Melih Dogan, a native of Ankara, Turkey, has since 1978 worked as an attorney in New York City specializing in the Turkish financial markets and international transactions.
What does the rule of the Refah (“Welfare”) Party, with its Islamist outlook, mean for foreigners doing business in Turkey? To date, all indications are that Refah’s position as senior partner in a coalition government is having little effect on the country’s dynamic private-sector economic growth.
An important reason for this stability is that Refah alone does not control the government’s economic policy. As part of an unnatural alliance with the True Path Party (led by former prime minister Tansu Çiller), which is secular in outlook and controls both the Ministry of the Economy and the Central Bank, its hands are partially tied. The president, Süleyman Demirel, also is committed to secularist ideals. Perhaps most important, the omnipresent Turkish military provides leverage against radical diversions not only in the realm of politics but also in those of business and legal practice -- as it reminded Turks in early February 1997, when it sent tanks ostensibly on a military exercise rumbling through a town that had adopted an overly fundamentalist, pro-Iranian outlook.
Already, some of Refah’s more ambitious intentions have been tempered by its partners. Its attempt to replace several hundred judges in the judicial administration met with strong negative reactions from the Turkish bureaucracy as well as the military command; as a result, Refah backed off.1 Also, although its pre-coalition platform called for the curbing and ultimately the complete elimination of interest charges, in keeping with the Islamic prohibition on usury, Refah will not carry out that plan.
If Refah does have an effect, it will be felt primarily in state-run companies and government monopolies, and particularly in a redefinition of privatization plans. Or the coalition’s lack of a cohesive economic plan could bring about a major devaluation of the currency, which would cause private industry to stagnate. Let us look at three aspects of the current business climate in some detail: private companies, the privatization process, and trade with neighbors.
PRIVATE SECTOR
The private sector has received the Refah coalition, headed by Prime Minister Necmettin Erbakan, in a cynical but indifferent manner; foreign investors have generally adopted a wait-and-see attitude. The first experience with Erbakan’s economic ideas came two decades ago, when he headed an earlier incarnation of the Refah Party and served as deputy prime minister in 1973-74 in a coalition government with Bulent Ecevit’s leftist Social Democrats. Businessmen generally expect from Erbakan more of what he did last time: populist rhetoric without tangible results.
Remarkably, the Istanbul Stock Exchange (with approximately two hundred listed companies and a total capitalization of $40 billion) had (along with Brazil) the world’s best performing stock market in 1996. The first months of 1997 have so far seen a further 35 percent increase in dollar terms. Despite these increases, the market will likely be lackadaisical so long as Refah sends out mixed signals about its business philosophy: for example, before forming a ruling coalition, it stood against privatization and afterwards supported the disbandment of state-owned companies.
Turkey currently offers incredible economic opportunities. Perhaps the most important recent development took place in 1995, when it joined the European Customs Union.2 With this step, the domestic duties and tariffs that had long impeded exporting or marketing in Turkey practically disappeared. Customs Union membership should not only greatly increase the incidence of foreign mergers with and acquisitions of Turkish companies but also the reverse: one Turkish company, Raks Elektronik A.S., announced in October 1996 its intention to acquire the Magnetic Tape Division of Germany’s BASF, with 2,500 employees and plants in Germany, Brazil, Indonesia, and France -- a $1 billion deal that would bring a European icon under Turkish control. Such a bold move by a Turkish corporation was unheard of in the past.
When analyzing the private Turkish economy, incidentally, many foreign analysts fail to take into account the substantial but amorphous underground economy that constitutes between 30 and 40 percent of the total GNP, or about $60 billion a year. This underground economy has fueled Turkey’s recent growth and is unlikely to be affected by changes in political leadership. To battle the corrupt business practices that accompany the underground economy requires several major changes. High-level government bureaucrats must stop participating in its benefits.3 Tax collection and administration, still done on paper without computerized entries, must be modernized. The government must assign the equivalent of a Social Security number for tax identification. Taxation needs to be more fairly distributed; to date, there is no capital gains tax on the sale of real estate or stock (though parliament is now considering taxing such gains).
