Wednesday, 05 June 2013

The Business of Turkey is Business: What the Increasing Importance of Anatolia's Exporting Houses Means

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by Ben Welch (vol. 6 no. 11 of the Turkey Analyst)

The changing shape of the Turkish business community, typified in part by the astonishing rise of Turkey’s small and medium size enterprises (SMEs) to national and international prominence, is a significant feature of the new environment which now plays a part in shaping political and economic decision making in Turkey. As the economic successes of the last decade remain a key element of the political narrative of the Justice and Development Party (AKP), and with the government seeking to guarantee and strengthen its core vote, it can be predicted that the influence of this distinct group of business interests is going to become more pronounced over time.

BACKGROUND: In 2003, Turkey’s definition of SMEs was revised to be in parallel with that of the EU’s definition of SMEs (an enterprise of between 1 and 249 employees, with annual balance sheet revenue or sales of up to 25 million Turkish Lira). World Bank data indicates that the SME’s now account for an estimated 27 percent of total economic output; 80 percent of employment, and nearly 60 percent of exports. Meanwhile, it is thought that they account for almost one half of all investment in Turkey, and two-thirds of all retail sales. With a combined net effect of this magnitude, it is little wonder that these businessmen now wield considerable influence over the country’s broader political economy.

The sector is dominated by firms from cities dotted throughout Turkey’s heartland, known as ‘Anatolian Tigers’, although not all ‘Anatolian Tigers’ are SMEs, and visa-versa. Many of these cities sit on Turkey’s old silk trading routes. There are political undercurrents to the sector which increasingly affect Turkish politics.

As this new group of entrepreneurs have risen to prominence so they have found political allegiances. At the most basic, and unwieldy, level of generalisations, they are run by conservative businessmen who tend to support Prime Minister Recep Tayyip Erdoğan and his Justice and Development Party (AKP). The ‘Tigers’, hailing from cities like Gaziantep, Kayseri, Konya, Bursa and Kocaeli, and their entrepreneurial class and approach to business represent an evolving element in Turkish society – one sometimes at odds with the views of the more established industrial powerhouses of Western Turkey. They also tell the tale of Turkey’s stumbling relations with the European Union.

As Turkish businessmen, frequently the owners and operators of SMEs, continue with their entrepreneurial activities, they will exert a larger and increasingly powerful influence over the policies of the Turkish government. It is through this prism that assessments of some aspects of Turkish foreign and even domestic policy should be undertaken.

IMPLICATIONS: In part, it is plausible to argue that the rise of the Anatolian Tigers relates to broader changes in Turkey’s political economy. From the early 1980s forwards, as Turkey sought to wean itself from the Import Substitution Industrialization (ISI) policies which dominated the economic planning of the republic’s first half century, the economy began to move towards becoming a more open, internationally focused market. These moves were in part dictated by the 1978/1979 balance of payments crisis – at which point the IMF came to Ankara with three key demands: currency devaluation; elimination of import/export controls; and, extensive cuts in government subsidies.

While the center right government of Süleyman Demirel was removed from power in the 1980 coup, the military made sure that the economic re-orientation that his government had embarked on was continued. By keeping Turgut Özal (an engineer, sometime World Bank employee and Undersecretary of Turkey’s State Planning Organization, now the Ministry of Development) as a deputy prime minister with responsibility for economic affairs, and endorsing Demirel’s economic program, the foundation stone for the next stage of Turkish development, and the rise of the Anatolian Tigers, had been laid. At the heart of these policies were three goals: improving Turkey’s balance of payments; reducing inflation; and, laying the groundwork for the creation of a market-based, export-oriented economy.

Özal’s founding of the Motherland Party, and subsequent victory in the 1983 elections, ushered in a period of profound economic upheaval – with the beginnings of a serious, and ongoing, effort to privatize Turkey’s powerful, and until that point, ubiquitous State Owned Enterprises; private-sector led industrialization; and, rapid growth in the export sector. It is important to remember, however, that inflation and economic instability were not banished over this period. Moreover – as populism returned, some have suggested that the boost in manufacturing and increased openness to the international market were supported over the 1980s by subsidies, tax rebates and the real depreciation of the Turkish Lira. However – the trend was established, and despite instability which continued throughout the 1990s, the foundations for the growth of this increasingly prominent sector of the Turkish economy had been set by the time of the victory of the AKP in the 2002 election. The subsequent, and far reaching, economic reforms the AKP pushed through in its decade of power have allowed for further progress, although much remains to be done.

