COUNTRY ANALYSIS REPORT Turkeyengine. The country received foreign direct investment (FDI) worth $20 billion in 2006, compared to $2.7 billion in 2004. The significant increase in

Turkey: Country Analysis Report – In-depth PESTLE Insights Published 09/2008

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 1

OVERVIEW

Catalyst

This profile analyzes the political, economic, social, technological, legal and environmental structure in Turkey. Each of the

PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects and future risks.

Summary

Key findings

The government has implemented various policies on liberalization, but corruption still poses a problem

Turkey is a strong proponent of liberal trade and investment policies. It has an open trading system, especially with

countries in the EU, with which it forged a customs union agreement in 1996. The agreement led to a positive shift in the

country's trade policy, allowing many Turkish firms to successfully extend their presence in the global economy. However,

Turkey faces widespread corruption in its political and bureaucratic machinery. Corruption remains a disincentive for foreign

investors and negatively affects economic development. Corrupt practices have not been effectively uncovered and

prevented by the government, and are proving to be major impediments for the efficient implementation of government

policies in Turkey.

While Turkey is witnessing a high flow of foreign investments, labor market issues remain a concern

Foreign investment plays a strong role in Turkey’s rapid expansion and has been a driving force of its economic growth

engine. The country received foreign direct investment (FDI) worth $20 billion in 2006, compared to $2.7 billion in 2004.

The significant increase in the inflow of foreign investment to Turkey proves the country’s considerable economic size and

the quality of its workforce. However, the Turkish labor market remains relatively rigid by international standards. According

to the World Bank's Doing Business report of 2007, Turkey is ranked 146 among 178 countries with regard to the difficulties

faced by businesses in hiring and firing workers. The current inflexibility of the labor market is also due to the business

sector finding it difficult to respond to competitive pressures and create an adequate number of jobs.

COUNTRY ANALYSIS REPORT

Turkey In-depth PESTLE Insights

Publication Date: September 2008

Overview



Implementation of several social reforms initiated; inadequate education infrastructure remains a setback

The government of Turkey has taken several steps to implement policies with the objective of improving the social benefits

provided to its people. The country initiated an Instrument for Pre-Accession Assistance for Rural Development (IPARD)

program in December 2007 to improve social conditions in settlements and regional centers. The government intends to

allocate funds to improve agricultural holdings and the overall performance and competitiveness of the food processing

industry along with the role of manufacturer groups in agricultural markets. However, the government needs to focus on

improving the infrastructure and the quality of education provided in the country's schools. Turkey’s education system has

been held responsible for the mismatch between labor demand and supply. For instance, more than 80% of primary and

secondary schools suffer from a shortage of teachers, and more than 87% have limited space and infrastructure.

The government is encouraging R&D efforts in the country, which is lagging behind in innovation and patents

The government has given considerable encouragement to foreign entities, prominent universities and research

organizations to increase R&D spending. It has established science and technology centers and is promoting the

development of the country's e-commerce network, with an aim to originating and formulating new national science and

technology policies. Nevertheless, Turkey still suffers from a low level of innovation, reflected by the low number of patents

registered in the country. The number of patents registered is on the rise, but is still far behind the levels seen in the EU

nations.

Although the country has favorable laws for encouraging foreign investment, the loopholes in the taxation system

continue to be a significant risk for the country

The government has been taking several initiatives to make Turkey an attractive destination for foreign money by

encouraging investments in infrastructure. The recent increase in foreign investment is mainly due to the introduction and

implementation of law number 4875, or the Foreign Direct Investment Law, in 2003. The establishment of this law removed

almost all of the restrictions and requirements previously imposed on foreign investors and provided them with the same

legal status as Turkish-owned companies under the Turkish Commercial Code. However, the country has had difficulties in

trying to enforce regulations, a situation likely to continue into the future. The problem primarily lies with the loopholes

available for those looking to evade the system. If stringent action is not taken very soon, these loopholes could lead to a

huge revenue loss for the government and diminish investments and consumption in the long run.

Turkey has a rich natural resource base, but its inability to tackle huge environmental problems continues to be a

challenge

Turkish is renowned for its plentiful natural resources and is home to many wild and domestic species, including wheat,

chickpeas, lentils, apples, pears, apricots, chestnuts and pistachios. However, the biggest challenge facing the Turkish

government is its inability to tackle the huge environmental problems that may arise due to an increase in chemical and

detergent effluents and air pollution, particularly in urban areas. Turkey has high levels of industrial air pollution from power,

cement, fertilizer, and sugar facilities, a large percentage of which lack filtration equipment. Turkey also faces land

degradation due to the inappropriate use of agricultural areas, overgrazing and deforestation, along with soil erosion in

more than half of its land surface.

Overview



PESTLE highlights

Political landscape

• The government of Turkey is based on the principle of democratic representation, and divides power between

several ruling bodies.

• Turkey has been pursuing a stable foreign policy in recent years, and has played a significant role in the

formulation and implementation of many global initiatives. The current foreign policy of Turkey includes assessing

the national security implications of the political turmoil in Iraq.

Economic landscape

• Turkey's business environment and economic competitiveness have improved over the years. In 2007, the

service sector was the major contributor to the Turkish economy, constituting around 66% of GDP. The industrial

sector produced about 27% of GDP, with the remainder coming from the agricultural sector.

• The government has set an objective of reducing public debt from approximately 40% of GDP to 30% of GDP by

2012. In addition, the government intends to increase national savings, which would facilitate the reduction of the

current account deficit, public debt and borrowing costs, and help curb inflation.

Social landscape

• The Turkish government has taken several initiatives to implement policies aimed at improving the social benefits

and quality of life in the country.

• The healthcare system in Turkey lags behind other European countries. For instance, total health spending

accounted for approximately 6.3% of its GDP in 2006, below the average of 8.9% for the member countries of

the Organisation for Economic Co-operation and Development (OECD).

Technological landscape

• Turkey has witnessed significant growth in R&D over the years by implementing several related policies,

including a national innovation strategy that emphasizes high-value products and increasing employment levels

through increased competitiveness.

• Turkey has seen double-digit growth in the information and communication technology (ICT) market between

2002 and 2007, and an increased number of skilled scientists are currently returning to the country to benefit

from opportunities offered to them by the EU.

Legal landscape

• The judicial system of Turkey is a tripartite system. The supreme courts of Turkey include the Constitutional

Court; the Military High Court of Appeals and High Military Administrative Court; the Council of State; and the

Court of Jurisdictional Conflicts.

Overview



• The business environment in Turkey has improved following the recently undertaken tax reforms. The corporate

tax rate was reduced from 30% in 2006 to 20% in 2007. Employment regulations, however, are rigid, and have

been a cause of decline in the overall productivity growth.

Environmental landscape

• Turkey is faced with increasing pollution levels, due to chemical and detergent contamination of water sources

and a concurrent increase in air pollution, mainly in urban areas.

• The volume of carbon dioxide emitted increased from 204.4 million metric tons in 2003 to 249.5 million metric

tons in 2007. Greenhouse gas (GHG) emissions per person were approximately equivalent to 4.1 tons of carbon

dioxide in 2004, which amounts to about one third of the average level in the EU/OECD countries.

Key fundamentals

Table 1: Turkey – key fundamentals

2006 2007 2008 2009 2010 2011 2012

GDP, constant 2000 prices ($ billion) 267.59 281.26 294.97 308.68 322.38 336.04 349.64

GDP growth rate (%) 5.99 5.11 4.87 4.65 4.44 4.24 4.05

GDP, constant 2000 prices per capita ($) 3,800 3,953 4,103 4,251 4,397 4,540 4,680

Inflation (%) 9.60 8.50 5.88 4.25 3.74 3.43 3.23

Exports, total as % of GDP 22.81 22.42 22.16 22.02 21.95 21.92 21.96

Imports, total as % of GDP 31.13 30.79 30.50 30.25 30.04 29.86 29.70

Mid-year population, total (million) 70.41 71.16 71.89 72.61 73.32 74.02 74.70

Unemployment rate (%) 9.72 9.47 9.43 9.38 9.33 9.20 9.14

Doctors per 1000 people 1.41 1.43 1.50 1.52 1.55 - -

Mobile penetration per 100 people 75.00 83.00 86.00 88.00 90.00 92.00 93.00

Source: Datamonitor D A T A M O N I T O R

Table of Contents



TABLE OF CONTENTS

Overview 1 Catalyst 1 Summary 1

Key facts and geographic location 10 Key facts 10 Geographic location 10

PESTLE analysis 12 Summary 12 Political analysis 13 Economic analysis 15 Social analysis 17 Technological analysis 20 Legal analysis 23 Environmental analysis 26

Political landscape 28 Summary 28 Evolution 28 Structure and policies 30 Performance 34 Outlook 35

Economic landscape 36 Summary 36 Evolution 36 Structure and policies 37 Performance 40 Outlook 53

Social landscape 54 Summary 54 Evolution 54 Structure and policies 54 Performance 57

Table of Contents



Outlook 59 Technological landscape 60

Summary 60 Evolution 60 Structure and policies 60 Performance 61 Outlook 64

Legal landscape 65 Summary 65 Evolution 65 Structure and policies 65 Performance 67 Outlook 68

Environmental landscape 69 Summary 69 Evolution 69 Structure and policies 69 Performance 69 Outlook 70

APPENDIX 71 Ask the analyst 71 Datamonitor consulting 71 Disclaimer 71

Table of Contents



TABLE OF FIGURES

Figure 1: Map of Turkey 11

Figure 2: Turkey – key political events timeline 29

Figure 3: Turkey – key political figures 30

Figure 4: Composition of the parliament of Turkey 32

Figure 5: Evolution of the Turkish economy, 1970–2007 37

Figure 6: Market capitalization of the Turkey stock exchange, 2000–07 39

Figure 7: GDP and GDP growth rate in Turkey, 2002–12 (Real GDP at constant 2000 prices) 41

Figure 8: GDP composition by sectors, 2006 42

Figure 9: Agricultural output of Turkey, 2001–07 43

Figure 10: Industrial output of Turkey, 2001–07 44

Figure 11: Services output of Turkey, 2001–07 45

Figure 12: Current account balance of Turkey, 2000–07 46

Figure 13: External trade of Turkey, 2002–06 47

Figure 14: Balance of trade of Turkey, 2000–07 48

Figure 15: Total foreign investment in Turkey, 2002–06 49

Figure 16: New Turkish lira–US dollar exchange rate, 2000–07 50

Figure 17: CPI and CPI-based inflation in Turkey, 2002–12 51

Figure 18: Total assets of commercial banks in Turkey, 2000–07 52

Figure 19: Employment and growth rate in Turkey, 2002–12 53

Figure 20: Expenditure on healthcare in Turkey, 2002–12 58

Figure 21: Government’s expenditure on education in Turkey, 2002–04 59

Figure 22: Growth rate of mobile and fixed-line subscribers in Turkey, 2002–12 62

Figure 23: Expenditure on R&D in Turkey, 2000–06 63

Figure 24: Number of R&D personnel in Turkey, 2000–06 64

Table of Contents



Figure 25: Carbon dioxide emissions in Turkey, 2000–07 70

Table of Contents



TABLES

Table 1: Turkey – key fundamentals 4

Table 2: Turkey - key facts 10

Table 3: Analysis of Turkey’s political landscape 13

Table 4: Analysis of Turkey’s economy 15

Table 5: Analysis of Turkey’s social system 17

Table 6: Analysis of Turkey’s technology landscape 20

Table 7: Patents received from USPTO 22

Table 8: Analysis of Turkey’s legal landscape 23

Table 9: Analysis of Turkey’s environmental landscape 26

Table 10: Mid-year population by age, 2006 55

Key facts and geographic location



KEY FACTS AND GEOGRAPHIC LOCATION

Key facts

Table 2: Turkey - key facts

Country and capital

Full name Republic of Turkey

Capital city Ankara

Government

Government type Republican parliamentary democracy

Head of state President Abdullah Gul

Head of government Prime Minister Recep Tayyip Erdogan

Population 71.9 million

Currency Turkish lira (TRY)

GDP per capita $12,900

Internet domain .tr

Demographic details

Life expectancy 73.1 years (total population)

70.7 years (men)

75.7 years (women)

Ethnic composition (2001 data) Turkish 80%

Kurdish 20%

Major religions (2001 census) Muslim 99.8% (mostly Sunni)

other 0.2% (mostly Christians and Jews)

Country area 780,580 sq km (total)

770,760 sq km (land)

9,820 sq km (water)

Languages Turkish

Exports Apparel, foodstuffs, textiles, metal products, transport equipment

Imports Machinery, chemicals, semi-finished goods, fuels, transport equipment

Source: CIA

Key facts and geographic location



Geographic location

Turkey is located between Asia and Europe, and is surrounded by the Mediterranean Sea, Aegean Sea, Sea of Marmara

and the Black Sea. It shares its borders with Greece, Bulgaria, Iran, Iraq, Syria, Armenia, Russia and Georgia.

Figure 1: Map of Turkey

Source: CIA The World Factbook D A T A M O N I T O R

PESTLE analysis



PESTLE ANALYSIS

Summary

The Turkish government is made up of democratically-elected representatives of the people, divided into several ruling

bodies. In 1997, the military forced the resignation of the Erbakan government to end the increasing social and political

power of Islamic institutions. Instability continued to increase, with the implementation of policies which secularized

education, and political leaders implicated in corruption charges. Soon Turkey witnessed a series of cabinet changes and

the year 2001 ended with acute economic crisis. On the international front, in 2002 and 2004, the Turkish parliament

passed certain human rights laws with the aim of strengthening the country’s association with the EU.

Turkey experienced a series of economic disruptions after the 1950s, which resulted in a balance-of-payments crisis by the

1970s. With ineffective structural reforms, Turkey had witnessed current account deficits, which it financed by external

borrowing that led to an increase in the country's external debt. The Turkish government failed to take sufficient measures

to tackle the increase in world oil prices during the 1970s, and borrowed short-term loans from foreign lenders; with rising

inflation and unemployment, the government found it increasingly difficult to repay the interest on these loans. After 2000,

however, Turkey’s economy gradually benefited from prudent fiscal and monetary policies coupled with a significant

reduction of expenditure on public infrastructure development.

