- a state-owned telephone provider that employs more than 55,000 -- gathered signatures aimed at stopping the planned privatization of their company. Many said the planned sale represented the government's caving to the IMF and the E.U. As the government seeks to privatize state-owned firms to pay off debts exceeding $230 billion, workers brace for job losses and wage cuts.

Proponents of Turkey's bid for E.U. membership argue that the effort has fostered a more democratic society, one governed by law, more protective of human rights and less prone to corruption.

"When you look to the rich countries, they are places where a democratic society is very strongly embedded," said Murat Yalcintas, president of the Istanbul Chamber of Commerce. "This is a process that is going to change the perception of life in Turkish society. It's a mechanism that will integrate us into the free-thinking, modern world."

Regardless of Turkey's political relationship with Europe, economic integration is already underway because of a customs union created in 1996 that allows the duty-free flow of goods. But companies in Turkey complain that the overvalued currency has prevented them from reaping the benefits of access to Europe. Between 1996 and 2004, the value of Turkey's exports grew to $63 billion from $23 billion, according to the State Statistics Institute, but imports reached $98 billion last year, yielding a $35 billion deficit.

Istanbul, a city of 12 million whose skyline is punctuated by minarets and Byzantine monuments, has prospered from trade with Europe. In a gleaming factory, Alarko Carrier Industry & Trade Inc. -- a joint venture of Turkish Alarko Group and U.S. manufacturing giant Carrier Corp. -- rolls out air-conditioning equipment. Four years ago, Carrier shut down a similar factory in Spain and moved the line here. Carrier shifted orders from a factory in Holland, taking advantage of a vast gap in production costs -- roughly $40 per hour in wages and benefits in Holland compared with $7.30 per hour here.

"Globalization is a very good thing for Turkey," said Ishak Alaton, Alarko's chairman of the board. "We want to attack Europe."

But Turkey's wage advantage is trumped by China, where many workers earn less than $1 an hour. The impact is particularly severe in the textile industry, which has lost more than 50,000 jobs so far this year, according to the Confederation of Progressive Trade Unions of Turkey.

"This competition with China and other countries in Asia -- India, Bangladesh -- is causing serious problems," said Suleyman Celebi, head of the union. "It's unfair."

Celebi acknowledged the irony of such complaints, which echo those directed at Turkey by European laborers losing jobs to factories here. But he said workers everywhere would benefit from higher labor standards that would be imposed were Turkey to join the E.U. More than half of Turkey's jobs are in the "underground economy," free of minimum wage and safety standards. "Without Turkey in the E.U., it will become an even greater threat to Europe," Celebi said.

In Turkey's southeast, grain farmers are already dealing with the impact of the bid to join Europe. The land is unforgiving -- scrub-covered mountains give way to the sandy plain stretching to Syria and Iraq. The Tigris and Euphrates rivers cross the region, but irrigation is scarce, and most farmers live under the tyranny of miserly skies. The loss of subsidies has pushed families that survive on less than $1,000 a year closer to the margins. Nearly devoid of industry, some communities have unemployment rates reaching 70 percent.

In Kavaklibag village, a community of mud-walled houses where dried cow dung is the only source of heat, Abdullah Atsiz, father of 13, worried that he might never again be able to feed his family. Grain prices are down nearly one-third since last year, as European imports surge and the government no longer sets a floor price. Fertilizer and insecticide prices have roughly quadrupled.

"The government policy now is to finish the farmers," Atsiz said as watched shadows lengthen across parched fields. "We're all in a panic."

He knew about Turkey's effort to join Europe. "I think this is all Europe's planning. They're trying to sell their products and kill ours," he said. Yet he also saw in closer ties to Europe an opportunity -- the chance for his children to escape abroad to find work.

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