It is against this macro-political and economic backdrop that the rise of this particular, conservative and Anatolian, business class can be seen. The European Stability Initiative’s now famous 2005 paper ‘Islamic Calvinists’ did more than just coin a pithy phrase. With its particular focus on the furniture making Boydak Group and denim makers Orta Anadolu of Kayseri (not forgetting that President Abdullah Gül is one of Kayseri’s favorite sons), the paper not only captured the effects of the period’s reforms – but also suggested that the late 1970s was the moment when mass production techniques and the possibility of partnerships with international firms first became available to the entrepreneurs. As they have become increasingly prominent economically, with a need to access international markets to trade goods and services, Turkey has returned to its historic trading and stomping grounds in the Balkans, the Caucasus, Central Asia, North Africa and the Middle East.

As new trade routes have opened, so has Turkey’s government sought to keep up with the new environment and national interests created by its roving, exporting businessmen. Their effect can be seen in many areas, as the government has attempted to readjust its foreign policy, and develop its international apparatus to support the new requirements. The notable and prominent development of relations with the Kurdish Regional Government in northern Iraq across the breadth of tradable goods is a prime example of an area where businessmen trod first and government followed. Diplomatic appointments from outside the traditional structure of the foreign service are being made for the first time, in order to better protect government objectives, while trade sections in key embassies are being beefed up to support the needs of Turkish business.

Meanwhile, Turkish Airlines, 49 percent state-owned, will look to expand its network in Africa so significantly in coming years that it aims to be the largest single carrier operating on the continent, surpassing Air France. This will be matched by increased official Turkish government presence across Sub-Saharan Africa, including countries as diverse as Chad and Somalia – which has increased in response to the rapid development of business interests throughout the area. Prime Minister Erdoğan’s visit to Mogadishu in 2011 was the first visit of the premier of a non-African country to the war torn state in twenty years.

While the Turkish government has begun to catch up with the internationalization of its businessmen, it is clear that there is much to do. Istanbul Commerce’s University’s 2013 study indicates that 55 percent of Turkish SMEs operate in at least one foreign country – and that about 36 percent operate in at least five. The operations in international markets are heavily skewed in favor of the business model which has been developed since the time of Özal’s rule – 90 percent export, while only 1.5 percent use Foreign direct investment (FDI) as a tool in international markets. In short, the study suggests that not only are Turkish SMEs internationalizing gradually, but in doing so they focus heavily on exporting. There is less focus on finding foreign partners, or increasing the scope of their foreign operations towards increased levels of FDI. While 62 percent saw economic factors as key barriers to market entry, significant numbers (48 and 44 percent respectively) saw political and socio-cultural issues as barriers to enterprise in foreign markets. As their appetites grow, it can be expected that there will be greater pressure on the government to provide better platforms for international business. The rulers of Turkey recognize that business in the world is a key driver of Turkish international relations.

CONCLUSIONS: The Turkish government has responded, in part, to the rapid evolution of the SME sector. The test will come over coming months and years, as other key issues arise. Part of the backdrop to Prime Minister Erdoğan’s recent visit to Washington was Turkey’s push for involvement in the proposed future free-trade agreement between the EU and the U.S. This is a major concern for the SME exporters of Anatolia. The nature of Turkey’s customs union with the EU is such that a third country signing a deal with the EU receives automatic access to Turkish markets – without reciprocity. Given the current focus of the SMEs’ business models, this is a key issue and one which will deserve close attention in the future.

Domestically, another problem sits neatly on the government’s table. SMEs are, given their usefulness to the economy, relatively capital constrained. It will be worth watching to see if further room is made for improving the supply of longer-term financing to the sector. With the complexity of these two points unlikely to be diminished in the short-term, and as the economic importance of SMEs is likely to continue to grow, it seems probable that their ability to impact foreign and domestic policy will grow over in the short to medium term. As the economic successes of the last decade remain a key element of AKP’s political narrative, and with the government seeking to guarantee and strengthen its core vote, it is not impossible to see the influence of this distinct group of business interests becoming more pronounced over time.

Ben Welch is an independent consultant, having formerly worked for the World Bank

Read 8706 times Last modified on Tuesday, 15 April 2014

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.


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