On the social front, Turkey has been faring well on various social parameters, mainly because of the manifold programs

that the government initiated for fiscal sustainability in the areas of healthcare and pensions. Some of the most important

social welfare schemes that the government provides are unemployment insurance, medical insurance, insurance for work-

related injuries, maternity insurance and housing security. Turkey aims to make radical changes in the public service sector

by introducing advanced technologies; the country also intends to increase productivity in the long run by allocating more

resources to R&D activities in both the public and private sectors. The government has been trying to make the country an

attractive destination for foreign money by encouraging more infrastructure investment, which contributes significantly to

the economic growth of the country through the diffusion of technology, positive externalities and capital inflows. Turkey

has an independent judicial system responsible for the maintenance of law and order. As for ecological concerns, Turkey is

involved in global environmental conservation programs and has linked its development aid to environmental objectives

and policies focusing on air pollution, biodiversity, chemical substances, environmental health and issues such as climate

change. However, Turkey suffers from industrial air pollution from power plants and the cement, fertilizer and sugar

industries, which continues to be an area of concern.

PESTLE analysis



Political analysis

Overview

Turkey has been a strong promoter of liberal trade and investment policies and the recent governments have shown a

sustained commitment to focus on improving economic policies. Turkey became a candidate for EU membership at the

Helsinki Summit in 1999. Nevertheless, increasing corruption and a perceived lack of political commitment continue to

discourage prospective international investors.

Table 3: Analysis of Turkey’s political landscape

Current strengths Current challenges

▪ Government policies on liberalization ▪ Terrorist attacks

▪ Rampant political and bureaucratic corruption

Future prospects Future risks

▪ Membership of the EU

▪ Troubled relations with neighbors


Current strengths

Government policies on liberalization

Turkey is a strong proponent of liberal trade and investment policies. It has an open trading system, especially with the

countries in the EU, with which it forged a customs union agreement in 1996. The agreement led to a positive shift in

Turkey’s trade policy, allowing many Turkish firms to successfully extend their presence in the global economy. Exports

have increased at an average of rate of 10% every year in real terms over the past decade. The automobile sector in

Turkey has benefited from the trade agreement; automotive exports as a percentage of GDP have grown significantly. In

effect, these policies have stabilized inflation rates and have led to higher levels of investment and trade.

Current challenges

Terrorist attacks

Turkey has witnessed a sporadic series of violent terrorist acts in the past, and it is believed that there are terrorist groups

in the country. It has historically been under threat from widely disparate terrorist groups, including left-wing and Kurdish

radicals, indigenous Islamic extremists, and Turkish militants with suspected links to Al-Qaeda. Furthermore, in 2006, the

state police in Ankara informed the press about the involvement of a group of military officers in a plot to weaken the Adalet

ve Kalkınma Partisi (AKP) government.

PESTLE analysis



Most of the terrorist organizations in Turkey have targeted foreign tourists or assets in the country. Since 2004, the

Kurdistan Workers Party (PKK) has been working to damage the Turkish tourism industry by targeting foreign tourists. Over

the years, radical Turkish Islamists have plotted several attacks in Turkey, the majority of which have been prevented. The

intention behind these schemes has been to hamper the foreign interests in the country, including institutions, businesses

and personnel associated with the US and the UK. These repeated terrorist attempts will inevitably increase the security

risk in the country and hamper its growth prospects.

Rampant political and bureaucratic corruption

Turkey faces widespread corruption in its political and bureaucratic machinery. The 2008 Global Corruption Report,

published by anti-corruption organization Transparency International (TI), ranked Turkey 64th in its corruption perception

index. According to both TI and the World Bank, corruption at the institutional level has traditionally been a cause of

hesitancy among prospective investors.

According to the 2007 activity report of the Turkish Police Department's Anti-Smuggling and Organized Crime

Administration (KOM), several bureaucrats have been found to be involved in corrupt activities during various operations

carried out by the police. The officials who were embroiled in these scandals were sacked from their jobs. Turkey’s outlook

for the future looks dismal as a result of increasing corruption cases and a perceived lack of political commitment.

Future prospects

Membership of the EU

In the 1999 Helsinki Summit, Turkey became a candidate for EU membership. This was a follow-up from the customs union

signed with the EU in 1995. This initiative has lead to the implementation of several political and economic reforms in the

country. For instance: after 2001, Turkey entered a period of high growth and significant structural transformation, with an

average annual growth of 7.5%. Turkey has been able to sustain this position due to the government's continued

commitment to improve its economic policies. The prospect of EU accession has helped Turkey increase its exports and

draw large capital inflows.

Future risks

Troubled relations with neighbors

Turkey’s relations with its neighbors, especially Greece, have been showing signs of improvement. Nevertheless, the

progress in its business relations does not change the fact that territorial disputes with its neighbors, in particular with

Greece over Cyprus, continue to cause political tension. Furthermore, a rift between Turkey and its ally the US, over

Ankara's intention to send troops into northern Iraq to fight Kurdish rebels, could further weaken its relations with the

international community and damage its investment climate.

PESTLE analysis



Economic analysis

Overview

The economic structure of Turkey is well supported by the fiscal and monetary policies of the government. Moreover, the

healthy flow of FDI into the country is boosting its economic development. The Turkish government also plans to implement

free trade agreements (FTAs) with the intention of encouraging foreign and domestic investors and thereby improving

competitiveness. Despite recent initiatives, such as the easing of overtime restrictions, the Turkish labor market remains

relatively rigid compared to international standards.

Table 4: Analysis of Turkey’s economy


▪ High inflow of foreign investment

▪ Prudent fiscal and monetary policies

▪ Current account deficit


▪ Implementation of free trade agreements ▪ Rigid labor market


Current strengths

High inflow of foreign investment

Foreign investment plays a strong role in Turkey’s rapid expansion and has been a driving force of its economic growth

engine. The country received FDI worth $20 billion in 2006 compared to $2.7 billion in 2004, and it is anticipated that this

will surpass $20 billion in 2008. The privatization program, scheduled to be implemented in 2008, includes the sale of major

bridges, highways, electricity grids and a stake in the partly privatized commercial bank, Halkbank. The money inflow

through foreign investment in Turkey will be useful for expanding the infrastructure of the country.

The significant increase in the inflow of foreign investment to Turkey proves the country’s considerable economic size and

quality of labor force.

Prudent fiscal and monetary policies

Turkey’s economy has significantly benefited from prudent fiscal and monetary policies. The government has sought to

tighten fiscal policies through the significant reduction of expenditure on public infrastructure development. Furthermore,

the government significantly increased the prime lending rates for commercial banks to extract excess liquidity out of the

market. Inflation in Turkey has witnessed a significant drop, as private investments have been increasing since 2003. The

inflation rate of Turkey declined from 25.3% in 2003 to 8.5% in 2007, remaining in single digits during 2006 despite the

depreciation of the Turkish lira. The Turkish central bank has been successful in lowering inflation since 2001, keeping it

down by tightening fiscal policies and implementing structural reforms that resulted in high productivity growth.

PESTLE analysis



Current challenges

Current account deficit

Turkey's declining current account balance has been hindering its economic stability. The current account deficit was $37.5

billion in 2007, compared to $8 billion in 2003. Imports have witnessed a sharp rise as a result of increased global

commodity prices and a strong Turkish lira. The current account deficit makes the country even more susceptible during

times of global financial uncertainty.

Future prospects

Implementation of free trade agreements

The Turkish government plans to implement FTAs to encourage foreign and domestic investors and boost competitiveness.

As part of this, the country entered into several trade agreements with various countries, including Jordan, Lebanon, the

Faeroe Islands, Albania, South Africa and Mexico. During April 2008, Turkey entered into an agreement with Albania to

boost economic and commercial relations between the two countries and promote joint investments between Turkish and

Albanian businessmen. Moreover, Turkey wants to forge a FTA with India by increasing the annual bilateral trade between

the two countries to $10 billion by 2012. Turkey also aims to broaden its business relations with India so as to narrow its

trade deficits. These FTAs will greatly improve the prospects of economic expansion in Turkey.

Future risks

Rigid labor market

Despite initiatives such as the easing of overtime restrictions, the Turkish labor market remains relatively rigid by

international standards. According to the World Bank's Doing Business report 2007, Turkey is ranked 146th among 178

countries in regard to the difficulties faced by businesses in hiring and firing workers. The current labor market scenario is

also stiff because the business sector in the country is finding it difficult to respond to competitive pressures and create an

adequate number of jobs. To tackle this situation, governments need to take initiatives that would make Turkish laws and

regulations more flexible. An overhaul of labor markets is essential to regain lost competitiveness and reduce the

unemployment rate.

In addition, high taxes on wages also contribute to Turkey's rigid labor market. The tax wedge, which is the share of

employee earnings taken by the government, is equivalent to the difference between labor costs to the employer and the

net take-home pay of the employee, including any cash benefits received from government welfare programs. For a family

of four, Turkey's tax wedge was significantly higher than other OECD countries at 42.7%, and 15 percentage points higher

than the OECD average wedge of 27.7% as of 2005. The rate of the tax wedge on wages has not kept pace with

productivity, making the economy uncompetitive.

PESTLE analysis



Social analysis

Overview

Turkey has been grappling with the problems of high unemployment levels and the lack of a proper educational system.

Turkey’s infant mortality rate is six to seven times higher than that of the members of the EU. The government has initiated

programs for fiscal sustainability, and reforms are expected to be undertaken in the areas of healthcare and the pension

system. Some of the most important social welfare schemes that the government has been providing are unemployment

insurance, medical insurance, insurance for work-related injuries, maternity insurance and housing security. The system is

financed primarily by contributions made by employers and through the payroll deductions of employees. With the recent

reforms in the education system, it can be expected that the tertiary education scenario will improve and the growing

mismatch between academic and industrial needs will be rectified.

Table 5: Analysis of Turkey’s social system


▪ Growing percentage of young population

▪ Low human development index

▪ Increasing infant mortality

▪ High level of unemployment


▪ Overhaul of social policies ▪ Ineffective social security system

▪ Inadequate education system and infrastructure


Current strengths

Growing percentage of young population

More than half the population of Turkey is aged below 30. With the rest of Europe facing the problem of an increase in the

average age of its population, Turkey has an opportunity to increase the employment rate within the country by capitalizing

on its young labor force. In addition, European small and medium enterprises (SMEs), as well as countries such as Austria,

Italy and Spain, have been showing an interest in investing in Turkey.

Current challenges

Low human development index

Turkey has historically shown weak performances on various social parameters, mainly because of its policies on such

matters. The human development index (HDI) of Turkey is 0.775 and the country is ranked 84th among the 177 countries

rated. Life expectancy at birth is 71.4 years, while the combined primary, secondary and tertiary gross enrolment ratio is at

PESTLE analysis



68.7%. Turkey also fares low in terms of gender equality. Turkey’s gender-related development index (GDI) value is 0.763.

GDI measures achievements by using the HDI indicators, but captures also inequalities in achievements between women

and men. The index indicates Turkey’s inability to create a positive social climate for women.

Increasing infant mortality

Turkey has a dismal infant mortality rate. The country’s infant mortality rate is six to seven times higher than that of the

members of the EU. For instance, the total number of deaths per 1000 live births during 2006 was approximately 37 in

Turkey, making it the country with the worst infant mortality rate in Europe. Among males the rate was 40 deaths per 1,000

live births, while among females it was 33 per 1,000 live births. The insufficiency of several of Turkey's preventive and

protective health services is the major cause for the high infant mortality rate in the country.

High level of unemployment

Turkey’s highly regulated labor market has led to high employment costs and increasing levels of unemployment.

According to the report released by the Turkish Statistics Institute, the number of unemployed people in 2007 increased by

approximately 38,000 to reach 2.3 million.

In early 2008, Turkey‘s population consisted of around 49.7 million people aged over 15 years: an increase of 737,000

people compared to the previous year. This rise has made it difficult for Turkey to create sufficient jobs for its population. In

the first quarter of 2008, the unemployment rate in Turkey was 11.6%, compared to 11.4% during the same period in 2007.

The unemployment rates in cities and rural areas were 13.4% and 8.5%, respectively, in the same period. In the first

quarter of 2008, more than 73% of the population who were unemployed comprised males, approximately 56% did not

have a high school education, and 30% had been jobless for a year.

Future prospects

Overhaul of social policies

The Turkish government has undertaken several initiatives to implement policies aimed at improving the social benefits it

provides to its people. The country initiated an IPARD in December 2007 to improve social conditions in settlements and

regional centers. The program, which will run until 2020, aims to improve the social conditions of people living in rural areas

by building hospitals, cultural centers, apartment buildings, roads, power-transmission lines and schools. The program's

objective also includes the modernization of the agricultural sector.

Furthermore, the government intends to allocate funds to improve agricultural holdings and the overall performance and

competitiveness of the food processing industry along with the role of manufacturer groups in agricultural markets. This

initiative would hence contribute to the development of the rural economy, and would promote the formation of micro-

enterprises which would create employment opportunities in the rural areas.

PESTLE analysis



Future risks

Ineffective social security system

The social security system in Turkey needs some serious enhancements, despite Turkey being the only country in the

world that has made three reforms in social security in two years. The retirement age is currently 44 for women and 48 for

men. The government has also made it clear that it has no plans to increase the retirement age to 65. As a result of both

this and the country's inadequate pension system, the Turkish people are finding it difficult to lead a proper social life after

their early retirement. Moreover, the current security system of Turkey is unsustainable due to low rates of registration

among workers, the underreporting of incomes and drifts in spending, which are causing growing imbalances in the system.

