Walker's World: How does Turkey do it?

ISTANBUL, Turkey, June 25 (UPI) -- As the economies of Europe, China, India and the United States all slow at once, how does Turkey do it? How does this country, poised at the intersections of Europe, Asia and the Middle East, grow its economy last year at close to 10 percent, lower its trade deficit and get its sovereign debt upgraded by Moody's?

Low debt is part of the answer. The economy has been growing so fast that its sovereign debt is now reduced to just 42 percent of Turkish gross domestic product, the lowest level in Europe after Sweden, Russia and the Czech Republic.

Intelligent policies help. Noting the warning signs last year when the trade deficit went to more than 10 percent of GDP, the Turkish central bank introduced a controversial but imaginative two-tier interest rate system to discourage inflows of hot money, which can flow out again just as fast.

But at the same time, to encourage inward investment and local manufacture, the government introduced new trade incentives, which allow foreign automakers like Renault to export more cars to Turkey but only if they increase their local output. Automakers that increase annual output in Turkey by 100,000 units will be entitled to import additional vehicles equaling 15 percent of that amount without tariffs, Economy Minister Zafer Caglayan explained.

Open a new engine manufacturing plant and the company can import an extra 30 percent of foreign made cars. Similar incentives are also on offer in industries like chemicals and steel-making (where the local steel industry has been hard hit by cheap imports from Russia and Ukraine).

A sharp eye for international politics also helps explain Turkey's success. Despite a far more assertive and self-confident foreign policy that began when Turkey refused to let U.S. troops use its territory during the Iraq war, Turkey has managed to forge close relations with China, Brazil, Russia and Iran, while remaining a staunch member of NATO.

Most recently, Turkey persuaded the European Union to loosen its visa regime for Turkish visitors. That might not sound like much but two EU members -- Greece and Cyprus -- are still outraged at Turkey's 1974 invasion of northern Cyprus and the continued presence of Turkish troops, helping protect the "independent" enclave of Northern Cyprus. A cynic might say Turkey was taking astute advantage of Greece's near-bankruptcy and the impatience of other EU countries with the slow pace of Greek reform; a realist would acknowledge Turkey's timing.

Another example comes from the nasty spat with France last year when the French Parliament passed a resolution saying that the deaths of Armenians in 1915 under the Ottoman Empire was an act of genocide. Although the Ottomans disappeared in 1918, successive Turkish governments have seen any such charge as a terrible insult, and Franco-Turkish relations -- and trade -- froze. But Turkey took advantage of the change of government in the latest French elections to declare the fuss was over and that trade links were back on track.

Relations are still very cold with Israel, formerly a close ally, after the deaths of Turkish citizens when Israeli forces boarded and seized a ship of volunteers taking aid and medical supplies to Gaza. This complicates Turkey's position with the United States where Congress is blocking Turkish requests for unmanned aircraft because Turkey is now seen as hostile to Israel.

By contrast, a personal relationship has developed between U.S. President Barack Obama and Turkey's moderate Muslim Prime Minister Recep Tayyip Erdogan. U.S. intelligence officials are said to be working closely alongside Turkish counterparts on the borders with Syria, where Turkey has taken an increasingly critical line as the crisis inside Syria spirals into civil war.

The apparent shooting down by Syria of a Turkish warplane has sharply raised the stakes. Turkey has formally taken the issue before its NATO allies and rejected Syria's claim that the plane was an intruder into Syria's airspace and Syria shot it down without knowing it was Turkish.

So far, however, Turkey's ability to navigate the swirls of regional geopolitics, from the instability of Iraq to Iran's nuclear ambitions, has been as impressive in its way as the ability of the Turkish economy to thrive in tough times. Of course, the most important reason for Turkey's economic success has been hard work, a great deal of local and foreign investment and a growing number of locally bred entrepreneurs.

Given that Europe is Turkey's biggest market and Europe has hardly been a growth center for the past four years, Turkey's resilience has been remarkable. And for once, Turkey's latest growth spurt hasn't collapsed under the combined effects of inflation, trade deficits, bad debts and banking crises, which is what happened to previous Turkish booms in the 1980s, 1990s and 2000.

Although growth is likely to slow this year to 5 percent or less, the current growth phase looks much more soundly based and sustainable.

There are some shadows on the horizon. The first is the resumption of political violence in the Kurdish regions. Last year was the bloodiest in several years in the ongoing conflict with the Kurdish Workers' Party. Last week, eight Turkish troops were killed in yet another border shootout (this is why Erdogan is pressing Obama for Predator drones).

More serious in the longer term is the slow pace of reform in Turkish education. The average Turkish worker these days could be described as someone who hasn't completed a high school education and the pace of economic growth points to the urgent need for more skilled workers, more graduates and specialists. Shortages of skilled labor are threatening to drive up wages and thus inflation, which could threaten the economic miracle.

One really worrying aspect of this is that unlike many other emergent markets Turkey has few hopes of women coming in to buttress the workforce. Turkey has the lowest rate of working women if any country in the Organization for Economic Co-Operation and Development at just 23 percent -- lower than it was 30 years ago.

Two other concerns are the large number of journalists arrested -- close to 100 -- and the government's continued pursuit of supposedly anti-Islamic groups in the military. After controversial claims of a coup plot, around 15 percent of serving generals and admirals are in prison, some for more than two years without any trial. This suggests institutional strains in the system that economic growth can dilute, but not resolve.