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Turkey leverages economy for global power

Emerging nations realign the world stage as U.S., Europe stumble

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ISTANBUL | While much attention has been focused on China and India, other quickly emerging nations are establishing themselves as powers to contend with in their parts of the world.

Turkey is one of those nations. A decade of robust and largely uninterrupted growth has allowed the longtime U.S. ally to influence world affairs and become an ambitious force in its strategically critical neighborhood at the nexus of Europe, Asia and the Middle East.

As with China and other large emerging nations, the swift rise of Turkey, South Africa, Colombia and several other regional economic powers contrasts with — and to some extent owes to — the economic weakness in the U.S., Europe and Japan in the aftermath of the 2008 financial crisis and recession.

Although the emerging nations were set back by the crisis, the damage to their economies proved largely temporary and they have since resumed robust growth that is enabling them to quickly make gains on more developed nations.

Turkey's secular Muslim leaders have made no secret of their ambition to reprise the economic pre-eminence, if not the military predominance, of the Ottoman era, when the region was the center of an empire that encompassed most of the Middle East, North Africa, Central Asia and the Balkans before crumbling in the aftermath of World War I.

Growing economic strength is giving Turkey a platform to fashion a more independent and Islamic-leaning foreign policy that puts the nation's economic interests squarely in the forefront over its traditional role of furthering the agenda of the North Atlantic Treaty Organization.

Sinan Ulgen, a scholar at the Carnegie Endowment for International Peace and a partner at Istanbul Economics, said Turkey's extraordinary economic performance in the past decade has transformed the nation's outlook on the world and is the driver behind its more assertive foreign policies.

"It's quite radical, quite a sharp economic transformation," he said, noting that per-capita income in Turkey tripled from $3,000 to $9,000 in less than a decade while foreign investment flows jumped from $1 billion a year to $20 billion a year and trade with the rest of the world burgeoned to $200 billion.

"That has totally changed the foreign policy outlook," and along with the end of the Cold War made Turkey particularly keen to re-establish peaceful economic relations with neighbors with Iran, Iraq, Syria, Lebanon, Greece, Eastern Europe and Russia. Turkey has adopted a "zero problems" policy toward such neighbors, with which it previously had cool or hostile relations.

"Now, one of the objectives of Turkish foreign policy is to ensure that Turkish exporters get new export markets and that the country receives more foreign direct investment," Mr. Ulgen said.

Broader reach

The Middle East, in particular, "is seen as a new untapped market for its economic actors," but the nation also is making forays into Africa and as far away as South America and China in its efforts to expand its universe of trade and influence.

While some in the West worry that Turkey is turning away from its Cold War-era ties with Europe and the U.S., particularly in aligning itself with Arab nations and against Israel on the Palestinian question, the nation's leaders insist that they seek only to supplement and expand their diplomatic universe.

Turkey's newfound independence in foreign policy was perhaps epitomized in 2003 when the government of Prime Minister Recep Tayyip Erdogan opposed the U.S. invasion of Iraq. But Turkey later showed its solidarity with the U.S. — as well as its entrepreneurial side — by becoming a major supplier of food and other necessities to U.S. troops in Iraq.

Gaziantep, a bustling and wealthy city not far from the Iraq border in southern Turkey, boasts that nearly 40 percent of the city's trade is with U.S. forces in Iraq. Mayor Asim Guzelbey said he is not worried about a loss of business as the U.S. winds down its military presence in Iraq.

"I believe the economy will increase" as Iraq moves toward establishing a peacetime economy, he said. "There will be greater construction in Iraq, and they will look for partners in Gaziantep."

Turkey, unlike Russia and Brazil, does not have natural resources to exploit. Its main economic strength is an entrepreneurial tradition that dates back centuries to the era of the Silk Road, when the Ottoman Empire gained its riches and power from taxing and dominating much of the critical trade route between East and West.

The Erdogan government has brought increasing political freedom and stability. Along with a fast-growing population, that has enabled Turkey to eke out a stellar economic performance that has won the country a seat on the Group of 20 economic powers.

Critical shift

Ali Babacan, Turkey's deputy prime minister, sees the end of the Cold War and 2008 global crisis as pivotal events that weakened the West's grip on the developing world and accelerated the emergence of competing power centers around the world.

He contrasted Turkey's brisk economic performance with the sluggish economy in the U.S. as it struggles to overcome a legacy of heavy debt and deficits that led to the crisis.

"We are moving towards a multipower system in the world. The Cold War is over," he said in an interview with visiting American journalists and scholars. For a while, "there was one superpower, but now after the recent crisis, there will be a multipolar world. The whole world is shifting to the East."

For the U.S., "the problems are so big, so accumulated over years, you should not expect a very fast recovery," he said, describing how Turkey had to slash its budget deficit early in the past decade from 12 percent of economic output and ended up with a 1 percent budget surplus.