Inadequate education system and infrastructure

To a great extent, Turkey’s education system has been held responsible for the mismatch between labor demand and

supply. In the future, economic growth will be led by the knowledge economy, and Turkey’s educational system may not be

capable of meeting the attendant needs. Furthermore, the primary and secondary schools in Turkey have inadequate

infrastructure and resources. For instance, more than 80% of the primary and secondary schools suffer from a shortage of

teachers, and 87.3% have limited infrastructure and physical space. Along with this, approximately 42% of the schools do

not have a library, while 71.5% have inadequate library facilities. The outmoded education system and lack of infrastructure

facilities in schools are seen as some of the primary reasons for the prevailing unemployment scenario.

PESTLE analysis



Technological analysis

Overview

Turkey has been slower in adopting technological advances than the EU countries, although policy measures have been

undertaken to expedite this. Total expenditure on R&D in 2006 as a percentage of GDP was 0.6%, compared to 2.3% in

the OECD countries. Nevertheless, over the past decade, Turkey’s telecommunications industry has been booming due to

the liberalization of the market. The number of mobile telephone subscribers increased at a CAGR of 22%, from

approximately 23 million in 2002 to 62 million in 2007. However, the levels of patenting remain extremely low, despite a

rapid increase in recent years. The R&D climate is expected to improve, as the government has been taking several

initiatives towards developing the technological landscape of the country by encouraging foreign entities, prominent

universities and research organizations to foster a culture of innovation.

Table 6: Analysis of Turkey’s technology landscape


▪ Significant development in the ICT sector

▪ Low expenditure on R&D


▪ Government encouragement to improve R&D

▪ Prospects of joining the EU reversing brain drain

▪ Lack of innovation and low number of patents


Current strengths

Significant development in the ICT sector

Turkey witnessed double-digit growth in the ICT market during 2001–07. Turkey’s ICT market reached approximately $24

billion in 2007, compared to $21 billion in 2006. The ICT sector contributed approximately 4% of GNP in 2006, and the

growth rate of this market was about 11% at the end of that year. The number of internet users in Turkey increased from

approximately 10 million in 2004 to 19 million users in 2007, at a CAGR of 23%. The number of mobile telephone

subscribers also increased at a CAGR of 22%, from approximately 23 million in 2002 to 62 million in 2007. The increase in

the ICT sector has been due to the privatization of the Turkish telecommunications sector by the government, which has

provided more scope for employment and attracted new foreign investment projects to Turkey.

PESTLE analysis



Current challenges

Low expenditure on R&D

Total expenditure on R&D in 2006, as a percentage of GDP, was around 0.6%: well below the overall 2.3% in the OECD

countries. In comparison, France’s expenditure for the same year was 2.13% of GDP, the US's 2.68%, Japan's 3.18% and

Canada's 1.8%. This huge asymmetry points towards the gross inadequacy of investments by both the private and public

sectors in R&D. In the long run, low R&D spending would erode the competitiveness of industries in Turkey.

Future prospects

Government encouragement to improve R&D

The Turkish government is inclined towards developing the technological landscape of the country, and has given

considerable encouragement to foreign entities, prominent universities and research organizations to foster a culture of

innovation. The government initiated a project on science and technology called Vision 2023 for the period 2003–23 under

the co-ordination of the Scientific and Technical Research Council (TUBITAK) and the Supreme Council of Science and

Technology (BTYK). The project mainly covers the implementation of the national Technology Foresight study and seeks to

gather and study information on the technological levels of industrial sectors. Other initiatives undertaken by the

government in this regard include establishing science and technology centers and encouraging the e-commerce network

in the country. The aim of these projects is to originate and formulate new national science and technology policies with the

intention of promoting and encouraging innovation.

Prospects of joining the EU reversing brain drain

There has been an increase in the number of skilled scientists who are returning to Turkey to gain from the opportunities

offered to them by the prospect of joining the EU. A total of 40 scientists left foreign universities and returned to Turkey

during 2005–07. The European Commission has also allocated E4.7 billion to support researchers and institutions during

2007–13. The increase in the number of skilled scientists will provide a boost to the development of technology in the

country.

Future risks

Lack of innovation and low number of patents

The low level of innovation in Turkey is reflected by the low number of patents registered in the country. Although the

number of patents registered is on the rise, it is still far behind the levels seen in EU nations. It compares very poorly to

some EU and developed countries, as illustrated in the table below. A continuation of the trend is likely to hamper the

scientific prospects of the country.

PESTLE analysis



Table 7: Patents received from the US Patent and Trademark Office by country

Year Turkey France Germany Japan US

2000 6 4,173 10,824 32,922 97,011

2001 14 4,456 11,894 34,890 98,655

2002 18 4,421 11,957 36,339 97,125

2003 32 4,126 12,140 37,248 98,590

2004 19 3,686 11,367 37,032 94,129

2005 10 3,106 9,575 31,834 82,586

2006 23 3,856 10,889 39,411 102,267


PESTLE analysis



Legal analysis

Overview

Turkey has an independent judicial system responsible for the maintenance of law and order. The Constitutional Court, the

highest constitutional body in Turkey with respect to legislation, determines the constitutionality of legislation prior to the

enactment of new laws. The judicial system is divided into the judicial and administrative orders of courts, and a clear

hierarchy of courts at different levels of states and center exists. The government has been trying to make Turkey an

attractive destination for investment by encouraging more infrastructure investment, which contributes significantly to the

economic growth of the country’s economy through diffusion of technology, positive externalities and capital inflows. Along

with this, the government has reduced the basic rate of corporation tax, with the intention of drawing FDI in Turkey.

However, there exist a lot of loopholes available for those looking to evade the tax system, which is leading to huge

revenue losses for the government.

Table 8: Analysis of Turkey’s legal landscape


▪ Comprehensive legal structure

▪ Robust framework for business entities

▪ Judicial inefficiencies


▪ Reduction in tax rates

▪ Favorable laws for foreign investment

▪ Existing loopholes in the taxation system


Current strengths

Comprehensive legal structure

The judicial system is composed of general law courts, heavy penal courts, military courts, the Constitutional Court and

three high courts. The High Court of Appeals handles criminal cases, the Council of State handles administrative cases,

and the Audit Court inspects the accounts of state institutions. Other courts include the civil, administrative, and criminal

courts. The comprehensive legal structure of the country has the capability to address various bottlenecks and structural

issues in the system and gives foundational strength to the investment climate of the country.

Robust framework for business entities

An entrepreneur in Turkey does not face any lengthy business registration processes for commencing a business. The

overall freedom to start, operate, and close a business is protected by Turkey’s regulatory environment. Starting a business

in Turkey takes an average of six days, compared to the world average of 43 days. Gaining a business license requires

PESTLE analysis



more than the world average of 19 procedures but less than the world average of 234 days, with costs relatively low. The

robust framework for business entities hence creates a successful commercial environment and drives business growth in

Turkey.

Current challenges

Judicial inefficiencies

Delays in the Turkish judicial system are a serious issue, and have become the subject of debate in recent times.

Furthermore, the political bias of judges has affected legal outcomes. The High Council of Judges and Prosecutors controls

the careers of prosecutors and judges, and thus can sway their decisions. Long pretrial detention and excessively

protracted trials are major concerns. Turkish commercial courts are overloaded with cases, and on average it takes over a

year to resolve each one. In criminal trials, the judicial process have been slow owing to the backlog of cases and court

decisions which are often arbitrary and have been subject to political interference in high-profile cases, which leads to

biased verdicts.

Future prospects

Reduction in tax rates

Turkey has one of the lowest corporate tax rates in the world, with further reductions expected in the coming years. During

2007, the government reduced the basic rate of corporation tax from 30% to 20%. It also introduced and implemented

online filing in an attempt to reduce the time required for preparing trade documentation, with the intention of drawing FDI

into Turkey, and lowered personal income tax from 40% to 37%. This reduction in the tax rates is expected to stimulate the

economic growth of the country.

Favorable laws for foreign investment

Turkey has been a hub for foreign investment over the years. According to the treasury, total foreign investment (including

real property purchases) increased from $2.8 billion in 2004 to approximately $20.1 billion in 2006. The treasury's official

figures for June 2007 reveal that about $10 billion in foreign capital entered the country during the first four months of 2007.

This increase in foreign investment was mainly due to the introduction of law number 4875, or the Foreign Direct

Investment Law, in June 2003 and the Directive for the Implementation of the Foreign Direct Investment Law in August

2003. The implementation of these laws removed almost all of the restrictions and requirements which were imposed on

foreign investors and provided them with the same legal status as Turkish-owned companies under the Turkish

Commercial Code.

The government has been trying to make Turkey an attractive destination for business ventures by encouraging

infrastructure investments. Foreign investment contributes to the economic growth of the country’s economy through the

diffusion of technology, positive externalities and capital inflows.

PESTLE analysis



Future risks

Existing loopholes in the taxation system

Enforcing regulations has been a challenge for the country and will continue to be the case in the future. The problem

primarily lies with the loopholes available for those looking to evade the system. Furthermore, personal income, company

sales and real-estate prices are frequently under-declared. According to a recent study, 30% of value-added tax (VAT)

revenue in Turkey is never collected. Levels of employment are often concealed in order to avoid the payment of income

tax and social security premiums on employees' salaries. If stringent action is not initiated very soon, the loopholes could

lead to a huge revenue loss for the government.

PESTLE analysis



Environmental analysis

Overview

Turkey has been a leader with respect to environmental legislation and ranks ninth in terms of biodiversity compared to

other European countries, with over 33% of its flora being endemic. The country is strongly involved in global environmental

issues and has linked its development aid to environmental objectives and policies focusing on air pollution, biodiversity,

chemical substances, environmental health, and global issues such as climate change. Despite the presence of a strong

framework, environmental pollution in Turkey is high due to an increase in the amount of chemicals and detergents being

dumped. There has also been a rise in air pollution, particularly in urban areas.

Table 9: Analysis of Turkey’s environmental landscape


▪ Rich biodiversity

▪ High pollution levels


▪ Kyoto Protocol ▪ Increasing levels of hazardous waste

▪ Rising emission levels


Current strengths

Rich biodiversity

Turkey is acclaimed for its rich natural resource base and ranks ninth in terms of biodiversity compared to other European

countries, with over 33% of its flora being endemic. Turkish flora boasts of many wild species and important domestic

species like wheat, chickpeas, lentils, apples, pears, apricots, chestnuts and pistachios. The Turkish landscape is also

dotted with ornamental flowers like the tulip. The distinctive biodiversity of the country has immense potential for

sustainable development or ecotourism.

Current challenges

High pollution levels

There is an urgent requirement for water treatment plants, wastewater treatment equipment and solid waste management

facilities in Turkey. The main reasons for the current high levels of environmental pollution in Turkey are: the increase in

chemical and detergent effluents; and the rise in air pollution, particularly in urban areas. Furthermore, the discharge of

pollutants by neighboring countries has contaminated the Black Sea.

PESTLE analysis



Air pollution has increased significantly in Turkey since the mid-1990s, and is especially severe in Istanbul, Ankara,

Erzurum, and Bursa. In Istanbul, for instance, the increasing number of cars in urban areas is resulting in smog. Turkey

also faces high industrial air pollution from power plants and facilities used by the cement, fertilizer, and sugar industries, a

large percentage of which lack filtration equipment. Moreover, the country has witnessed soil erosion in more than half of its

land surface. Turkey loses approximately one billion tons of topsoil annually. The increasing level of environmental pollution

could harm the health of the people and the economy.

Future prospects

Kyoto Protocol

Turkey intends to become a signatory to the Kyoto Protocol to benefit from the promotion and implementation of the Clean

Development Mechanism (CDM). Experts have opined that international co-operation as part of the Kyoto Protocol will

continue to benefit ecological conservation in Turkey. In June 2008, the Turkish government decided to approve the Kyoto

Protocol. It aims to share the position of the treaty's European signatories in considering the Kyoto Protocol as the basis of

effective international action to reduce the pollutants causing climate change.

Future risks

Increasing levels of hazardous waste

Turkey’s environmental condition is constantly under threat due to the amount of hazardous waste that is being generated

in the country. It is estimated that only 29% of the waste collected is disposed of in sanitary landfills. Municipal and

industrial dump sites, along with their illegal equivalents, comprise approximately 80% of contaminated sites in the country.

Sites which are contaminated constitute a significant problem for public health, the environment and economic

development. Currently, the manufacturing sector contributes significantly to environmental pollution. Although the costs to

implement anti-pollution measures would be high, they would provide long-term benefits for Turkish industries.

Rising emission levels

The GHG emissions per person in Turkey were equivalent to approximately 4.1 tons of carbon dioxide in 2004; this

amounts to about one third of the average rates in the EU and the OECD countries. Turkey is party to the United Nations

Framework Convention on Climate Change, but is not a signatory to the Kyoto Protocol and hence does not have a target

for GHG emission reductions. However, the government has announced its intention to sign the Kyoto Protocol at some

point in the future, and the increasing emissions levels in Turkey could make it fail to meet the attendant GHG target.

Furthermore, the increasing quantities of GHGs could soon lead to international pressure to reduce emissions levels.

Political landscape



POLITICAL LANDSCAPE

Summary

The government of Turkey is based on the principle of democratic representation, and divides power between several

ruling bodies. In 1923, Turkey was established as a republic and since then has maintained strong secular credentials. The

constitution of Turkey administers the legal framework of the country. The legislative power of Turkey is enshrined in the

550-seat Grand National Assembly of Turkey (Turkiye Buyuk Millet Meclisi), which represents the 81 provinces of the

country. The president is the head of state, and is elected every seven years by the Grand National Assembly.

Evolution

Pre 1975

Turkey was dominated by the Ottoman Empire from the Middle Ages to the 20th century. The imperial reign began to

deteriorate in the 19th century when the Ottoman Empire, under pressure from the West, implemented a series of reforms

called Tanzimat during 1839–76. The dissatisfaction created by the resulting bureaucratic absolutism led the Young

Ottoman movement to turn towards the creation of a more liberal, Western-style, secular government and improve the

country's relations with Europe, although these changes were later stifled by Sultan Abdulhamid II in the 1870s.