PRIVATIZATION
While the private business community is thriving in Turkey, state-owned Turkish companies (locally known as Tekel) are top-heavy, have high overhead, and for the most part deliver mediocre services and products. The government’s five domestic television stations offer bland and self-serving fare, especially when contrasted with the high-tech U.S.-style programming of the private stations. Not surprisingly, Tekel languishes when it faces stiff competition.
Turkish politicians generally agree that privatization is critical for Turkish economic growth, and in the late 1980s, Prime Minister Turgut Özal announced a grand plan to privatize most state-owned companies rapidly. By the time the plan was ready to be implemented, however, Özal had given up the prime ministry for the presidency and so could not carry through with his project, and his many short-lived successors Demiral, Çiller, Yilmaz and Erbakan chose not to do so. Also, the two usually diametrically opposed parties, Refah and the Social Democrats, adopted nearly the same position against privatization.
Several state-owned cement companies were sold (to Cimens Français), as were some small banks, but the great bastions of the state-owned enterprises, such as the Erdemir steel factories, the Petkim chemicals processor, and Telecom, remained in state hands. Although they were processed for bids, legal action by members of parliament making transparently emotional appeals (for example, that Turks should not “auction off their virgin daughters to foreigners”)4voided the sales. In October 1996, Demirel vetoed the sale of the Etibank mineral and mining complex. An investor who enters the maze of the Turkish privatization program faces a bewildering array of regulations, a lack of disclosure, and the prospect of companies’ being withdrawn even after the bidding process is conducted and the winner announced.
Although entering the government has not converted Refah into a fervent supporter of privatization, and the party has not presented a credible or consistent program of its own to address this issue, in December 1996 the government did accept bids for three state-owned banks. More surprising, the bid process was completed for a state-owned cement company and it was sold to the highest bidder at $47.5 million. In the same month, three state banks were privatized in rapid succession, raising approximately $320 million in additional revenues. These exceptions notwithstanding, an overview of the Turkish privatization program suggests that it will go nowhere until a strong and visionary leader emerges or an existing leader transforms himself into a model of Özal.
The reluctance to privatize results from the usual factors. State-owned companies tend to be laden with employees hired through nepotism or political populism, so that private investors will necessarily reduce the work force by a third to a half. Some Turkish businessmen even urge the government to close state-owned operations and pay salaries to the nonworking employees, arguing that “close and pay” results in tremendous savings (it costs less to pay workers not to work than to operate mining behemoths such as Zonguldak on the Black Sea). Privatization will thus send thousands of employees into early retirement or joblessness, intertwining it with the social security and unemployment systems. Without a cogent program to soften the landing for these displaced workers, something that does not yet exist, privatization cannot take place in a politically palatable manner.
BUSINESS WITH NEIGHBORS
Turkey produces many goods -- most notably agricultural foodstuffs, low-technology consumer products, textiles, and construction labor -- that have the potential to sell tremendously well in neighboring countries. In one case, such a trade already exists and is flourishing: the “luggage trade” with Russian tourists resulted in approximate $5 billion in revenue in 1996.5 In addition, Turkish construction companies have demonstrated an incredible ability to adapt to conditions in diverse climates and hostile environments, a trait that would make their nomadic ancestors proud. Of particular note is their activity in the former Soviet Union, where Turkish businessmen are engaged at a furious pace of commercial activity in the Turkic republics of Kazakstan, Azerbaijan, and Turkmenistan. In this case, commercial viability is complemented by politics, as the Refah Party supports such connections for pan-Islamic reasons, while the other major parties support it mainly for economic reasons.
