GDP Research Paper Example

__ February 2015 (date)

Information about the Country (Turkey)

Turkey is strategically located at the crossroads of Asia, Europe and the Middle East. Nowadays, Turkey has a fast strong, growing and sound economy. At the same time, Turkey still has many issues that need attention. The account deficit is large, inflation is still significant, competitiveness is an issue, corruption, and what is most problematic, unemployment is rather high, namely in the south east and east, and among those first entering the labor market and women. The current growing fears about limits to free press and semi autocratic leadership are also a matter of concern. Turkey should overcome these issues in order to sustain long term healthy economic growth.
The economy of Turkey is growing and dynamic. It is a blend of modern industry, traditional agriculture and commerce. Around 30% of industry employees work in textiles. But textiles are not the main product for export. This industry has been overtaken by the quickly growing electronic and automotive sectors. Turkey also has a vivid innovation and science sector, though it lags behind many OECD states in this area. With quick rates of growth and an increasing and young population of more than 70 million, Turkey possesses the potential to become the largest European economy after Germany with the largest population if it should become a part of the European Union. Turkey is a member in the club G20 of important economies now, and it is on par with the BRIC club emerging giants. Some researchers suggest that within the next decade Turkey will grow more quickly than any other economy besides China or India.
Turkey’s economic growth has confronted many barriers over the recent decades. Since the 1950s, historically, the country has experienced serious complications to its economy almost every 10 years. In 1994, due to deterioration of macro-economic fundamentals and large public spending, the economy of the country faced one of its most significant recessions up to that time. However, the Turkish economy recovered over the next 3 years, growing by more than 8%. The slowdown returned in 1998 as a result of the Russian and Asian financial crises. In 1999, two earthquakes, measuring on the Richter scale 7.4 and 7.2, hit northwestern part of Turkey in the middle of its industrial region, making Turkey experience its worst contraction during some decades. Ten years ago the economy of Turkey was in turmoil once again. The banks of the country were approaching collapse and the inflation was very high. By 2000 the nation's currency collapsed, liquidation crises, the banks had to be rescued, public debt made up to 74% of GDP, and the IMF was asked for help for the 18th time. Since that time, the economy of Turkey has entered a structural reform and high growth era. A reform program, financial-sector privatization and supervision, caused significant economic increase with an annual growth rate of GDP of 6.8% between 2002 and 2008 in comparison with an annual average in the 1990s of 4%. The private sector increased significantly during recent years, but the country’s government still plays an important role in most important industries, such as transport, banking and communications. The rate of inflation fell to historic low one, reaching 6.4% in comparison with 75% in the 1990s. Significant budget management improvement was introduced, and government debt declined substantially from 76% of GDP (2001) to approximately 35% (2010).

As the levels of GDP in 2013 increased to USD 820 billion, up from USD 305 billion (2003), GDP per capita grew to USD 10,782, up from USD 4,565 in the mentioned period. The dynamics of GDP per capita and economic growth is available in Appendixes A and B correspondingly.
The Turkish economy’s visible improvements have also increased foreign trade, while exports approached USD 152 billion in 2013, up from USD 47 billion (2003). Similarly, revenues from tourism, which in 2003 were approximately USD 14 billion, in 2013 exceeded USD 32.3 billion.
Substantial improvements during such a short period of time have put Turkey as an exceptional emerging economy on the world economic scale, the 16th world largest economy and the 6th largest economy in comparison with the EU countries in 2013 according to figures of GDP (at PPP) (Invest.gov.tr).

Population and Labor

Turkey’s population makes 75.6 million, with 30% under the 14 years old. Over 76% of the Turkish population is urban areas’ inhabitants. The labor force quantity in Turkey is 26.8 million, out of which 24.3 million are working. Around 26.2% of the workforce is employed in agriculture; 19% works in the industrial sector. Children are required to complete 8 years of school and stay in school until the age of 14 years old. 98.17% of turkish population finishes primary school; 36% of those who finished primary school get higher or vocational education. The population growth is demonstrated in Appendix C.

Income Distribution and Labor Market

Although the economic growth is rapid, unemployment remains on the high level. In 2007 a historical low unemployment rate of 8.4% was recorded, and unemployment level increased to 14.8% during the world’s slow-down. According to Turkstat, the unemployment rate changed to 12% in August 2010. Employment rate in Turkey increasingly declined during the past two decades. In 2006 it was 46%, lower than the rate of all European Union countries and the drop from 57% in the 1980's. Another characteristic feature of labor market in Turkey is the low quality of the majority of its jobs, with around one-third of all working places in the informal sector. University graduates level of unemployment is also high (6.9%) (Nathanson and Brand).