In 1876, Turkey formed a parliamentary constitution under the leadership of Abdulhamid, who was later forced to summon

a parliament in 1908 by the Young Turks movement. He planned a counter revolution in 1909, but failed and on account of

this was banished to Salonika. Abdulhamid was succeeded by Enver Pasha, who emerged as the new leader of the

country. During 1909–12, the European powers took advantage of the weak Ottoman government to occupy most of the

empire’s remaining territory in southeastern Europe. During World War I, Enver Pasha’s coalition with Germany caused

Britain, France, and Russia to declare war on the Ottoman Empire.

During the 1950s, conflicts between different political parties of the country increased, as Prime Minister Adnan Menderes's

government was perceived as rigid by his opponents. Moreover, the economy suffered from inflation and heavy debt during

this period. In 1960, Menderes responded to the mounting protests by implementing martial law and suspending political

activities. Later, under the leadership of Suleyman Demirel of the Justice Party, which gained a majority of seats in the

election of 1965, a single party government was formed. Turkey witnessed a series of weak coalition governments during

the 1970s. The country’s economic and political condition also worsened during World War II and, in early 1945, Turkey

declared war on Germany. In 1952, Turkey became a member of the North Atlantic Treaty Organization (NATO).

Political landscape



Figure 2: Turkey – key political events timeline

• In 1952, Turkey abandoned Ataturk's neutralist policy and joined the NATO.

• In the 1960s, Turkey and Greece had several conflicts over Cyprus, and in 1974 armed conflict resulted in the partition of the island.

• In 1965, SuleymanDemirel was elecetdas the prime minister, who later resigned due to pressure from the army due to a series of political violence.

• In 1990, Turkey permitted the US led coalition against Iraq to launch air strikes from Turkish bases.





• In 1876, Turkey formed a parliamentary constitution, under the leadership of Abdul Hamid, who was later forced to summon a parliament in 1908 by the Young Turks movement.

• In 1923, Turkey became a republic under the leadership of Kemal Ataturk, who was elected the president.

• Turkey became secular in 1928.




• In 1993, Tansu Cillerwas elected as Turkey's first woman prime minister.

• In 1995, the Cillercoalition collapsed, and also during the same year, pro-Islamist Welfare Party won the elections but lacked support to form a new government.

• In 1998, the Welfare Party, the largest in parliament was banned. Mesut Yilmaz resigned amid corruption allegations, and replaced by BulentEcevit.

• In 2000, AhmetNecdet Sezersucceeded SuleymanDemirel and was elected as the president.





• In 2001, the European Court of Human Rights held Turkey guilty for violation of the rights of Greek Cypriots during its occupation of northern Cyprus.

• In 2002, the parliament approved reforms which were aimed at securing the EU membership.

• In the 2002 parliamentary elections, the secular Islamist Justice and Development Party gained majority of votes.

• In 2004, PKK agreed to end to its terrorist activities.





• A new lira currency was introduced wherein the banknotes were denominated in millions.

• In 2006, Kurdish separatist group, the PKK, announced a unilateral ceasefire in operations against the military.

• In the same year, the EU partially froze Turkey's membership talks because of the formers failure to open its ports and airports to Cypriot traffic.

• Abdullah Gul was elected as the president in August 2007.





Pre –1940 1940–90 1991–2000 2001–04 2005 Onwards







































Pre –1940 1940–90 1991–2000 2001–04 2005 Onwards































Pre –1940 1940–90 1991–2000 2001–04 2005 Onwards


1975–2000

During 1978–79, the military took over the administration of the country due to increasing political violence, which had

started to affect Turkey’s fragile economic structure. This improved the economic conditions of the country significantly and

in the early 1980s civil order began to be restored, albeit at the cost of a flawed human rights environment. A new

constitution was approved in 1982 to curtail mounting international pressure. In the 1980s, the government of General

Kenan Evren, seventh president of Turkey, provided political stability to the country; Evren was succeeded by his former

minister of state, Turgut Ozal, in 1989. However, political instability rose again in Turkey during the mid-1990s, when the

Kurdistan Workers’ Party (Partiya Karkeren Kurdistan, or PKK) intensified its violent acts in the country with the aim of

gaining Kurdish autonomy in southeastern Turkey.

With the increasing social and political power of Islamic institutions, the military forced the resignation of the Erbakan

government in 1997. Political instability continued to increase with the development of policies which secularized education,

and when several political leaders were charged with corruption. During 1998, the Welfare Party was suspended by the

Constitutional Court following allegations of an anti-secular stance. In the following year, PKK leader Abdullah Ocalan was

arrested with the aim of suppressing the Kurdish revolution in southeastern Turkey.

Political landscape



In the late 1990s, Turkey’s troubled relations with Greece, caused by issues related to oil drilling rights and the air space

over the Aegean Sea, were seen to improve. Following the 1999 elections, Bulent Ecevit established a new coalition

government, which gained stability in 2000.

2001–07

In 2001, Turkey witnessed a series of cabinet changes and ended the year in an acute economic crisis. During 2002–04,

the parliament implemented a series of human rights reforms, with an aim to solidifying Turkey’s association with the EU. In

the 2002 parliamentary elections, the Islamist Justice and Development Party (Adalet ve Kalkınma Partisi, or AKP) gained

a majority in the parliament with a landslide victory in the elections and, following a constitutional reform, party leader

Tayyip Erdogan was elected as prime minister in 2003. In 2007, the AKP again won the parliamentary elections and

Abdullah Gul was elected as president. In the same year, the parliament permitted military operations in Iraq in pursuit of

Kurdish rebels, and during the end of the year, launched a series of air strikes on fighters from the Kurdish PKK movement

in Iraq.

Structure and policies

Key political figures

The key political figures in Turkey include:

President Abdullah Gul

Prime Minister Recep Tayyip Erdogan

Figure 3: Turkey – key political figures

Abdullah Gul has been the president of Turkey since August 2007, prior to which he served for five months as the prime minister during 2002–03. He was the foreign minister from 2003 to 2007, and played a key role in improving Turkey's relations with Syria and other Turkic-speaking countries in Central Asia and the Caucasus.

Recep Tayyip Erdogan has been the prime minister of Turkey since 2003. He is the current leader of the AKP, and one of the major representatives of the moderate Islamist movement in Turkey. In 1985, he was elected as the party's chairman for the Istanbul province and served as the mayor of the Beyoglu district. He was nominated as a candidate for the parliament for the central Istanbul area in the late 1980s.


Political landscape



Structure of government

Structure of legislature

The legislative power of Turkey is enshrined in the 550-seat Grand National Assembly of Turkey, and the members of the

parliament are elected for a five-year term. To gain representation in the parliament, a party must gain at least 10% of the

total votes in the national parliamentary elections. Turkey has a multi-party system, with several different political ideologies

represented across the various factions.

Executive branch

The president is the head of state, and is elected every seven years by the Grand National Assembly. Executive power lies

with the prime minister, who is selected by the parliament through a vote of confidence.

Key political parties

Justice and Development Party

The AKP is the ruling political party of Turkey, and is a moderate, pro-Western party which promotes a liberal market

economy. During the elections conducted in July 2007, the AKP won 46.6% of the votes and gained more than 340 seats in

the parliament.

Republican People's Party

The Republican People's Party (Cumhuriyet Halk Partisi, or CHP) was formed during the Congress of Sivas, an assembly

of the Turkish National Movement held in 1919 in the city of Sivas. The current structure of the party was created during the

time when the Republic of Turkey was moving towards a multi-party system. The CHP has ties with the middle and upper-

middle class constituency of Turkey. During the 2007 general elections, the CHP entered into an alliance with the

Democratic Left Party and suffered a heavy defeat, gaining just 7.3 million votes. The party was in a leading position only in

Thrace and two other provinces on the Aegean coast.

Nationalist Movement Party

The Nationalist Movement Party, (Milliyetçi Hareket Partisi, or MHP) is a nationalist conservative party in Turkey. In the

2007 legislative elections, the party won over 14% of the national vote and more than 70 seats in the parliament. It enjoys

considerable support from the electorate.

Democratic Party

The Democratic Party (Demokrat Parti, or DP) was established by Suleyman Demirel in 1983 as the True Path Party

(Dogru Yol Partisi, or DYP). The party has been in power four times since its establishment, with the government led by

Demirel on one occasion and by Turkey's first woman prime minister, Tansu Ciller, in the other three instances. The party

currently has just four seats in the parliament following a disastrous performance in the recent elections, in which it was

only able to win 6% of the total vote.

Political landscape



Young Party

The Young Party (Genc Parti, or GP) is a secular, liberal political party in Turkey. In the 2007 elections, the party won just

3.3% of the votes and none of its candidates gained a place in the Grand National Assembly of Turkey.

Composition of government

In the 2007 elections, the AKP won 341 seats, followed by the CHP (112) and the MHP (71). Independent candidates took

a total of 26 seats.

Figure 4: Composition of the parliament of Turkey

AKP 47%

CHP21%

MHP14%

Independents 5%

Other13%


Key policies

Over the past two decades, Turkey has operated a growth plan based on competitive markets to foster the private business

sector. The high levels of FDI and other capital flowing into the country over this period have resulted in the appreciation of

the country’s local currency in real terms, except during periods of international capital market turbulence or internal

political tensions. This appreciation has in turn helped the country to deal with inflation. The government is also trying hard

Political landscape



to enhance its economic and political relations with its neighbors. However, this can only be achieved by strengthening the

macroeconomic policy framework and providing its business sector with an employment-friendly environment, and this

strategy is susceptible to regular macroeconomic imbalances.

Economic

Turkey has increased its government expenditure over the years, and the attendant increase in debt remains a concern.

There has also been a significant improvement in the fiscal discipline of the country ever since the 2001 financial crisis.

However, Turkey still needs to increase its expenditure and invest in areas which can contribute towards future economic

growth. The country also aims to improve its political stability in the long run and expects to be among the 10 largest

economies of the world by 2023. However, an increase in inflation rates and strict monetary tightening by the central bank

in 2006 has dampened domestic demand growth, compared with the rapid rates of increase witnessed during 2004–06. To

deal with the situation, the Turkish government has allocated more than 25% of its national income for investments, and

expects the country to grow at a rate of 7% during 2010–15.

Social

Turkey’s social welfare system is healthy in terms of the benefits it provides to its citizens. The system provides health,

welfare and pension payments. Turkey is among the countries which have the highest per capita social welfare services

expenditures in the world. The ministries of education, youth, family and health, regional planning and urban development,

and labor and social affairs are responsible for a range of public services offered by the state.

A new law on social security and general health insurance took effect on May 2008 in Turkey, wherein the retirement age

was raised to 65 for both women and men from the current respective ages of 58 and 60. The law also increased the

minimum number of working days required to qualify for retirement benefits from 7,000 to 7,200, and mandated that the

updating co-efficient used to calculate pensions will henceforth be determined according to the consumer price index (CPI)

and GDP figures. In addition, the government aims to place special focus on factors related to aging and unemployment

when providing social benefits such as pensions and unemployment insurance.

Foreign

Turkey has been pursuing a stable foreign policy in recent years, and has played a significant role in the formulation and

implementation of many global initiatives. The current foreign policy of Turkey includes assessing the national security

implications of the political turmoil in Iraq. Turkey also intends to provide the necessary impetus to Iraq to develop policies

that would facilitate stability across the whole region.

Since 2005, Turkey has improved its relationship with Greece, with whom it has had an uneasy relationship over the years.

Disputes over the Aegean Sea and issues related to the island of Cyprus have caused hostility between the two countries,

but the recent improvement in business connections may ultimately usher in some stability to the region. Surprisingly,

Greece is a strong backer of Turkey’s bid to become a member of the EU, although it has also criticized Turkey for failing to

comply with the basic reforms required to facilitate EU membership. The issue of Cyprus has continued to remain a critical

aspect in Greco–Turkish relations, as all attempts to reunify the island's Greek-dominated south with its Turkish-controlled

north have failed. Greece has traditionally maintained close relationships with Serbia, primarily because both countries

Political landscape



belong to Orthodox branches of Christianity and have had troubled relations with their Catholic and Muslim neighbors

historically.

Turkey's trade volume with nearby countries has been steadily increasing; this is demonstrated by the fact that it has

signed FTAs with 11 countries since 1996. In 2006, Turkey was ranked the 17th largest economy of the world, and the

country aims to become the sixth biggest economy in the world after gaining EU membership.

Defense

Turkey’s military expenditure has remained steady in recent years, constituting 5.3% of the GDP as of 2005. The Turkish

defense industry is among the world's top defense industries in terms of rapid development and expansion to overseas

markets, with its exports expected to touch around $1.5 billion annually within the next three years. The sector has

customers from Europe, the Middle East, the Far East and Africa. The provenance of the growth of Turkey’s defense

industry can be traced back to the weapons ban imposed on the country by the US, in 2007. The ban, which was issued as

a result of the Turkish military's intervention in Cyprus, emphasized the need for a self-sufficient defense infrastructure.

As part of the development program, the Undersecretariat of Defense Industries (SSM) intends to increase the share of the

defense industry in the North Atlantic Treaty Organization (NATO) from the current 4% to 20% by the end of 2011. The total

share of all the other countries that are included in the NATO defense investment projects currently constitutes only around

18%. To beef up its defense infrastructure, the government intends to invest around $10 billion annually in the sector.

Turkey ranks fourth among 10 Middle East countries and fifth among the European countries in terms of defense

expenditure. Iran tops the list among the Middle East countries in defense expenditure, followed by Saudi Arabia and Israel;

and in Europe, Britain tops the list, followed by France, Germany and Italy.

To protect itself from possible aerial threats, Turkey intends to launch long-range missile and air defense systems and has

entered into agreements with various defense companies in the US, Russia, China and Israel. It also aims to develop

Azerbaijan's armed forces and modernize their training and education process.