Relations with Israel constitute an untapped area of Turkey’s business potential. The two states signed a mutual economic cooperation treaty in 1995, and they need to intensify their efforts to create joint ventures and increased trade. To date, these have consisted mainly of Israeli investments in the tourism and casino business, especially in southern Turkey, a region visited by over 250,000 Israeli tourists in 1996. Turkey has much to gain from Israel’s technology and its proven ability to raise international capital, presently a tedious route for even blue-chip Turkish companies. Contrary to expectations, Refah has not tried to impede the progress of the economic treaty with Israel; in fact, it even extended relations with the Jewish state by signing a second military cooperation agreement with it in August 1996.
Erbakan’s trips to Iran, Libya, and Nigeria, meanwhile, have aroused considerable controversy but will result in tangible economic benefits, for any trade with the starved consumers of those countries is helpful to the Turkish economy. (Long gone are the days that Turkish firms worked in the Libyan oil fields under delayed payment agreements.) But Ankara will have to be very tactful and cautious in negotiating for economic benefits from Iran, Iraq, and Syria -- neighbors of Turkey’s who all support the insurgency of the Kurdish Workers’ Party (PKK) in eastern Anatolia and reject Turkish control over water from the Tigris and Euphrates Rivers. Erbakan’s experience in Libya -- where in his presence Mu`ammar al-Qadhdhafi made repugnant remarks about the Turkish people and their heritage -- also shows that economic benefits do not change rogue governments politically.
Though infuriating to Americans, Erbakan’s dealings with these rogue regimes has caused no crisis in relations with the U.S. government. To the contrary, Ankara and Washington in October 1996 announced a Turkish-U.S. Joint Economic Commission to strengthen economic and commercial ties. This fits within a larger context: the U.S. Department of Commerce has labeled Turkey as one of the “big ten” economies of the world and steadfastly emphasizes its support for Turkey’s economic well-being, including the use of Turkey as a bridge to transport oil from Central Asia and western markets via the Mediterranean port of Ceyhan.
CONCLUSION
The accession of Refah to political power has not sidetracked Turkish business practices or operations. It appears that Refah is either unwilling or unable to transform the established capitalistic practices of Turks. When considering the future, Turkish business leaders raise the prospect of three distinct scenarios:
* Refah will survive as the leading political party for many years to come by using the coalition vehicle and by tip-toeing over each political and social obstacle it confronts;
* The current coalition of the Refah and True Path parties will fail, leading to a general election and the eventual merger of True Path with the other center-right party, Motherland. “Mother-Path” will then face down Refah; or
* The military will intervene and appoint a political outsider to reform the Turkish political system (perhaps along the lines of the American presidential/congressional system).
From a business perspective, the key question is whether the Turkish government will settle on a political role for itself in the region and the world. If it does, Turkey need no longer be chronically ill. Clarity about political motives and plans, especially with regard to the Middle East and Europe, would dramatically enhance both Turkey’s economic stature and prowess.
1 Financial Times, February 25, 1997.
2 Joining the European Union (EU) proper does not seem likely in the near future due to doubts on both sides. Erbakan has a highly ambivalent position with respect to the EU, which he calls a “Christian Club.” Turkish Daily News, March 8, 1997. Incidentally, the coalition government that Erbakan was part of in 1974 refused to join what was then the European Community, even as Greece did join; as a result, Greece now can exercise veto power over Turkey’s entry.
3 A fatal car accident in the small town of Susurluk in Nov. 1996 unearthed a network of corruption. In the car were a fugitive gangster and drug dealer, a local police chief, a former beauty queen, and a parliamentary deputy; what were they doing together? Their car also revealed a horde of cash, false passports, and an arsenal of weapons. The incident took Turkey by storm and remains several months later a topic of heated discussion and parliamentary investigation.
4 Interview with the late Suphi Baykam, the parlimentary speaker, on Aug. 25, 1995.
5 Interview with Mehmet Bayar, chief advisor to President Süleiman Demirel, Nov. 22, 1996.
