Turkey’s booming economy. Babacan’s miracle

A steady hand has helped to turn Turkey round

THE Turkish economy minister, Ali Babacan, was just 27 when he had his first brush with the World Bank, in 1994. As an adviser to Ankara's mayor, Mr Babacan persuaded the Bank to reopen a multi-million dollar project it was financing, saying the deal was overpriced. The Bank agreed, and the work was done for half the amount. Ten years on, such fiscal prudence has helped Mr Babacan to pull Turkey out of the hangover from the 2001 economic crisis, the worst in its recent history.

Western bankers who were then in despair talk now of Turkey's miracle. GDP grew by a healthy 8% in 2004. Inflation was down to single digits (just over 9%) for the first time in 30 years. As if to cement the markets' confidence, European Union leaders agreed in December to start membership talks with Turkey next October. Their decision came on the heels of a three-year, $10 billion IMF stand-by agreement. Exports are doing well, even to Iraq (which took $1.8 billion in 2004). Nor did the war in Iraq deter tourists, who brought a record $12.6 billion into Turkey in the first nine months of{grave}2004. The banking system, almost bust in 2001, has been restructured with a huge injection of public funds. To celebrate, on January 1st Turkey seamlessly introduced a new lira, dropping six zeros from the old one.

This rosy picture owes a lot to the unprecedented political stability that Turkey has enjoyed since the AK party, led by Recep Tayyip Erdogan, now prime minister, came to power in November 2002, after a decade of fractious coalition rule. Macroeconomic progress has run in tandem with sweeping political reforms that some diplomats call “a silent revolution”. Yet Mr Babacan accepts that more must be done.

For instance, dodging taxes is a national sport; Mr Babacan says overhauling the tax system is a top priority, as is bringing the country's huge black economy - estimates range between 30% and 50% of GDP - into the light. Other challenges include rationalising the archaic farming sector, which employs 30% of the labour force but accounted for a mere 12% of GDP in 2003. A corrupt judiciary must be reformed if embarrassingly meagre foreign direct investment and hoped-for privatisations are to take off (in 2003, FDI per person in Turkey was worth a mere $8, compared with $244 in Hungary and $110 in Poland). If unemployment is not to rise above today's high 10% (in some Kurdish regions in the south-east, it is as high as 70%), half a million new jobs must be created every year.

The government's large debt, amounting to some 74% of GDP, most of it short-term and in foreign currency, remains a big vulnerability - although the primary (pre-interest) budget surplus of 6.5% of GDP is at least shrinking the debt burden, and lower interest rates are making it easier to service. The current-account deficit is another worry: it touched 5% of GDP in 2004. But the best safeguard for the future is continuing political stability. And some think that means keeping on the clever and impeccably honest Mr Babacan.

Rumours of a cabinet reshuffle are rife. The word is that Mr Babacan, one of the few young, English-speaking ministers, will be given the unpopular job of chief negotiator with the EU. The son of a rich Ankara textile merchant, Mr Babacan has made enemies, some of whom may be happy if he moved on. He refuses favours from members of Istanbul's elite, knowing they will expect favours in return. A penchant for Ferragamo shoes and hair gel aside, Mr Babacan displays none of the ostentation of some predecessors. He prays five times a day and has never touched alcohol, not even in his business-school days in Chicago, he says.

Fellow AK party members envy him for earning the trust of Mr Erdogan so quickly. His wife, who covers her head Islamic-style, is a close friend of the similarly garbed prime minister's wife, Emine. Will he accept the EU job? “I don't want to even think about it,” Mr Babacan says. He may have to do so very soon - and the cause of economic reform in Turkey may need to find a new champion.