Performance

Governance indicators

The World Bank report on levels of governance uses factors such as voice and accountability, political stability and

absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for

212 countries and territories over the period 1998–2007. The study was conducted by Daniel Kaufmann and Massimo

Mastruzzi of the World Bank Institute, and Aart Kraay of the World Bank Development Economics Research Group. For

any country, a percentile rank of 0 corresponds to the lowest rank, and 100 to the highest.

Turkey ranked in the 41.8 percentile in terms of voice and accountability in 2007, much lower than Greece's rank of 81.3

during the same period. Voice and accountability measures the extent to which a country's citizens are able to participate in

selecting their government, along with freedom of expression, freedom of association and the availability of free media.

Turkey ranked in the 20.7 percentile on the political stability and absence of violence indicator in 2007, again much lower

than Greece, which had a percentile rank of 63.0 during the same period. This indicator measures perceptions of the

Political landscape



likelihood of destabilization of the government by unconstitutional or violent means, including domestic violence and

terrorism.

Turkey ranked in the 63.5 percentile on the government effectiveness indicator in 2007. Turkey’s rank was lower than

Greece, which scored a percentile of 71.1. Government effectiveness measures the quality of public services, the quality of

the civil service and the degree of its independence from political pressures, the quality of policy formulation and

implementation, and the credibility of the government's commitment to such policies.

Turkey ranked in the 59.7 percentile in terms of regulatory quality in 2007. In comparison, Greece had a percentile rank of

73.2 during the same period. Regulatory quality measures the ability of the government to formulate and implement sound

policies and regulations that permit and promote private sector development.

Turkey ranked in the 53.3 percentile on the rule of law indicator in 2007. Turkey’s rank was lower than Greece, which had a

score of 67.6 during the same period. Rule of law measures the extent to which agents have confidence in and abide by

the rules of society. It also looks at the quality of contract enforcement, the police and the courts, as well as the likelihood of

crime and violence.

Turkey ranked in the 59.4 percentile in terms of control of corruption in 2007. Turkey’s percentile is considerably lower than

Greece, which had a percentile rank of 68.9. Control of corruption measures the extent to which public power is exercised

for private gain, including both petty and grand forms of corruption, as well as the appropriation of the state by elites and

private interests.

Outlook

The government has been trying hard to maintain fiscal discipline as well as economic freedom, and has achieved a certain

degree of success as far as political stability and continuation of reforms are concerned. Turkey has been a strong

proponent of liberal trade and investment policies. It has an open trading system, especially with the countries in the EU,

with which it signed a customs union agreement in 1996. Turkey needs to maintain good relations with its neighboring

countries: for instance, Turkey’s relations with Greece have been showing signs of improvement but remain far from

healthy. While disputes over the Aegean Sea and the island of Cyprus have caused hostility between the two countries

over the years, the recent improvement in business connections may ultimately usher in some stability to the region. Over

the years, Turkish radicals have plotted several attacks—the majority of which have been prevented—mainly targeted at

institutions, businesses and personnel associated with the US and the UK. These terrorist attacks, if not prevented, can

only hamper the investment and political climate of the country.

Economic landscape



ECONOMIC LANDSCAPE

Summary

There has been a significant decline in the GDP growth of Turkey over the period 2004–2007. The GDP growth dropped

from 9% in 2004 to 5.1% in 2007and is expected to further decline to 4% by 2012. The expected slowdown in GDP is due

to the increase in commercial bank interest rates in March 2008, itself caused by the weakening of financial conditions

globally and growing domestic political uncertainty. The service sector dominates the economy, making a contribution to

the GDP of more than 66%. This is followed by the industrial and agricultural sectors, with contributions of 27% and 7%,

respectively. There has been an improvement in the business environment and competitiveness of the economy over the

years. Turkey, with its prudent fiscal policy and rising tax revenue, is well on course to attaining a favorable fiscal position.

Evolution

1923–90

The Turkish economy lagged during World War I, primarily due to the underdeveloped agricultural sector and poor-quality

livestock that the country possessed. Turkey was dependent on very few factories for certain provisions like sugar and

flour, and these were under foreign control. Prior to 1923, the economy was disordered to a large extent, with the

agricultural output reaching a nadir. During 1923–85, the economy grew at an average annual rate of 6%, due to the

implementation of proactive government policies which gave a boost to agricultural, industrial, and service production. Post-

1950, the country experienced economic disruptions, and in the 1970s witnessed a balance-of-payments crisis. Following

inadequate structural reforms, Turkey was left with current account deficits, which it financed by international borrowings

that led to an increase in the country's external debt. The Turkish government failed to take sufficient measures to tackle

the increase in world oil prices during the 1970s and accepted short-term loans from foreign lenders. With the rise in

inflation and unemployment, the government found it difficult to repay the interest on these loans. During the 1980s, the

government initiated a liberalized program which helped overcome Turkey’s balance-of-payments crisis.

1990–2007

The Turkish economy faced a crisis in the 1990s, primarily due to a significant increase in inflation. The surge in inflation

was followed by an increase in imports and a slowdown in the expansion of exports. The trade deficit and the current

account deficit both grew in 1993. Inflation was around 54% during 2001 as Turkey's currency, the lira, continued to receive

a hammering at the hands of international investors. With little social protection and the presence of a large informal sector

which absorbed millions of workers into marginal and low-paid jobs, the real rate of unemployment was probably far higher.

As the falling domestic demand helped to contain import growth, the current account balance surged from a deficit

equivalent to some 5% of GNP in 2000 to a surplus of more than 2% in 2001. Public finances witnessed an improvement

during the period 2000–04, as the International Monetary Fund (IMF)-supported program of fiscal and structural reforms

started to bear fruit. The central government's primary budget balance (ignoring debt repayments) increased from around

1.5% of GDP in 1999 to 6.5% by 2004.

During 2002, the real output growth was around 11%, and in line with the central bank's targets. A growing confidence in

the lira was demonstrated by a gradual drop in the share of foreign currency deposits in the country's banking system.

Economic landscape



Turkey's economic performance continued to improve during 2003, and maintained a decent run during 2005 as well,

reaching a growth rate of 7.3%. Inflation rate touched 6.2% in the same year.

Figure 5: Evolution of the Turkish economy, 1970–2007

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1971 1980 1990 2000 2002 2004 2005 2006 2007

Year

Gro

wth

rate

(%)



Financial system

Financial authorities/regulators

Central Bank of the Republic of Turkey

The Central Bank of the Republic of Turkey (CBRT) issues banknotes in the country, and is responsible for the

implementation of monetary policy with the aim of achieving and maintaining price stability. It follows the directives of the

CBRT Law framed on January 14, 1970. According to the law, the objective of the bank is to maintain the economic

development of the country by regulating money markets, implementing treasury operations and safeguarding the value of

Economic landscape



Turkish currency. Among other things, the bank determines the reserve and liquidity requirements, handles the gold and

foreign exchange reserves of the country, regulates the volume and circulation of Turkish lira, ensures stability in the

financial system, and monitors financial markets.

Capital Markets Board of Turkey

The securities and institutions markets in Turkey are regulated and supervised by the Capital Markets Board (CMB). The

market primarily consists of organized market participants and institutions such as: public and listed companies;

exchanges; financial intermediaries; mutual, closed-ended and pension funds; the Settlement and Custody Bank

(Takasbank); and the Central Registry Agency (CRA). Other market participants and institutions include the Association of

Capital Market Intermediary Institutions of Turkey (TSPAKB) and organizations operating in the capital markets under the

CMB's regulations.

Stock exchange regulator

The Istanbul Stock Exchange (ISE) is the primary securities exchange in Turkey, formed to provide trading in equities,

bonds and bills, and foreign securities and real estate certificates (among other international securities) to all domestic and

foreign participants. The ISE works to ensure a transparent and fair trading environment in the country.

Insurance regulator

The domestic and foreign insurance and reinsurance companies are regulated by the Association of the Insurance and

Reinsurance Companies of Turkey (AIRCT).

Turkish stock markets

Securities are traded in Turkey through three exchanges. Equities and fixed income securities are traded in the ISE, futures

contracts are traded at the Turkish Derivatives Exchange and precious metals at the Istanbul Gold Exchange. The ISE,

founded in 1985, is the only official market for shares, rights, global depositary receipts, derivatives and bonds trading in

Turkey for retail and institutional investors. The ISE seeks to provide a transparent and fair trading environment for

domestic participants as well as foreign issuers and investors. The securities traded on the ISE markets include equities,

exchange traded funds, government bonds and treasury bills, corporate bonds, and repo and reverse repo. The securities

traded in the equity market include rights coupons and exchange-traded funds. Government bonds and treasury bills are

traded in the bonds and bills market. Furthermore, there exist two sub-markets within the bonds and bills sector: purchases

and sales and repo/reverse repo markets.

Economic landscape



Figure 6: Market capitalization of the Turkey stock exchange, 2000–07

69.7

47.134.2

68.4

98.3

161.5 162.4

286.6

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2000 2001 2002 2003 2004 2005 2006 2007

Year

$ bi

llion


Asset management

Brokerage firms and portfolio management companies generally provide asset management services. Portfolio

management companies have more than a 90% share in the market, in terms of the size of assets under management,

with approximately 95% of the portfolios held by institutional investors. The assets managed by these companies increased

at a CAGR of 17% during 2004–07.

The mutual fund industry in Turkey is relatively small compared to the members of the EU. For instance, Turkey’s mutual

fund portfolio as a percentage of GDP was only around 3% as of 2007, compared to 11% for Poland, 10% for Greece and

9% for Hungary.

Key policies

The Turkish government aims to bring the economy back to a growth path by freeing the labor market and reducing fiscal

deficit. Along with this, the government has initiated reform measures that will translate into strong fiscal adjustments,

improve government finances and lower unemployment, and is also seeking to stiffen fiscal policies through a significant

reduction of expenditure on public infrastructure development. Furthermore, the government has reduced the primary

surplus target for 2008 from over 4% of GDP to around 3.5%, so as to tighten monetary policy towards stemming

inflationary pressures. Interest rate hikes made by the central bank would allow the government to strike a balance

Economic landscape



between growth and disinflation. The government aims to fund initiatives aimed at supporting growth by investing in

infrastructure, especially in the underdeveloped southeastern region. It also intends to increase employment by reducing

labor taxes.

The government has recently increased the prime lending rates for commercial banks to extract excess liquidity out of the

market. Since 2003, after the increase in private investment, inflation in Turkey has witnessed a significant drop. The

government intends to implement FTAs to encourage foreign and domestic investors and provide the impetus needed to

improve competitiveness; it also intends to ease the stringent labor market and create space for an adequate number of

jobs by making Turkey's labor laws and regulations more flexible.

Performance

GDP and growth rate

Overview

There was a significant decline in the GDP of Turkey between 2004 and 2007. The GDP dropped from 9% in 2004 to 5.1%

in 2007, and is further expected to decline to 4% by 2012. Furthermore, the GDP is expected to slowdown with the increase

in commercial bank interest rates in March 2008, which resulted from weakening global financial conditions and growing

domestic political uncertainties. Weakening global financial conditions could reduce capital inflows to Turkey, which has

large external imbalances, resulting in the depreciation of lira. It could also increase inflation and lead to an increase in

domestic interest rates.

Economic landscape



Figure 7: GDP and GDP growth rate in Turkey, 2002–12 (Real GDP at constant 2000 prices)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Valu

e ($

bill

ion)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Grow

th rate (%)

Value Growth rate


GDP composition by sector

The service sector was the largest contributor to the Turkish economy in 2007, constituting around 66% of GDP. It was also

the fastest growing segment, followed by industry and agriculture. The industry sector generates around 27% of GDP and

the remainder is contributed by the agricultural sector.

Economic landscape



Figure 8: GDP composition by sectors, 2006

Agriculture7%

Industry27%

Services66%


Agriculture

Agricultural output in Turkey has grown significantly since 1990. The sector remains one of the fastest growing across the

OECD countries, in terms of production and use of purchased variable inputs, due to an increase of 1% in the country's

cultivated land area during the period 1990–2004. The volume of agricultural production increased by 16% across 1990–

92. During the period 2002–04, crop production and livestock production increased by 19% and 11%, respectively. A major

share of the agricultural output comes from the arable farming sub-sector, which accounts for approximately 75% of the

total output value.

Economic landscape



Figure 9: Agricultural output of Turkey, 2001–07

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2001 2002 2003 2004 2005 2006 2007

Year

Agr

icul

ture

out

put (

TRL

billi

on)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Grow

th rate (%)

Agricultural output Growth rate

Source: Datamonitor

Note: the sectoral breakdown is given in local currency due to the

impact of foreign exchange fluctuations on the growth figures

D A T A M O N I T O R

Industry

The industrial sector accounts for 27% of GDP as of 2007. During April 2008, more than 80% of Turkey's total

manufacturing capacity was fully utilized. However, the industrial sector witnessed a decline in 2008 compared to

2007 in terms of capacity usage in the textiles, clothing, food and machinery sectors. The usage of available

production capacities in the metals, food, automobile, and clothing industries increased during 2006–07. The

modest gains in production capacity usage suggest that industry will continue to grow. The annual average growth

of industrial production in Turkey during 2001–07 was more than 30%. Furthermore, industrial production increased

by 3.4% in July 2008 compared to July 2007. This increase in industrial production was primarily due to, among

other growth, an increase of 9.1% in the mining sector, 3.1% in the manufacturing industry and 4% in the power,

gas and water industries.

Economic landscape



Figure 10: Industrial output of Turkey, 2001–07

0.0

50.0

100.0

150.0

200.0

250.0

2001 2002 2003 2004 2005 2006 2007

Year

Indu

stria

l out

put

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Grow

th rate (%)

Industrial output Growth rate

Source: Datamonitor

Note: the sectoral breakdown is given in local currency due to the

impact of foreign exchange fluctuations on the growth figures


Services

The services segment in Turkey contributes 66% of the GDP. Tourism is a significant industry within this sector, and an

important revenue generator for the country's economy. The country intends to attract approximately 50 million foreign

visitors per year in 2008, providing employment to about five million people in the tourism sector. The annual average

growth of service output in Turkey during 2001–07 was around 34%.