Openness to Foreign Investments

The ruling Justice and Development Party (AKP) won a third term in 2011, a victory reaffirmed by the AKP win on municipal elections in March 2014. As a component of its election campaign, the Party has promoted heavily its goal to become a top ten world economy by 2023. In order to reach closer this goal, the Government of Turkey has elaborated specific approaches for 24 industrial sectors that included eight sectors of priority. It has also developed specific plans for physical infrastructure improvement, as well as a significant expansion of Turkey’s information technology, health, and education sectors, all of them are devoted to make Turkish organizations more competitive. The Government of Turkey recognizes that the local economy will not be enough to reach the above-mentioned goals and that the country will need to accept significant foreign direct investment (FDI). Turkey developed one of the most liberal legal conditions for FDI in the OECD. Turkey attracted $15.7 billion in FDI in 2011, although a substantial portion of this has been received from portfolio investment. These figures, however, are still far below the needed level, and the Government of Turkey is actively looking for more FDI. In order to attract more FDI, Turkey needs to grow export promotion and trade advocacy efforts, and also access to credit, especially for medium- and small- sized businesses involved in value-added services and goods. Turkey should also enforce more international trade rules, ensure the timely execution and transparency of judicial orders, increase cooperation on policy issues with foreign investors, and make policies promote sustainable, strong, and balanced increase. In accordance with World Investment Report 2013 of the United Nations Conference on Trade and Development (UNCTAD), increasing regional political uncertainty and subdued economic perspectives at the global level are decreasing foreign investors’ interest in the country. UNCTAD states a sharp outward investments increase with investment abroad by Turkey growing in 2012 by 73% to $4.1 billion.

Justification for Selecting Turkey

The company is going to invest in Turkey and start sales of its products: organic cosmetics and healthcare products. As the company already operates in Russia, China, Brazil and India, it has a significant experience in market entry activities and strategy. The Turkish market is in the process of active development; therefore it offers a lot of possibilities for new products. The products will be advertized under the existing brand of the parent company. The following mass media will be engaged: TV, radio stations and popular journals. I suppose, both expats and local employees can be engaged in the project. The parent organization will first establish a representative office in Turkey and later also a limited liability company.

Political Arena of Turkey

The Turkey’s political situation has improved recently as well. Politics of Turkey used to be highly volatile and unstable. Parties would appear and disappear quickly, politicians would be banned abruptly, and several times the army of the country interfered and removed the current government. But all this improved after the election in November 2002, when the one party government was formed, which was led by the Mr. Erdogan's mildly Islamist Justice and Development (AK) party. After more than eight years of Mr. Erdogan AK party’s rule, an array of impressive economic and political reforms was implemented. Also, Mr. Erdogan won a significant referendum that enables him to increase control of government over the judiciary system and army. The role that is played by Turkey's political stability in general Turkey's market improvement is very substantial. Yet, the referendum’s results have revealed that Turkey is still deeply divided. Mr. Erdogan is also intolerant of criticism and highly partisan. Press’s freedom in the recent years is not taken for granted. This was obvious in the government's relation to the country's largest media group (Dogan). After a several unfavorable articles, the group has become the object of unusually severe tax inspections. Since then, Turkish journalists know that it is not allowed to criticize the AK party. In the progress report (2009), the European Commission reprimanded the Turley’s government over this fact. The country has traditional ties to the Muslim and Arab world which have been getting stronger under the current government leadership. These ties deal with the domestic issues, for example, the ban of the wearing a veil removal in universities and state institutions, and to international issues such as Israel relations deteriorating. Turkey that was mostly ignored for many decades now has more significant regional presence, which has become favorable to economic growth of the country. In the past Turkey has relied mostly on exports to the Western Europe, especially Germany. The EU still remains Turkey's largest market, its share is decreasing, and exports to Iran and the Middle East has grown significantly. This has provided the country with the access to broader diversified markets and lowered its dependence on the European economic recovery.

Corruption and Ease of Doing Business

In Turkey corruption was widespread. According to the information of Transparency International's Corruption Perceptions Index that ranks around 200 countries by their perceived corruption levels, Turkey ranks on par with states such as Namibia and Malaysia, and below states such as Kuwait and South Africa. Turkey is also lacking significant deregulation and structural reform. In World Bank Doing Business report as of 2011, Turkey was ranked 65 of 183 countries (60 in 2010). Additionally, it is below the average of OECD on some indicators, such as procedures, time and cost. The OECD in its last report states that “higher productivity and employment growth will not be achieved without a regulatory reform”.
The scandal on corruption that became popular in December, 2013 implicated many of Turkish high level officials and members of their families. This led to large reorganization of the judiciary and the police, which critics supposed was an attempt of the government to stop the investigations on corruption. The Prime Ministry is very insistant about its active struggle against so called “parallel state”, an groups operation affiliated with former Erdogan ally became opponent Fethullah Gulen, that according to the Prime Minister has infiltrated the government of Turkey and trying to control it. The ensuing crackdown of government on its opponents caused some controversial decisions, including an internet controls tightening that led to the social media platforms YouTube and Twitter blocking in 2014. The legal system is still susceptible to external influence and biased towards outsiders to certain degree.

