Turkish Tiger ?

Turkish Tiger
By MATTHEW KAMINSKI
October 21, 2006; The Wall Street Journal

ISTANBUL -- Turkey's boisterous democracy stands out in the Islamic world. But the country is unique in another way, as a thriving Muslim market economy with -- and here's the crucial distinction with, say, a Malaysia -- a large, independent private sector and a shrinking state. In debates over how to change the Middle East, market reform tends to take a backseat to party building or free elections. Maybe, as Turkey shows, we're putting the cart before the horse.

The recent troubling news here, from Kurdish terrorism to the rise of political Islam and anti-Americanism to tensions with Europe, can't take away from Turkey's economic renaissance. New and old industries powered a 7% expansion in 2005, the fourth consecutive year that growth approached double digits; this year, it'll be around 5%. Inflation, an old Turkish non-delight, is under control. Inside the European Union's free-trade area since 1996, Turkey has done especially well with export-driven manufacturing. More than half of Europe's television sets are made here. Investors are taking notice; Citigroup this week bought 20% of the second-largest Turkish bank for $3.1 billion. Though the economic gap with Europe remains wide, Turks are spending their way to bourgeois respectability, buying, in the past year, $3.5 billion in imported cars. Consumer loans are up 120% in that time, housing 300%.

The change is as striking in beguiling Istanbul, the commercial capital, as in the conservative, once predominantly agricultural, hinterlands of Anatolia, whose new breed of manufacturing tycoons are nicknamed "Islamic Calvinists" by a local think tank. "It's a party," says Nedim Esgin, who spent two decades as a senior executive at Turkey's largest industrial group, Koç, before going into business on his own.

It wasn't always so. Kemal Atatürk's Turkish Republic started life in 1923 with the same handicaps as its former Arab Ottoman colonies: virtually no industrial base and a tiny commercial class. "What distinguishes Turkey is that it developed a private sector in the post-Ottoman period," says Sevket Pamuk, a prominent Turkish economic historian. (His younger brother, Orhan, won the Nobel for literature last week.) "That was not true in the Near East." In eight decades of Kemalist Turkey, he adds, the rise of a strong business class was "the key to democracy." Its Arab neighbors opted for statist policies and political structures, where, in Mr. Pamuk's words, "state industries became family enterprises."

Corruption and poor governance, three military coups in a span of 20 years, and financial crises -- most recently and dramatically five years ago -- kept Turkish democracy and capitalism from fully maturing. Until 2001, Turkey held the dubious distinction of being the only country that ran 50% or higher inflation for more than two decades. But the traumatic 2001 crisis forced the then-government to clean up the banks and rein in budget deficits. A year later Recep Tayyip Erdogan, best known abroad for his roots in Turkey's Islamist movement, broke another pattern, of unstable politics, by winning commanding control of parliament for his Justice and Development Party.

To the question of whether Islam hinders development, Mr. Erdogan offers one answer: On the economy this "Islamist" government has stuck to the market playbook. The budget deficit is 1% of GDP, down from 16% in 2001; the debt-to-GDP ratio 60%, compared with 110% five years ago. Inflation is creeping up, to 10%, after hot money fled emerging markets early this summer and the lira fell 22% against the dollar at one point; but Turkey weathered that brief storm well. The Islamists have embarked on the most far-reaching privatization program in Turkish history, selling off telephone companies, petrochemical plants and steel makers and lowering barriers to foreign investment -- with little opposition. A vestige of state control, dating back to Ottoman times, is its ownership of large tracts of land, but that, too, is on the agenda.

As mayor of Istanbul, Mr. Erdogan worked closely with and gained the trust of the city's business class. He was also, unusually for a Turkish politician, a businessman himself, having run a food-distribution franchise. He came into office "with a free-enterprise mindset," says Mr. Esgin, who's not otherwise complimentary. "This is the most economically liberal government Turkey has had." Voters like the new prosperity. "Elections are now about the economy, not ideology," says Murat Gulkan, at Deutsche Bank.

The good times have made for a richer civil society. Since the last military-led regime in 1980-83, notes author Hugh Pope, 27 private universities have been founded, mostly courtesy of tycoons like the Koç and Sabanci families. Sabanci University's art gallery last year put on a popular Picasso exhibit, a first in Istanbul; Rodin followed this summer. Associations and lobby groups are mushrooming; they are giving voice to competing interests and providing counterweights to the Islamists in charge, even as opposition parties remain weak. Turkish democracy has never been stronger.

There is another face to this government and, unusually for modern Turkey, it's a distinctly Middle Eastern one. It includes Mr. Erdogan's Islamic social agenda, such as his push to lift the ban against women wearing head scarves in public buildings. His prickly foreign policy, which no longer prizes the American alliance above all, breaks with Atatürk's strict secularism and pro-Western bent.

While Mr. Erdogan's conservative social policies resonate with a large chunk of the electorate, they leave many Europeanized Turks anxious about their personal freedoms. It's not out of the question that the military, traditional guardian of the Kemalist secular order, may step in again and put an end to this democratic experiment. Europe has been an anchor for Turkish reform, and the recent strains with the EU that brought talks on membership to a virtual halt in recent weeks bring another risk of relapse.

But economic pluralism has entrenched political pluralism, and freedoms, in ways that will be hard to displace. Turkey's neighbors, and America's democracy pushers, please take note.