Economic landscape



Figure 11: Services output of Turkey, 2001–07

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2001 2002 2003 2004 2005 2006 2007

Year

Serv

ice

outp

ut

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Grow

th rate (%)

Services output Growth rate

Source: Datamonitor

Note: The sectoral breakdown is given in local currency due to

the impact of foreign exchange fluctuations on the growth figures


Fiscal situation

Turkey's overall central government budget minus interest payments stood at a surplus of $18.4 billion in the first half of

2008, compared to $15.3 billion in the first half of 2007. In the first half of 2008, Turkey’s budgetary revenues and non-

interest expenditures increased by 8.1% and 8.2%, respectively, compared to 2007. The government has set an objective

of reducing public debt from approximately 40% of GDP to 30% by 2012. Apart from this, the government intends to

increase national savings, which would in turn facilitate the reduction of the current account deficit, public debt and

borrowing costs, and help curb inflation. These fiscal and monetary policies are required to ensure the right balance

between the growth and inflation objectives.

Current account

Turkey’s current account balance has been facing a deficit over recent years. The deficit was $37.5 billion in 2007,

compared to $8 billion in 2003. This increase in the current account deficit is indicative of an adverse balance of payments,

Economic landscape



and is the result of the private sector’s significant reliance on external financing. The deficit is expected to further increase

due to unfavorable terms of trade movements with uncertain prospects for growth. This could pose a significant risk for the

export and economic stability of Turkey.

Figure 12: Current account balance of Turkey, 2000–07

-40.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007

Year

Valu

e ($

bill

ion)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Percentage (%)

Current account balance Current account balance as % of GDP


Exports and imports

During 2006, Germany was the largest single exports market for Turkey with a share of 11.2%, followed by the UK (8.1%),

Italy (7.0%), France (5.6%), Spain (4.3%) and Russia (4.4%). The average annual growth rates of exports and imports

during 2002–06 were 21.7% and 28.4%, respectively. Exports to the US market, meanwhile, have been declining over

recent years. In 2007, for instance, Turkey’s exports to the US market represented 6%, compared to more than 7% in 2004.

Turkey also participates in significant trade-related activities with the member nations of the European Free Trade

Association (Iceland, Liechtenstein, Norway, and Switzerland), along with countries including Albania, Bosnia and

Herzegovina, Croatia, Egypt, Israel, Macedonia, Morocco, the Palestinian territories and Syria.

Russia is Turkey’s key importer, accounting for 13.8% of the market in 2006. Germany accounted for 10.3%, China 7.8%,

Italy 5.9%, the US 4.8% and France 4.6%. Turkey imports oil from Russia, Saudi Arabia, Iran, Syria and Iraq. During 2007,

Economic landscape



Turkey’s imports and exports were valued at $156.9 billion and $110.5 billion, respectively. A significant increase in the

value of imports was witnessed in 2007, largely due to high global commodity prices.

Figure 13: External trade of Turkey, 2002–06

109.0106.7

148.8

107.1

141.2

192.6

226.5

257.8

99.085.9

65.250.0

127.5

76.057.1

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2002 2003 2004 2005 2006

Year

$ bi

llion

Exports Imports Total trade

Source: D A T A M O N I T O R

Economic landscape



Figure 14: Balance of trade of Turkey, 2000–07

-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.02000 2001 2002 2003 2004 2005 2006 2007

Year

Bal

ance

of t

rade

($ b

illio

n)

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Percentage (%)

Balance of trade Balance of trade as % of GDP


External debt

Turkey's overall foreign debt, including public and private sector debt, was $247.2 billion during 2007. Private sector debt

accounted for $158 billion, and public sector debt amounted to $73.4 billion plus the balance owed by the central bank of

the country.

International investment position

Foreign direct and portfolio investments

Turkey has witnessed growth in the inflow of FDI. By the end of 2006, the total foreign investment in Turkey stood at $31.4

billion, an increase of nearly 27.1% over the previous year. A large portion of this investment, $20 billion, came from FDI.

Furthermore, it is anticipated that FDI will exceed this in 2008, excluding privatizations. The privatizations scheduled during

2008 include the sale of major bridges, highways and electricity grids, and a stake in partly privatized commercial bank

Halkbank. Worldwide, the country ranked second in terms of FDI in the sheet glass industry, seventh in the iron and steel

industry; and 17th and eighth in the motor vehicle and shipbuilding industries, respectively.

Economic landscape



Figure 15: Total foreign investment in Turkey, 2002–06

1.0 1.72.7

10.0

20.0

1.5

3.9

9.4

14.6

11.4

2.5

5.6

12.1

24.6

31.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2002 2003 2004 2005 2006

Year

$ bi

llion

Foreign direct investments Portfolio investments Total foreign investments


Foreign exchange position and exchange rate

Turkey’s foreign exchange reserves grew from $59.2 billion in 2006 to $76.5 billion in 2007, representing an increase of

29.2%. This was primarily due to a rise in the gold reserves. Turkey intends to increase its foreign exchange reserve to

$130 billion over the years and strengthen the exports of the country. During the first quarter of 2008, for example, Turkey

recorded approximately $58 billion of foreign exchange earnings of which exports accounted for $47.4 billion.

Economic landscape



Figure 16: New Turkish lira–US dollar exchange rate, 2000–07

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2000 2001 2002 2003 2004 2005 2006 2007

Year

Turk

ish

lira

per U

S$


Credit rating

Standard & Poor’s has given a long-term sovereign credit rating of ‘BB-’ for Turkey and rates the country's outlook as

stable. However, the increasing current account deficit could bring the economy under pressure in the medium term.

Monetary situation

Key monetary indicators

The CBRT is the central bank of the country and is responsible for the implementation of monetary policies. One of the

main objectives of the current policy is maintaining price stability.

Inflation

Turkey has traditionally witnessed high inflation levels, although these have gradually come under control over the past few

years. In the 1990s, the annual inflation rate varied between 60–90%. However, restrictive monetary policies and high

interest rates helped in lowering the average inflation rate to 11.4% during the period 2002–06. Turkey’s inflation increased

from 6.2% in 2005 to 8.5% in 2007; this was due to a significant increase in energy and food prices, along with the

Economic landscape



depreciation of the Turkish lira. The tightening of global liquidity conditions will increase Turkey’s exposure to external

shocks.

Figure 17: CPI and CPI-based inflation in Turkey, 2002–12

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Con

sum

er p

rice

inde

x

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Inflation (%)

Consumer price index Inflation


Money supply

Turkey has witnessed strong monetary and credit growth over the years. This strength was reflected in the continued high

growth rates of the monetary aggregate M1, which increased from 10.7% in 2001 to 41.6% in 2005. The monetary

aggregate M2 also increased, from 107.7% in 2001 to 239.5% in 2005. A gradual rise in the key CBRT interest rates

started in 2005 from low levels in previous years; this has led to an increase in the short-term bank rates in Turkey,

although these rates are also influenced by competition between credit institutions.

Banking sector

As of January 2008, Turkey had 46 banks operating through 7,480 national branches and 50 branches abroad. Prior to

1980, there existed only four foreign banks in Turkey; however, liberalization in the 1990s led to an increase in the number

of foreign banks. For instance, as on January 2008, Turkey had approximately 50 foreign banks. Over the years, Turkey

has implemented several reforms to encourage financial market development. The liberalization of interest and foreign

Economic landscape



exchange rates provided scope for several new participants in the banking sector, and several foreign banks were

encouraged to operate in Turkey. The assets of the commercial banks have increased from $52.4 billion in 2004 to $80.8

billion in 2007.

Figure 18: Total assets of commercial banks in Turkey, 2000–07

27.0

49.0 49.1 51.0 52.4

67.0

73.0

80.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2000 2001 2002 2003 2004 2005 2006 2007

Year

$ bi

llion


Employment

The tertiary sector employs 41% of the population, followed by the secondary and primary sectors with a share of 23% and

36%, respectively. The average annual growth in employment stood at around 23.7% during 2002–07: relatively moderate

compared to the growth of the economy. Although Turkey witnessed a substantial increase in wages in the 1990s and the

early 2000s, the real value of wages has been low due to rising inflation. There also exist wage disparities between eastern

and western Turkey.

The number of unemployed people increased by approximately 38,000 to reach 2.3 million in 2007, and the non-

institutional civilian population reached 68.9 million.

Economic landscape



In the first quarter of 2008, the unemployment rates in the cities and rural areas were 13.4% and 8.5%, respectively,

making the overall unemployment rate 11.6% compared to 11.4% during the same period in 2007. During the same period,

among the unemployed, more than 70% of the male population was unemployed, of which 30% had been jobless for a year

and 56% had less than a high school education.

Figure 19: Employment and growth rate in Turkey, 2002–12

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Empl

oym

ent (

mill

ion)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Grow

th rate (%)

Total employment Growth rate


Outlook The labor market is currently stiff, finding it difficult to respond to competitive pressures and to create an adequate number

of jobs. Turkey's labor laws and regulations should be made more flexible so that the labor market can function smoothly.

Despite recent initiatives, such as the easing of overtime restrictions, the Turkey labor market remains relatively rigid by

international standards. Moreover, the current account balance of Turkey has been declining, which could hinder the

economic stability of the country. The government has sought to tighten fiscal policies through a significant reduction of

expenditure on public infrastructure development. Furthermore, the government has significantly increased the prime

lending rates for commercial banks to extract the excess liquidity out of the market.

Social landscape



SOCIAL LANDSCAPE

Summary

More than half of Turkey's population are below the age of 30, which is attracting significant European SMEs to invest in

the country. However, Turkey's highly regulated labor market has led to high employment costs and soaring levels of

unemployment, which has made it difficult to provide sufficient jobs to the increasing population.

The Turkish government has taken several initiatives to implement policies aimed at improving the social benefits and

quality of life experienced by its citizens. However, the healthcare system in Turkey lags behind those of other European

countries. For instance, while Turkey has been home to an increasing number of doctors over recent years, it continues to

have a low number of physicians per capita compared to the other members of the OECD.

Turkey’s educational system consists of two categories: formal education and non-formal education. Formal education

refers to the standard tuition provided within schools for individuals of a certain age group; these schools are divided into

pre-primary, primary, secondary and higher education institutions. Non-formal education is provided for people with no

educational background and those who discontinued their education after a certain period.

Evolution

The social landscape in Turkey has undergone various alterations with the changing political, economic and social order. In

the post-war years, the priority for the government was the resettlement of its population. For instance, Turkey witnessed

an increase in emigrants to Western Europe after World War II due to excess demand for labor; after the fall of the Berlin

Wall, it also became a target for numerous immigrants, who migrated from the former Soviet Union countries and other

Muslim states. The Turkish government has implemented a number of social security policies involving issues such as

healthcare, pensions and education. However, economic growth has not led to an equitable society. The income disparity

has been widening over the years, with the higher income group benefiting the most. The increase in the infant mortality

rate needs to be resolved as early as possible by the initiation of economic reforms and alterations to the methods of

healthcare, or it could slow down the pace of population growth substantially.


Demographic composition

Composition by age and gender

The age structure shows that 25.5% of the population belonged to 0–14 age group, 67.7% of the population is in the 15–64

age group and 6.8% of the population is aged 65 or over. Females comprise 49.5% and males account for 50.5% of the

total population. In 2008, the birth rate was 16.2 per 1,000 people, and the fertility rate was 1.9 children born per woman. In

2008, the infant mortality rate was high at 37 per 1,000 live births and the death rate was relatively low at six per 1,000

people. The gender ratio at birth is 1.05 males per female. Life expectancy for the total population is 73 years; 70 years for

males and 75 years for females.

Social landscape



Table 10: Mid-year population by age, 2006

Mid-year population by age Female Male

0–4 2.8 2.9

5–9 2.9 3.0

10–14 3.1 3.2

15–19 3.2 3.3

20–24 3.3 3.4

25–29 3.2 3.3

30–34 2.9 3.0

35–39 2.7 2.8

40–44 2.4 2.5

45–49 2.0 2.0

50–54 1.6 1.6

55–59 1.3 1.2

60–64 1.0 1.0

65–69 0.9 0.8

70–74 0.7 0.6

75–79 0.5 0.4

80+ 0.5 0.3


Urban/rural composition and migration

The urban population comprises more than half of Turkey's population. Although the percentage of the population in urban

areas is low compared to other European countries, congestion around metropolitan centers has now become a serious

issue. Moreover, Turkey has witnessed an increasing number of immigrants from countries such as Armenia, Georgia,

Azerbaijan, Iran, Afghanistan, Pakistan and Central Asia in general.

Religious composition

The majority of the population are Muslims. In 2006, 99.8% of Turks were Muslims and the remaining 0.2% were Christians

and Jews.

Education

Turkey’s educational system consists of two categories: formal education and non-formal education. Formal education

refers to the standard tuition provided within schools for individuals of a certain age group; these schools are divided into

pre-primary, primary, secondary and higher education institutions.

Pre-primary education is voluntary, and is provided for children that are not yet old enough for compulsory primary

education, generally those between the ages of 36 and 72 months. The intention behind the pre-primary system is to

ensure the physical, mental and emotional development of the children, and to train them for primary education. For the

academic year 2004–05, there were 434,771 students and 22,030 teachers in 16,016 pre-primary institutions. Primary

Social landscape



education is provided to children in the age group six to 14 years, with the aim of teaching them the basic knowledge, skills

and habits required to become a good citizen.

Regional primary boarding schools are built in villages wherein the population is low and scattered that have a central

location in a group of villages, and regional boarding primary schools are envisage for villages where such grouping is not

possible. During the academic year 2004–05, there were 299 regional primary boarding schools with 142,788 students and

280 primary boarding schools with 147,632 students. Secondary education is provided in general, vocational and technical

high schools and runs for a minimum of three years. During the academic year 2004–05, three million students were taught

by approximately 168,000 teachers across 6,861 secondary schools. Higher education institutions are attended after

secondary education; they provide courses that run for at least two years and train students in various fields. Non-formal

education is provided for people with no educational background and those who discontinued their education after a certain

period.