Cosmetics and Healthcare Products Market

Sometimes governments of Turkey’s policies complicate the country’s ability to fully realize its potential of development and the cosmetics and pharmaceuticals field is an example of it. The reform of health sector in 2006 contributed to a much larger market of healthcare products, dominated by state health-care system of Turkey. Together with Turkey’s growing and young population, it has made Turkey an attractive healthcare products investment market. There are three significant issues, however, which continue to inhibit healthcare products firms’ investment and trade in Turkey: an exchange rate/pricing issue, the threat of new offset civilian policies, and significant delays in receiving GMP (Good Manufacturing Practices) examination approvals from the Turkish Ministry of Health (MOH). The Turkish Ministry of Labor and Social Security (MLSS) and the MOH play important roles in pricing of pharmaceuticals and healthcare products. The MOH establishes the maximum price that can exist for such products, and the MLSS agrees pharmaceutical bulk prices for products that are spread through national healthcare system of Turkey. The MOH negotiated a pharmaceutical budget in 2009 that established substantial discounts on purchases of pharmaceutical products distributed through national health care system of Turkey within the condition of a gradual increase in spending for pharmaceuticals each year through 2012. However, in 2010 and 2011, MLSS and MOH noted shortfalls of budget and asked for larger discounts from organizations, which they were obliged to grant given the dominant role of Turkish Government’s in pharmaceutical spending.

Regulatory System’s Transparency

The government of Turley has adopted laws and policies that, in general, should foster transparency and competition. However, foreign organizations in some sectors claim that laws and regulations are sometimes applied not in fair and transparent manner. Turkey is the WTO Government Procurement Agreement (GPA). Legislation of Turkey generally requires transparent and competitive bidding practices in the public sector. A Public Procurement board is intended to hold public tenders, and there are minimum thresholds of bidding under which international companies are not allowed to bid on public tenders. The legislation gives preference to Turkish citizens, and legal entities established by them, local bidders, as well as to corporate organizations established under law of Turkey by foreign firms. The law on public procurement has been changed eight times since its enforcement and has been assessed by the European Union as not the one in accordance with the EU acquis communautaire. The government amended the regulations again in February 2014 to lay out a procedure to possibly implement civilian offsets in contracts of government procurement, which would be to the contrary of the WTO GPA.
In general, health, labor and safety policies and laws do not impede or distort investment, although legal limitations on employees discharging may provide a disincentive to labor-intensive activity in the market.

Foreign Portfolio Investment and Foreign Direct Investment Statistics

According to Turkey Central Bank’s data, FDI of $19.5 billion (2008) plummeted by 57% to $8.4 billion in 2009 due mostly to the global financial crisis negative impact on worldwide investment flows. FDI inflows started to rebound in 2010 approaching $16.04 billion (2011). FDI dropped to $12.8 billion in 2013 as world investors pulled back from numerous emerging economies. EU countries made 52% of FDI Turkey’s capital inflow in 2013, in comparison with to 85.8% in 2011. A significant growth of FDI inflows from Gulf and Asian countries can be noticed in 2013 compared to previous years. Companies from the United States accounted for FDI 3.4%, compared to 5.5% in 2011. According to the Turkey’s Central Bank, in 2013 the breakdown of FDI to manufacturing industry of Turkey was:

Food products, tobacco and beverages 3.35%

Optical and electrical equipment 5.9%
Chemicals 2.6%
Textiles 0.57%
Equipment for transport 0.73%
Other 6.4% (Appendix C) ('Department Of State: 2014 Investment Climate Statement').

Fact about the Healthcare Products and Cosmetics Sector

The production of the sector increased by 19% at a CAGR during 2005-2011.
According to Report of EMI’s for Turkey’s Sector of Chemicals (2013), spending on cosmetics in Turkey per capita is USD 36, compared to USD 258 in Denmark, USD 235 in Norway and USD 231 in Austria. Therefore, there are significant room for growth and opportunities for this economic sector in Turkey.
The Turkish cosmetics and detergent industry has been increasing at a relatively quick tempo. The 2009 recession impact proved to be temporary as the industry figures recovered approaching USD 4 billion in 2010 and even getting higher than its pre-crisis levels.
In 2011 the sector reached a USD 3.9 billion value of production. The CAGR for the 2005-2011 six-year periods equates to 12%.
The detergents’ production volume in 2011 made 1.4 million tonnes.
According to information of the Ministry of Economy, there were approximately 12,000 people employed in the industry, indirectly and directly, in the whole country in 2012.

