Accession talks will result in fringe benefits

Date: 29/09/05

Whether or not Turkey and its 67 million inhabitants finally join the European Union is far less important to Turkish business than the fact that accession talks now seem destined to start.

This, at least, is the view of economist Tolga Ediz, who follows the country for investment bankers Lehman Brothers in London.

"It is hard to find a Turkish businessman or academic who really believes that the country will make it into the EU. On this most are pessimistic," he says.

"But," he goes on, "they are optimistic about the outlook for the economy." And one of the main reasons for this is, he says, that they believe that the process by which Turkey opens and closes chapters of the acquis communautaire is, at the moment, more important than actual membership, since this process itself will keep the pressure on government to continue with domestic reforms.

"The conditions for Turkish membership in the EU are virtually revolutionary in character, they require a fundamental change in the structure of government," says Kivanç Ulusoy at the Middle East Technical University in Ankara.

Some benefits have already appeared from Turkey's decision in 2002 to accept in principle a reform agenda based on the EU acquis and from the austerity programme the International Monetary Fund insisted on as Turkey plunged into economic crisis in 2000 and 2001.

Since 2001, when real growth plunged by 7.4% and annual consumer price inflation peaked at 68%, output has surged. Real growth has been running close to 8% a year. Last year inflation was down to 8.4%, the budget deficit had fallen to 7% of gross domestic product (GDP) from 16.5% in 2001 and there were tentative signs that foreign direct investment (FDI), a worrying weak spot hitherto, is finally beginning to pick up.

Deutsche Bank, for example, is predicting that next year net FDI will hit €4.2 billion. This is small for an economy with a nominal GDP of more than €250bn (FDI in China has been running at more than €41bn per year for the past five years) but it may be a sign that foreign investors too are beginning to take a longer, more optimistic view.

The Organisation for Economic Co-operation and Development (OECD), the intergovernmental think-tank based in Paris, in its 2004 economic survey of Turkey, described the country as now one of its fastest growing members but still concluded that it was too soon to say "to what extent the rebound reflects a transition to a higher medium-term growth path," which could, it says, be as high as 7%.

Labour-force growth - Turkey has a young population - and untapped reform potential, could underpin such a growth rate.

But the OECD still worries that economic reforms have simply not yet gone far enough to be sure they are deeply embedded. Even more sceptical analysts argue that the bounce since 2001 may just be the expected short term pay-off from better economic policies and the lower interest rates, lower inflation and increased confidence that have followed.

Certainly the economic challenges ahead for Turkey are immense. It faces competition from China, not least in its key textile industry, which will only be partially compensated for by its closeness to its main export markets in the European Union.

China has, moreover, raised the bar so far as the required pace of economic development is concerned by pushing to break into hi-tech areas at a relatively early stage in the development process. Turkey, too, will have to improve the quality of its 'human capital'.

Like most of its emerging market peers, Turkey is vulnerable to the global economic slowdown which now seems to be gathering pace. That said, the economic (and political) outlook for the country is now far better than it would have been if the EU had completely turned its back on its huge neighbour.

• Stewart Fleming is a freelance journalist based in Brussels.

Article takes a look at the possible impact of the opening of EU accession negotiations on the Turkish economy.