Healthcare

Healthcare services

The healthcare system in Turkey lags behind other European countries. For instance, while Turkey has been home to an

increasing number of doctors over recent years, it continues to have a low number of physicians per capita compared to the

other members of the OECD. In 2006, Turkey had 1.6 physicians per 1,000 people, while the OECD average was 3.1.

Similarly, the country had only 2.1 nurses per 1,000 people that year, compared to an average of 9.7 across the OECD

countries. Also in 2006, the number of acute care hospital beds in Turkey was 2.5 per 1,000 people, below the OECD

average of 3.9. The private sector in Turkey contributes 26% of the total health expenditure, which is significantly lower

than the OECD average of 38%. Moreover, a major portion of the healthcare services are provided by the public sector. For

instance, the Ministry of Health runs 769 of Turkey’s 1,225 hospitals, with 133,000 of the 197,000 total beds.

Turkey has improved the healthcare services provided by hospitals by importing large quantities of modern machinery and

equipment. In 2006, the Ministry of Health initiated a project wherein several medical centers would be built in three major

cities to provide health facilities in 13 regions throughout the country. The Turkish government is encouraging foreign

companies to invest in the healthcare industry. The private hospitals in Turkey, which have been improving their medical

equipment in recent years and charge less than rivals in other European countries, have witnessed an increasing number

of patients from the European and the Middle Eastern countries.

Social welfare

Social welfare policies

A large number of social security organizations exist in Turkey, with a great variety of benefits and provisions. Some of the

most important social welfare schemes that the government provides are unemployment insurance, medical insurance,

insurance for work-related injuries, maternity insurance and housing security. The system is financed primarily by

contributions made by employers and through deductions from employees' wages. Apart from all these, the Turkish

government also provides social welfare funding for vulnerable sections of society such as disabled, orphaned and

abandoned children.

Social landscape



The government introduced a social security reform law in 2006 in order to encourage more sustainability in the social

security system of Turkey. The law aims to determine the eligibility criteria for retirement, and offer state pensions that are

designed to be affordable. Government subsidies also support health coverage for certain types of workers. Access to such

programs is principally determined by a person's occupational group and industry. The law also addresses the fact that

workers contributing lower social security contribution rates are bound to end up with much lower pensions. With a view to

ensuring incentives for the poor to participate in the formal labor market, policies have been introduced to make a social

safety net available for low income workers in the formal sector.

The government has introduced reforms in Turkey with an aim to increasing the pension eligibility age and has

implemented health sector reforms in the hope of catering to the key health issues of all citizens. The government has also

implemented several policies with the objective of improving the social benefits and quality of life experienced by its

citizens. It initiated an IPARD program in December 2007, with the intention of improving the social conditions in

settlements and regional centers for the period up until the year 2020. Turkey’s state welfare and pension system provides

health, welfare, and pension payments to its people. The social insurance law of Turkey offers maternity, illness, retirement

and death insurance for all employees, excluding those in agriculture and the self-employed.

Performance

Healthcare

The healthcare system in Turkey lags behind other European countries. For instance, total health spending accounted for

approximately 6.3% of GDP in Turkey in 2006, below the average of 8.9% in the OECD countries. By comparison, the US's

total health spending for that year accounted for 15.3% of its GDP, followed by Switzerland (11.3%), France (11.1%) and

Germany (10.6%).

Social landscape



Figure 20: Expenditure on healthcare in Turkey, 2002–12

0.00

10.00

20.00

30.00

40.00

50.00

60.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Expe

nditu

re ($

bill

ion)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Percentage (%)

Healthcare expenditure Healthcare expenditure as % of GDP


Income distribution

Turkey has a very inequitable society, with disparities in household incomes and high concentrations of poverty.

Furthermore, the absence of economic growth in the east could encourage migration to the large cities of the west, which

could lead to urban congestion. There are wide income discrepancies in Turkish society, with the income per family varying

tremendously between the major urban areas, Istanbul, Ankara and Izmir, and the provincial towns and rural areas. In

2006, the percentage of the population in the income bracket above $20,000 was 39%, 24% were in the $5,000–$10,000

bracket, and the remaining 37% of the population earned below $5,000.

Education

Turkey has a literacy rate of 88% for the total population. While the male literacy rate is at 96.1%, the female literacy rate is

slightly lower at 81.5%. The relatively low literacy rate for women is the result of feudal attitudes which currently prevail in

the rural areas of the country.

Turkey has a more centralized and less flexible system of education than most EU countries. The government intends to

provide education for the children of primary school age living in less populated and sparsely settled areas. It has also

reduced the number of schools with combined classes and offers more qualified education and training services. The

government provides free textbooks to the primary education students of lower income groups or rural families. According

Social landscape



to the latest report available, during 2002 Turkey spent 7% of its GDP towards education, of which 4.3% of GDP was spent

by the government and the remainder by the private sector.

Figure 21: Government’s expenditure on education in Turkey, 2002–04

0.00

5.00

10.00

15.00

20.00

25.00

2002 2003 2004

Year

Expe

nditu

re ($

bill

ion)

6.6

6.7

6.8

6.9

7.0

7.1

7.2

7.3

7.4

7.5

7.6

Percentage (%)

Expenditure Expenditure as % of GDP


Outlook

A large number of structural changes need to be implemented to improve the quality of healthcare and education in the

country and reduce the prevailing inequality in society. Unemployment is also an area of concern, and has been

aggravated by labor inflexibility. The Turkish government has implemented several policies with an aim to improving the

social benefits and quality of life experience by its citizens. To a great extent, Turkey’s education system has been held

responsible for the mismatch between labor demand and supply. In the future, economic growth will be led by the

knowledge economy and Turkey’s educational system may not be capable of meeting the attendant needs. Reforms are

also expected to be undertaken in the areas of healthcare and the pension system. With the recent reforms to the

education system, it can be expected that the tertiary education scenario will improve and that the growing mismatch

between academic and industrial needs will diminish. Turkey needs to initiate economic reforms so as to alter the methods

of healthcare used in the country.




TECHNOLOGICAL LANDSCAPE

Summary

Turkey aims to implement radical changes in the public service sector by introducing advanced technologies, and is also

focusing on increasing productivity in the long run by allocating more resources to R&D activities both in the public and the

private sectors. Turkey needs to increase its R&D expenditure, which at around 0.6% of GDP is currently well below the

overall 2.3% in the OECD countries. Turkey has taken several initiatives towards liberalizing the telecoms market.

Evolution

The R&D activities in Turkey were financed by the government until 1991. Legislation on state support for R&D investments

was implemented in 2000, with a view to providing loans for the procurement of equipment for R&D activities by industrial

companies. The consecutive year witnessed the legislative development of the Technology Development Zones

(Technology Parks) Law, which encourages the establishment of technoparks by universities with the aim of promoting

industrial R&D by universities and research centers. In 2002, Turkey became a member of the Sixth Framework

Programme of the EU. During 2001–05, Turkey initiated the Eighth Five-Year Development Plan with the intention of

increasing the share and quality of services provided in the IT sector, investing in innovation and R&D, and decreasing

costs and prices to make them affordable.


The government of Turkey is placing emphasis on restructuring the economy to be more focused on the production of high

quality, value-added products and services, while at the same time making the transition to a knowledge-based economy

and society. With this view, Turkey aims to implement radical changes in the public service sector by introducing advanced

technologies. It is also focusing on increasing productivity in the long run, by allocating more resources to R&D activities

both in the public and the private sectors. The government has set the objective of utilizing its labor force efficiently so as to

improve productivity, and is increasing its investment in infrastructure to achieve this in the long run.

In 1994, several initiatives were taken towards liberalizing the telecoms market by the enactment of laws. Turkey formed

Turk Telekom (a state economic enterprise) by implementing a new law, with the intention of disconnecting

telecommunications services from the government. The implementation of this law has enabled it to privatize the telecoms

companies. Internet service providers have also entered into service contracts with Turk Telekom.

Intellectual property

Turkey is recognized as one of the countries where intellectual property rights (IPR) protection and enforcement is a key

issue. In 2007, the International Intellectual Property Alliance (IIPA) placed Turkey on its watch list due to the high level of

copyright piracy in the country, which placed it among the poor performers. According to IIPA estimates in 2007, piracy was

highest in the business software industry, which lost $193 million as a result, and the percentage of business software in

use made up by illegal copies reached a high of 64%. During the same period, sound recording and entertainment software

also experienced losses as a result of the extensive piracy in the country.




There have also been inconsistencies between the verdicts given by the Turkish Patent Institute (TPI), the entity legally

responsible for supporting the technological development and protection of IPR in Turkey, and IPR court decisions; this has

led to certain large and medium-sized companies in Turkey infringing well-known trademarks. During 2005 and 2006, more

than 8,000 raids were carried out over IPR, and pirated materials with a market value of E600m were seized.

Consequently, over 10,000 suspected offenders were referred to the judicial authorities, with the majority of the violations

being from the music and publishing sectors.

Research and development

Turkey has generated significant growth in R&D over the years by implementing several related policies, which include a

national innovation strategy that emphasizes products of high value and the development of employment levels through

increased competitiveness. The government has also introduced various programs with an aim to encouraging foreign

participants, prominent universities and research organizations to promote a culture of innovation. With this view, it entered

into an agreement with Joint Research Centre, the EU's scientific and technical research laboratory. The agreement

focused on cooperation in the key areas of environment and health; security; energy; agriculture; and chemicals. It also

initiated a science and technology project called Vision 2023 for the period 2003–23 under the co-ordination of the

Scientific and Technical Research Council (TUBITAK) and the Supreme Council of Science and Technology (BTYK).

Turkey has improved its relations with the EU countries, and the changing market conditions due to globalization have

forced the companies in the country to invest in R&D and innovation. The government has promoted several programs for

R&D projects by providing monetary support and raising awareness of industrial R&D and innovation through

supplementary activities. Turkey has also entered into the Sixth Framework Programme for Research and Technological

Development, a strategy initiated by the EU to fund and promote research. Furthermore, the European Investment Bank

has agreed to provide a loan of E400m to promote R&D activities in Turkey.

Performance

Telecoms

The telecoms sector has witnessed increasing growth over the years with the expansion of the mobile market, which has

been the driving force behind the development of the telecommunications services in Turkey. The number of mobile

telephone subscribers has increased at a CAGR of 22%, from approximately 23 million in 2002 to 62 million in 2007. The

broadband market has also experienced a significant increase, mainly through the current digital subscriber lines (DSL).

Turkey has introduced several regulations with regards to inspecting band frequency use, reviewing significant market

power operators (SMP) and managing price caps. It also implemented regulations on new licenses for fixed telephone

services to market mobile virtual operator services and broadband wireless access services.

The government intends to promote the usage of ICT by increasing its expenditure from $533m in 2006 to $555m in 2007.

The telecoms industry has more than five million Asymmetric Digital Subscriber Line (ADSL) users and expects to reach 10

million by 2010. The number of fixed telephone subscribers in 2007 was around 19 million, with the number of GSM

subscribers that year at 62.5 million.




Figure 22: Growth rate of mobile and fixed-line subscribers in Turkey, 2002–12

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Gro

wth

rate

(%)

Mobile phones growth Fixed line growth


Information and communication technology

Turkey remains a hub for various IT vendors, due to its large market size and the fact that its ICT sector witnessed strong

growth during 2002–07. During 2006, the ICT sector contributed approximately 4% of GNP and posted a growth rate of

11%. Turkey’s ICT market is expected to reach approximately $24 billion in 2007 compared to $21 billion for 2006, an

increase of 20%. The number of internet users in Turkey increased from approximately 10 million in 2004 to 19 million

users in 2007, at a CAGR of 23%. In addition, it is anticipated that the country's IT market will reach $5.5 billion by 2006,

compared to $2.6 billion in 2002. Turkey’s software market, meanwhile, has been projected to reach $1 billion in 2007,

compared to $880m in 2006.

Research and development

R&D expenditure

The R&D expenditure in Turkey is 0.6% of GDP, and the government’s target is to reach 2% by 2013. The government also

intends to increase its investment in the field of innovation by implementing a law that would make firms in Turkey more

competitive from labor-intensive sectors like textiles, which could lose out against increasing competition from China and

India.




During 2005, the higher education sector contributed approximately 54.6% of R&D expenditure; business enterprises,

which include state economic enterprises and the private sector, generated 33.8%; and the government produced 11.6%.

The total number of R&D personnel (full-time equivalent) in 2005 was approximately 50,000, of which 51.6% were

employed in higher education institutions, 30.4% in businesses, and 17.9% by the government. The total number of R&D

personnel (full-time equivalent) amounted to 2.2% of the labor force in 2005.

Figure 23: Expenditure on R&D in Turkey, 2000–06

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2000 2001 2002 2003 2004 2005 2006

Year

R&

D e

xpen

ditu

re ($

bill

ion)

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

Percentage (%)

R&D investment R&D Expenditure as % of GDP





Figure 24: Number of R&D personnel in Turkey, 2000–06

76 7680

8387

97105

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006

Year

Num

ber o

f R&

D p

erso

nnel

('00

0)


Outlook

Turkey has seen double-digit growth in the ICT market from 2002 to 2007, and there has been an increase in the number of

skilled scientists who are currently returning to the country to gain from the opportunities offered to them by the EU. The

growth in the ICT market is due to the privatization of the Turkish telecommunications sector that was initiated by the

government. The telecoms sector has witnessed increasing growth over the years with the expansion of the mobile market,

which has been the driving force behind the development of the telecommunications services in Turkey. Though the

government has given considerable encouragement to foreign entities, prominent universities and research organizations

to foster a culture of innovation, its own contribution towards R&D has been very small. The level of patenting also remains

extremely low, although there has been an increase in recent years.

