Note: This article is an abridged version of an in-depth country study produced as part of the Prosperity Index project of the Legatum Institute. Complete versions of all 12 are available on the Institute's website.
By any broad measure, the Turkish economy is successful. Turkey has almost doubled average incomes since the turn of the century, even as it reduced poverty and narrowed income equality. What's more, the economy has shown remarkable vigor in bouncing back from the recession in spite of the ongoing malaise in its European trade partners.
But Turkey's evolution since World War II suggests that the transition to upper-income status will require difficult political and socioeconomic adaptations. Indeed, to understand Turkey's strengths and vulnerabilities, one must understand how the country has imperfectly bridged gaps between democracy and authoritarianism, free markets and crony capitalism, secular nationalism and Islamic conservatism.
The urgent need for cooperative security in the face of Soviet expansionism after the Second World War brought Europe and America closer in many ways, leading them to build liberal institutions that matched their converging cultural outlook. However, rapid growth and common security concerns have not produced a parallel convergence between Turkey and the West.
Strong property rights do exist in Turkey, but they are not buttressed by an impartial judiciary to enforce contracts and ensure due process. Civil society is dominated by business and the religious orders, which have close ties to the state. Big business is far more influential than small business or trade unions, while citizen groups defending causes ranging from environmentalism to consumer rights have little traction. Indeed, Turkey's failure to adopt Western political values is forcing analysts to reconsider the near-consensus view that global economic integration will lead to a more liberal world order.
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In the first few decades following World War II, by contrast, Turkey's inclination toward crony capitalism only grew stronger. Wealth was increasingly concentrated in a cluster of well-connected firms and families. So-called "strategic" companies were nurtured with a host of subsidies and protected from import competition, while consumers were forced to accept shoddy goods at high prices. Barriers to market entry stifled enterprise and economic mobility.
Turkey's financial system similarly diverged from the liberal ideal, suffering from inefficiency and chronic instability. Hyperinflation and balance of payment crises (in which the central bank ran out of foreign exchange) occurred in every decade of the second half of the 20th century. Turkey became a frequent visitor to the International Monetary Fund's emergency room. But being a frontline state in the battle against communism afforded Turkey considerable forbearance.