Slaying the debt dragon is what gave Turkey's citizens and businesses the confidence to spend and grow, Mr. Babacan said. He has cautioned U.S. leaders privately within the G-20 against using further debt to try to stimulate the economy.

Congress and the Obama administration shunned such advice from U.S. allies and passed a $890 billion bill last month extending the Bush-era tax cuts and adding more tax cuts and spending.

Mr. Babacan also was critical of the Federal Reserve's plan to print money to purchase much of the U.S. Treasury debt in coming months, noting that wariness about burgeoning U.S. debt has been weighing on the U.S. dollar and tarnishing its role as the world's reserve currency.

Mr. Babacan's remarks illustrate how leaders in emerging markets have been emboldened by the West's struggles with debt problems while their economies have received a boost from their success at controlling past debt problems. He noted that Turkey's sound financial condition surpasses those of most European countries and has made it increasingly attractive to investors and businesses looking for opportunities.

Although the economic crisis temporarily set back trade with Turkey's main trading partners in the European Union, it did not do fundamental damage to Turkey's economy. In the U.S. and Europe, the overhang of debt continues to hold down growth, and explosions of public-sector borrowing has led to further financial crises in Greece, Ireland and other countries.

'Anatolian Tiger'

Turkey's economic success as the "Anatolian Tiger" has lent itself to second thoughts about whether the country should go through with its long-standing bid for full membership in the European Union.

Mr. Babacan and other Turkish leaders insist that they still want to complete their economic union with Europe, but they say they now expect Turkey to do just fine regardless of its status in Europe.

Turkish leaders stress that they benefit simply by pursuing EU membership through a series of governmental reforms requiring the country to strengthen its system of democratic rule and open markets, while guaranteeing an independent judiciary, freedom of the press and human rights.

"I don't know whether we'll become a member of the EU or not, but it's important for us to meet those targets for our own democratic reform," Mr. Babacan said.

Turkey now has an economic climate similar to China's, and both are dealing with issues of fending off inflation in economies that are attracting tens of billions of dollars in investment from abroad. Such a swell of investment can scarcely funnel fast enough into growth projects.

Investors from all over the world, disillusioned with the sluggish growth in the U.S., Europe and Japan, have swarmed to Turkey and other emerging markets to capitalize on double-digit rates of growth.

Turkey, China, Brazil and the other emerging markets have grown so quickly that they now constitute nearly half the global economy. China surpassed Japan last year to become the world's second-largest economy — about the same time that the Financial Times came up with an acronym ("Civets") for the up-and-coming second tier of emerging powers, including Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

Bubble under the surface

The investment boom also has a dark side: More than two-thirds of the stocks on the Istanbul stock exchange are owned by foreign investors. Mr. Babacan touts that as a sign of global confidence in Turkey's open markets, but notes that it also raises the prospect that foreign money is fueling an investment bubble that could end badly if foreigners exit the market as quickly as they entered.

"All this money has flooded in" to the emerging markets, said David Herro of Harris Associates, suggesting that the boom may be close to running its course. "With all the euphoria surrounding them, it's hard to find fundamental value. … Growth in emerging markets is helping the world, but you can overpay for it, and that's what's happening."

The flood of money from the rest of the world is giving boasting rights to Turkish businessmen and citizens, as well as the government.

Kerem Aydin, deputy secretary general of Tuskon, a confederation of Turkish businessmen and industrialists, noted that at Turkey's growth rate of 6 percent or more a year could make it the second-largest economy in Europe after Germany within 10 years should it succeed with its EU bid. With a population of 75 million and growing briskly, it would be among the most populous countries in Europe as well.

"That's undoubtedly why some people fear our membership," he said, referring to opposition to Turkey that has surfaced in France and some other EU countries.

Mr. Aydin expects Turkish businesses will be indifferent in the end on full membership in the EU. At this point, their European markets are stagnating and they see more opportunities for growth in countries to the east and south.

Turkey's hopes of reigniting its influence and economic dominance at the crossroads between Europe and Asia was dissected and mocked in a series of leaked classified documents made available by WikiLeaks several weeks ago.

A classified cable from Ambassador James Jeffrey last year noted that robust economic growth is "one secret of Turkish success" in reaching out to Middle Eastern countries such as Syria and making Turkey a more pivotal player in the region.

Mr. Jeffrey said the U.S. should expect Turkey to become more independent even though the nation has "not achieved any single success of note" with its diplomatic ventures, including a recent attempt along with the Brazil to mediate the Iranian nuclear program dispute.

Turkey has "Rolls-Royce ambitions" but only "Land Rover resources," he said, and will have to compete for influence in the region with Russia, Egypt, Saudi Arabia, the EU and other regional powers.

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