Legal landscape



LEGAL LANDSCAPE

Summary

Turkey has a tripartite judicial system that is responsible for the maintenance of law and order. The supreme courts of

Turkey include the Constitutional Court, the Military High Court of Appeals and High Military Administrative Court, the

Council of State and the Court of Jurisdictional Conflicts. It also comprises the law courts, penal courts and military courts,

along with three high courts.

The overall freedom to start, operate, and close a business is protected by Turkey’s regulatory environment. In addition, the

business tax scheme and the reforms to the availability of grants and incentives have resulted in an increase in foreign

investment in the country.

Evolution

In 1926, the Islamic law of the Ottoman Empire was substituted with a secular system similar to that of the Italian legal

system. Since 2002, Turkey has witnessed significant developments in the area of judicial reforms. In that year, Turkey

abolished the death penalty law and modified some of the laws in the legal system. This was primarily achieved with the

implementation of several new laws related to the criminal, criminal procedural and civil legal systems. Laws regarding the

establishment of the regional courts of appeal and the Justice Academy were also brought into effect. With these revisions,

several specialized courts were introduced for resolving disputes in the areas of family, IPR and consumer protection. The

Ministry of Justice implemented an advanced information technology system, the National Judicial Network Project, which

focuses on improving the judiciary’s ability to collect information and communicate with other governmental institutions.


Judicial system

Structure of the system

The judicial system of Turkey is a tripartite system. The supreme courts of Turkey include the Constitutional Court; the

Military High Court of Appeals and High Military Administrative Court; the Council of State; and the Court of Jurisdictional

Conflicts. It also comprises law courts, penal courts and military courts, along with three other high courts.

The Constitutional Court was established in the 1961 constitution, and is the highest court in Turkey. It solves cases that

involve the president of the country, members of the Council of Ministers, or presidents and members of the high courts.

The Constitutional Court comprises eleven regular members, and has the right to choose a president and deputy president

for a term of four years by a majority vote via secret ballot. The president of Turkey selects two regular members from the

Court of Cassation and the Council of State, and one member each from the Military Court of Cassation, the Military High

Court of Appeals, the High Military Administrative Court and the Court of Accounts. He or she also chooses one member

from a list of three candidates selected by the Higher Education Council, and three members from the senior administrative

officers. Three further candidates are selected through a majority vote of the members.

Military courts have the authority to charge members of the armed forces for crimes committed against other military

personnel or for offenses committed in military settings. The Military High Court of Appeals gives the final verdict; this is

Legal landscape



generally made by a president, who has powers equal to a brigadier general and a chief prosecutor. The High Military

Administration Court has authority over military personnel in administrative cases and has functions similar to the Military

High Court of Appeals.

The cases handled in the general law courts include civil, administrative and criminal cases. Penal courts handle cases

related to offenses that can result in more than five years of imprisonment. These courts are located in most cities, and

involve only one judge for minor cases. The high courts handle criminal cases and the Council of State is invoked to

resolve disputes between government entities or administrative cases.

Tax regulations

Income tax

Personal income tax is generally levied by the central government. The base rate on wages is 15%, and can increase to a

marginal rate of 35%. Due to the fluctuations of the foreign exchange value of the lira, the tax rate on the salary of a

foreigner cannot be predicted. However, if the lira remains relatively constant, a foreigner earning approximately $60,000

annually would be subject to a tax rate of approximately 26%. An individual who resides in Turkey for more than six months

should pay taxes based on their worldwide income for that fiscal year. However, an emigrant who is on an assignment in

Turkey for a business trip and individuals who are in Turkey for holiday or educational purposes are not regarded as

citizens, even if their stay exceeds more than the stipulated six months.

Corporate tax

Corporate tax is charged on income and earnings derived by public and private limited companies, including foreign and

other joint venture companies. The tax rate currently imposed is 20% and the withholding tax charged in the case of profits

being distributed is 15%. Resident companies are levied tax on both their national income and income from other countries.

Value-added tax (VAT)

Goods that are imported into Turkey are subjected to VAT. The VAT rate in Turkey is 18% for most goods and services and

8% for foodstuffs, books, natural gas and pharmaceuticals imported with permission from the Ministry of Health. The VAT

rate for journals, newspapers, certain farm products, used cars and most financial-leasing transactions is 1%. The

government recently reduced the VAT rate on textile and leather products from 18% to 8%.

Legislation affecting business

Establishing operations as a foreign enterprise

Foreign and domestic entities have the right to establish and own business enterprises. They are allowed to engage in all

forms of remunerative activities, including the right to establish, acquire and dispose of interests in business. Private

enterprises enjoy the same treatment as public enterprises with respect to access to markets and other business

operations. Foreign investors are entitled to start any company included in the Turkish Commercial Code, and can employ

a foreign workforce in Turkey after obtaining the necessary work permit from the Ministry of Labor and Social Security.

Foreigners who intend to set up a liaison office, which carries out market research on the investment opportunities in the

Turkish market on behalf of their head office in Turkey, have to obtain permission from the General Directorate of Foreign

Legal landscape



Investment. Initially, permission is granted for three years and can be extended later based on the performance over the

preceding three years and the future plans of the company.

Business enterprises can be formed on the basis of various formats such as commercial partnerships, co-operatives and so

forth.

Labor laws

Turkey has introduced several reforms over the years and has formulated various measures to combat unemployment. In

2003, the country implemented provisions for unemployment insurance and a new labor code (Act 4857) aimed at providing

social security for workers. Unemployment insurance was further strengthened by the improvement of the employment

opportunities offered by the Turkish Employment Agency (ISKUR), public employment institution, and other private

providers. An initiative has been taken by the government to improve incentives for employment creation, and widen the

coverage of formal social protection for workers.

Labor market regulations have been implemented in Turkey to encourage job opportunities and increase the productivity of

the workers. Flexible working hours, which make it easier to arrange work schedules in accordance with company needs,

are common in Turkey. Organizations have also encouraged part-time employment in the country. Female employees have

the option of taking paid maternity leave for 16 weeks, which can be extended to six months without pay.

Moreover, employment organizations in Turkey such as the ISKUR have initiated several reforms to encourage and

promote employment. These reforms include job brokering (matching job seekers with vacancies), improving the

employment prospects of the disabled, and monitoring the unemployment insurance program and private employment

agencies. To provide support for the ISKUR’s initiatives, the EU has implemented an active labor market program (ALMP)

in Turkey, which focuses on institution building through policy development.

Corporate governance

The regulatory framework for corporate governance in Turkey is strong. There have been considerable improvements in

disclosure practices by listed companies, and several international standards for accounting and auditing have been

initiated. However, there exist risks in terms of control over the shareholders who take an active role in the management

and strategic direction of company groups, many of which are listed on the Istanbul Stock Exchange. Although

improvements in corporate governance have occurred and corporate houses are following international disclosure norms,

these practices are only confined to very large listed companies.

Performance

Effectiveness of the legal system

The business environment in Turkey has improved following the recently undertaken tax reforms. The corporate tax rate

was reduced from 30% in 2006 to 20% in 2007. The employment regulations are rigid, however, and have been a cause of

decline in the overall productivity growth. Turkey has been ranked as the 74th freest economy by the Wall Street Journal's

Index of Economic Freedom. Turkey’s index score of 60.8% is more than the Asia Pacific average of 58.7%, and is higher

than the world average of 60.3%. This score indicates a highly conducive environment for business.



However, the judiciary system in Turkey is subject to influences and political interference in high-profile cases, and hence

there exists a need to revise judicial reforms to introduce qualified judges and improve the infrastructure of the legal

system. Moreover, the commercial courts in Turkey are overloaded with cases, and on an average it takes over a year to

resolve each one. The judicial reforms implemented, therefore, should be in a position to handle key structural issues in the

system and resolve it through specialized courts or different appeal structures.

Turkey ranks highly in various indexes such as business freedom, trade freedom, fiscal freedom, freedom from government

intervention, investment freedom and property rights freedom, but does not score highly in indexes like financial freedom,

monetary freedom, freedom from labor and freedom from corruption. In Doing Business 2008, compiled by the World Bank,

Turkey is ranked 57th in the starting a business index, 136th in the employing workers index, 64th in the protecting investors

index, 128th in the simplifying licenses index, 31st in the registering property index, 68th in the getting credit index, and 112th

in the closing a business index. According to Doing Business 2008, starting a business takes an average of six days. In

contrast, the OECD average is 14.9 days, and costs 5.1% of per capita GNI.

Outlook

Turkey does not require any lengthy business registration processes to establish a company. The overall freedom to start,

operate and close a business is protected by Turkey’s regulatory environment. Moreover, business taxes are low compared

to other developed countries. Several labor reforms have been initiated and implemented to overhaul public sector

pensions and the system of job protection given for indefinite labor contracts. Turkey has strong labor regulations to

safeguard workers from unemployment and other labor market risks. In addition, Turkey has also introduced several laws

to boost foreign investment. The introduction of the Foreign Direct Investment Law and the Directive for the Implementation

of the Foreign Direct Investment Law in 2003 has provided foreign investors with the same legal status as Turkish-owned

companies under the Turkish Commercial Code. This also eliminated almost all restrictions and requirements which were

hitherto imposed on them. However, there exist several loopholes available for people looking to evade the tax system, and

hence implementing regulations has been a significant challenge for Turkey and is expected to continue to be so in the

near future.




ENVIRONMENTAL LANDSCAPE

Summary

Turkey’s government has been at the forefront in meeting various environmental challenges. The country has introduced

several policies to increase the production of renewable power by compelling the national transmission companies to

provide grid connection to all renewable power projects. It is strongly involved in global environmental issues and has

linked its development aid to environmental objectives and the policies focusing on air pollution, biodiversity, chemical

substances, environmental health and global issues like climate change. Nevertheless, the discharge of chemicals and

detergents into water has led to an increase in environmental pollution, mainly in urban areas.

Evolution

Since the 1990s, ecological policies in Turkey have been undergoing reforms as they are driven by the environmental

legislation of the EU. The Ministry of Environment was formed in 1991 with a view to monitoring environmental issues such

as urban air pollution, which has been a major threat to Turkey. During the current decade, the EU ensured that the

environmental legislation in Turkey was updated. In 2003, however, the merger of the Ministry of Environment with the

Ministry of Forestry reduced the authority of environmental officials in policy making and enforcement procedures.


Environmental regulations

Policy

In 2005, Turkey initiated a law which emphasized the usage of renewable energy resources for the generation of electrical

energy by introducing tariff support for electricity produced by renewable sources. Turkey also introduced several policies

to increase the production of renewable energy by compelling national transmission companies to provide grid connection

to all renewable power projects. Furthermore, it has undertaken initiatives to improve transmission links with the EU to

stabilize its power system, and has removed the ban on several restrictions which could hamper foreign investment in the

power sector. The energy policies in Turkey are aimed at encouraging private capital and the development of international

cooperation. For instance, Turkey has implemented several projects to increase energy efficiencies in the industry,

transport and residential sectors.

Performance

Environmental impact

Turkey is faced with increasing pollution levels due to chemicals and detergent released into water sources and an

attendant increase in air pollution, mainly in urban areas. Furthermore, the discharge of pollutants by neighboring countries

has polluted the Black Sea. The country has been facing the problem of air pollution, which is acute in areas such as

Istanbul, Ankara, Erzurum and Bursa. Moreover, increased car ownership and the slow growth of public transportation have

significantly increased the urban pollution in Istanbul. Air pollution is also caused by energy plants and fertilizer facilities,

since the majority of these lack filtration equipment. Turkey also faces land degradation due to the inappropriate use of

agricultural land, overgrazing and deforestation, along with soil erosion in more than half of its land surface. The volume of




carbon dioxide emitted increased from 204.4 million metric tons in 2003 to 249.5 million metric tons in 2007. The GHG

emissions per person in Turkey were approximately equivalent to 4.1 tons of carbon dioxide in 2004: this amounts to about

one third of the average values in the EU/OECD countries.

Figure 25: Carbon dioxide emissions in Turkey, 2000–07

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2000 2001 2002 2003 2004 2005 2006 2007

Year

Volu

me

(mill

ion

met

ric to

ns)

-10.0

-5.0

0.0

5.0

10.0

15.0

Grow

th (%)

Volume Growth rate


Outlook

Turkey is ranked 75th in terms of per capita carbon emissions. GHGs emitted per person in Turkey were approximately

equivalent to 4.1 tons of carbon dioxide as of 2004, which amounts to about one third of the average values in EU/OECD

countries. To annually reduce the menace of carbon emissions, Turkey intends to encourage sustainable energy

development projects by involving itself in carbon trading, which would result in a GHG reduction of approximately five

million tons. The government has decided to ratify the Kyoto Protocol, which binds 37 industrialized countries to limit their

GHG emissions. However, Turkey has been facing high pollution levels over the years due to water and air pollution,

mainly in urban areas. Municipal and industrial landfills and their illegal equivalents comprise approximately 80% of

contaminated sites. Currently, the manufacturing sector contributes significantly to environmental pollution.

APPENDIX



APPENDIX

Ask the analyst

DATAMONITOR’s Country Analysis Practice consists of a team of economists, analysts and researchers, all with expertise

in their given fields. For any questions or comments about this report you can contact the author directly.

[email protected]

Datamonitor consulting

We hope that the data and analysis in this brief will help you make informed and imaginative business decisions. If you

have further requirements, Datamonitor’s consulting team may be able to help you. For more information about

Datamonitor’s consulting capabilities, please contact us directly at [email protected].

Disclaimer

All Rights Reserved.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means,

electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Datamonitor.

The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the

findings, conclusions and recommendations that Datamonitor delivers will be based on information gathered in good faith

from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such

Datamonitor can accept no liability whatever for actions taken based on any information that may subsequently prove to be

incorrect.

Documents

COUNTRY ANALYSIS REPORT Turkeyengine. The country received foreign direct investment (FDI) worth $20 billion in 2006, compared to $2.7 billion in 2004. The significant increase in