Exports and Imports of the Healthcare Products

Turkish detergent, personal care and cosmetics exports reached in 2012 with a CAGR of 11% USD 1.47 billion, while the export markets number made 156. These were the result of recent technological improvements and modernization of production, distribution and management. The industry’s top export markets include Russia (9%), Iraq (15%), Iran (5%) and Azerbaijan (6%). Other large export markets include largely of Middle Eastern and Eastern European countries.
Import figures in 2012 reached USD 1.83 billion, slightly reducing compared to the value of previous year. Import figures have been increasing much similar to exports and have grown with a CAGR of 8% over the years. Top countries of import include France (13%), Germany (20%), Ireland (6.6%), Poland (7%) and Italy (6.6%).
According to information of the Ministry of Economy, there were about 750 organizations in the industry in 2012 with the majority of manufacturers situated in Istanbul, the largest trade and production center in Turkey. Most of the other producers were situated in Kocaeli, Izmir, Mersin, Gaziantep and Adana.

Major market players: Unilever, Henkel, P&G and Hayat Kimya Sanayi ('The Chemicals Industry In Turkey').

Hair care. Hair care in 2003 accounted for 32% of total sales value and remained the largest contributor to toiletries and cosmetics over the given period. Shampoo was responsible for the moat of sales. But styling agents experienced strong volume growth with the most dynamic performance and was the only hair care type not to witness a value sales decline.
Sun care. Most dynamic sun care sales due to increasing tourists’ number reached US$23.1 million in 2003 showing positive growth both in volume and value terms over 2002. The increase was attributed to the increasing consumers’ consciousness in Turkey about the sun protection importance as well as to the growing tourists’ number who visit Turkey. The low sales base also helped to the positive rates of growth.
Supermarkets dominate. Supermarkets were the main outlets of retail over the review period due to their well-spread networks throughout Turkey, wide choice of products, credit cards acceptance, and most importantly the promotions and low prices they offered. The supermarkets’ share significantly increased over the review period together with the growing number of the outlets.

Conclusion

As we can conclude from the above information, Turkey is a developing economy and emerging market. I have chosen Turkey for investing, as I believe its current economic conditions offer many possibilities for new products. The above-mentioned material provides a lot of reasons for it, such as: increasing income of citizens, growing quantity of working women, acquiring of the western lifestyle, prevalence of young population, availability of supermarkets chains, and etc.

Main advantages of Turkey include:

institutionalized economy influenced by FDI of USD 135 billion in the past 10 years;
significant economic growth over the past decade with an average annual GDP growth of 5.1% (2003-2013);
up from USD 305 billion in 2003, GDP made USD 820 billion in 2013;
sound policies of economy with a favorable fiscal discipline;
strong structure of financial sector resilient to the world financial crisis (Invest.gov.tr).
Expected positive increase of the sector during forecast period. Euromonitor forecasts that toiletries and cosmetics will reach almost US$3.3 billion of sales by 2008, showing constant growth of value at the level of 11.2% over 2003. In line with the economy’s recovery and the increasing number of young population, toiletries and cosmetics will show positive growth over the future period in contrast to the decreases during the previous period. Main factors will be as follows: the higher quantity of working women, increased incomes, and the increasing young people’s interest in Western lifestyles which may encourage them to consume more toiletry products and cosmetics. Moreover, significant competition amongst both multinational and local companies will cause larger investment in promotion, advertising and development of new product ('THE COSMETICS SECTOR IN TURKEY').
Turkey does not have an ideal economic environment, but shows clear trends for improvement and growth. This ensures favorable market conditions for entering with a new product/brand.

Works Cited

'Department Of State: 2014 Investment Climate Statement'. U.S. Department of State (2014): 1-23. Web. 10 Feb. 2015.
FOCUS ECONOMICS,. 'Turkey Economic Outlook'. N.p., 2015. Web. 11 Feb. 2015.
Invest.gov.tr,. 'Economic Outlook - Invest In Turkey'. Web. 10 Feb. 2015.
Nathanson, Roby, and Gilad Brand. 'Economic Overview Of Turkey'. Israeli European Policy Network (2011): 1-11. Web. 10 Feb. 2015.
'The Chemicals Industry In Turkey'. Investment Support and Promotion Agency of Turkey (2014): 29-32. Web. 10 Feb. 2015.
'THE COSMETICS SECTOR IN TURKEY'. Istituto nazionale per il Commercio Estero (2008): 4. Web. 10 Feb. 2015.
Appendix A
GDP per capita (USD)
Appendix B
Economic Growth (GDP, annual variation in %)
Appendix C
Population (million)
Appendix D
FDI to Turkey in 2013 (by industry), %