Graduate School of Business April 2000



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Turkey
Country Report


University of Chicago

Graduate School of Business

April 2000




Phil Doyle

Jat Gullapalli

Pablo Hernandez

Kimberly Russell

Laura Walker

Turkey Country Report

Prepared by:
Philip Doyle

Jat Gullapalli

Pablo Hernandez

Kimberly Russell

Laura Walker

University of Chicago

Graduate School of Business

Business 487

April 2000


Abstract

The paper examines Turkey’s attractiveness to foreign investors in year 2000 and the subsequent five-year period. Conclusions are drawn from a combination of desktop research of press and academic journals, interviews with U.S. and Turkish journalists, businesspeople, politicians, and academics, and a two-week investigative trip to Turkey in March 2000. Factors affecting growth and structure of the Turkish economy are analyzed with respect to investment risk implications, including: EU candidacy and foreign relations; political stability; military influence; inflation reduction; privatization; infrastructure inadequacy; Islamist politics; and the Kurdish issue. The paper concludes that, while risks to backsliding on many of the examined issues exist, Turkey’s growth prospects are good, and the country now represents an attractive bet for investors relative to past years.



We would like to thank our sponsors CNA Insurance, Deutsche Bank, Diamond Technologies,

and Pfizer Pharmaceuticals for making this project possible. We would also like to

extend special thanks to Can Cadamoğlu and Izzet Kohen for their extreme generosity.




Table of Contents


Introduction 1

Political Factors 2

European Union 2

Political Stability 3

The Military 5



Economic Factors 6

Inflation 7

Privatization 8

Infrastructure 10



Social Factors 11

The Kurds 11

Islam 13

Conclusion 16



Appendices i

Appendix A: Banking ii

Appendix B: Economic Development Trends iii

Appendix C: Turkey’s Kurds: Background Information iv

Appendix D: Upcoming Election v

v


Appendix E: Political Parties vi

Appendix F: Economic Trends vii

vii

Appendix G: Contact List viii



viii

Major Contacts viii

Other Contacts x

Appendix H: Bibliography xii



xii

Appendix I: Comments to Next Year’s Team xiv




Introduction




Discussion of Turkey in Western circles draws a wide range of curious questions. Educated and traveled Westerners are well aware of Turkey’s current sociopolitical factors and consider Turkey a potential emerging market success. Many that have never traveled to Turkey have a different reaction. While fascinated by Turkey’s unique and rich history, they are unsure what to think about Turkey given media coverage of human rights violations and political instability over the past two decades. Each of these reactions is simultaneously quite valid – the country is everywhere and nowhere the same. The country’s population of approximately 60 million people is 99% Muslim, but considers itself secular. It is also governed by a coalition democratic parliament, but was founded by a military general, Mustafa Kemal, and the military retains primary power. It has periods of spectacular real GDP growth (7.3% and 7.6% in 1996 and 1997, respectively) followed by periods of contraction (-5.0% in 1999); inflation has been volatile throughout the late 1990s culminating in a rate of 69% during 1999. Finally, Turkey is uniquely located at the crossroads of Europe and Asia.
A Model for Factor Analysis... In creating a generic model to analyze any country from an investment perspective, it is important to study political, economic and social factors to reach a conclusion. Our analysis of Turkey focused on factors in these broad areas. We studied political factors such as the political structure, the power of the military, and the progress of Turkey’s relations with the EU. We studied economic factors such as inflation, privatization and infrastructure. Finally, we analyzed social factors such as Turkey’s ability to manage conflict with Islamic groups as well as its unofficially recognized Kurdish minority. The factors that we chose to study and present in this report are those that will have the primary impact on Turkey’s investment prospects going forward. These factors reflect Turkey’s ability to manage economic and social development in the future, and the degree to which an investor can expect stability, certainty, and consistency.
A good bet going forward... After analyzing these variables, we conclude that at the present time, Turkey’s investment climate offers high expected returns with a reduced risk profile than at previous times in its history. Politically, Turkey is likely to experience a smooth transition to a more popular democratic form. Economically, the likelihood of lower inflation and structural reform will lead towards an increasingly market-based economy. Finally, Turkey’s social factors are, for the moment, “quiet”. The unique combination of these factors leads us to conclude that Turkey represents a good investment bet going forward.

Political Factors


Throughout the last decade, Turkey’s political instability has led to ineffective governance of the country. On three separate occasions the military has stepped in to “rescue” the country from political chaos, thus relieving politicians of the responsibility of their actions. In the past year, the military has relinquished some power, political cooperation has improved, and the EU has emerged in as the new disciplinarian.



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