There is more than one way to witness Turkey's economic metamorphosis. You can see it, easily enough, in Istanbul's wealthy center, where Ferraris cruise the sea road, neighborhoods gentrify at astonishing rates, housing prices are soaring, and tourists pack the streets. Or you can head to the pleasant residential neighborhood of Sütlüce, where middle-class families play in lush parks along the waters of the Golden Horn, traffic hums through newly constructed tunnels, and silver apartment buildings glint in the sun. Sütlüce is a few miles from where Turkey's Prime Minister, Recep Tayyip Erdoğan, grew up and is home to the grand Istanbul headquarters of the ruling Justice and Development Party. The formerly rough-and-tumble neighborhood's transformation mirrors that of its favorite son, a poor, tough, soccer-playing kid who has become one of the most powerful leaders in Turkish history. Though many of Erdoğan's constituents may have once supported him because of his devotion to conservative Islam, they're now more enamored of all those inviting parks and smooth roads. Erdoğan's Turkey is booming.
On June 12, the Turkish Prime Minister won a third term in office with 50 percent of the vote—a historic win for a formerly Islamist political party in a secular Muslim country. In declaring his victory from a balcony at the party's Ankara headquarters, Erdoğan said: "Today, freedom, peace, justice, and stability, as much as democracy, have won." Turks disenchanted with Erdoğan's heavy-handed style would disagree; some fear that he has acquired too much power and that democratic reform languished during his last term. As Turkey's economic clout has grown, so has its confidence on the world stage, which has caused friction with the West. Even as it pursues membership in the EU, Ankara has developed closer ties with regimes in Iran and Syria. The opening to Damascus, in particular, now threatens to backfire on Erdoğan, as the Syrian regime's crackdown against the opposition has sent thousands of refugees fleeing to Turkey's borders.
Perhaps more than anything, voters were driven by fear of going back to the old Turkey, a place of abysmal public services, crumbling roads, unstable banks, an exclusive clique of industrial barons, rampant inflation, and six zeros on the currency.
By Western standards, many parts of Turkey remain poor. Much of Anatolia, the rural eastern region, bears no resemblance to the glitter of Istanbul and the western coast. Still, Turkey's economic expansion has brought the prospect of a First World future closer than ever. In the last decade, Turkey, a country of 80 million people, has become the 17th largest economy in the world. Since 2003 its gross domestic product has more than doubled from $304 billion in 2003 to $734 billion in 2010. Exports have more than tripled from $31 billion in 2001 to almost $114 billion last year. According to the International Monetary Fund, Turkey's economy grew by 8.9 percent in 2010.
When the Justice and Development Party, known as the AK Party, came to power in 2002, some political observers expressed concern that it would impose its conservative religious ideology on a proudly secular nation. Instead, the ideology the AKP proved to be most devoted to was capitalism. Erdoğan's political success has been built on promoting and cultivating a new business elite—made up of both secular and religious Turks—which has, in turn, driven the society's modernization. He managed the delicate political trick of pleasing these elites while still looking like a populist.
To the rest of the Middle East Turkey has long been a model for how Islam and democracy can peacefully coexist. Perhaps even more impressively, it's also demonstrating how a Muslim country in a turbulent neighborhood can achieve genuine prosperity. The question now is how long it will last.
Erdoğan was lucky to inherit a brilliant economic blueprint from Kemal Derviş, who shepherded Turkey through a devastating financial crisis in 2001 in his role as Treasury Minister, when the country received a $45 billion bailout from the IMF. The AK Party "has held on to an economic design that Kemal Derviş put into place," says Sinan Ülgen of EDAM, the Center for Economics and Foreign Policy Studies. "What it did led to a radical overhaul of the Turkish governance system."
At the time of the crisis, Turkey was relying on foreign investment and was drowning in debt. Inflation fluctuated between 40 and 60 percent. Then there were the banks, which had lent recklessly. "It was in many ways a banking crisis," says Derviş, who went on to become the head of the United Nations Development Programme and is now Director of Global Economy and Development at the Brookings Institution in Washington. "Even entities that had decent balance sheets suddenly looked insolvent. That led to a ripple effect through banking and corporate sectors."
Under Derviş's guidance, Turkey spent the equivalent of 40 percent of the country's GDP to recapitalize its banks. Nineteen banks out of about 80 were nationalized. The Turkish lira was devalued. By establishing a more competitive exchange rate, Derviş's policies created the conditions for an export boom, which began in 2002—at just the time, Derviş says, that "the world economy was beginning a long period of growth." By Erdoğan's election in 2002, the economy had stabilized.
As a former Islamist, Erdoğan remained on shaky ground with Turkey's then-powerful secularist military. Many Turks also feared the new Prime Minister would turn their country into a repressive religious state. But as a former mayor of Istanbul with a good record of cleaning up the city, Erdoğan knew that investing in public works projects and keeping the economy stable would appeal to all Turks. Erdoğan also stuck to Derviş's reforms and continued a policy of privatization. Above all, Erdoğan recognized that much of the country's entrepreneurial potential remained unrealized. For decades, Turkey's economy, like its politics, had been ruled by secularist elites. Under Erdoğan, a new generation of formerly poor Turks—many of them religious—known as the Anatolian Tigers, began to thrive.
"In the past, government focused on the large-size businesspeople," says Rizanur Meral of the Confederation of Businessmen and Industrialists of Turkey, an organization from the heartland founded in 2005. Erdoğan's capitalist army consists of conservative, hard-working men like Meral, who hails from eastern Turkey. They form close-knit business and religious organizations that bind them to the united purpose of moneymaking and charity. "People didn't have the courage to go to Ankara [to make political connections]. And inflation was so high that mid-size people couldn't access capital," Meral says. "Then the government became open to every level of businesspeople."
Ismail Kısacık is one of them. The president of LC Waikiki Taha Holding, a clothing company that is now the biggest retailer in Turkey, Kısacık is soft-spoken, careful, and polite. Sitting in his spare office in an Istanbul neighborhood far from the city center, Kısacık describes a career arc resembling those of many Turkish entrepreneurs from the countryside. His father had been a tailor from the central Anatolian city of Malatya. Kısacık, an observant Muslim, went to college in Istanbul, then worked for an established old-guard construction company before venturing out on his own.
Today, his daughter attends the best private high school in Istanbul, and his son is in high school in the U.S. Turks like Kısacık embody the Turkish up-by-the-bootstraps national narrative, much like Erdoğan himself. "Turkey is changing a lot and especially for people from Anatolia," he says. "I can say I am one of them. My first priority is my family and my businesses. I only concentrate on that." Kısacık's company donated $20 million—10 percent of its profits—to charity last year.
These days, Kısacık travels frequently to his textile plants in Egypt. He had just returned from Alexandria, where he checked on the status of his factory amid the Egyptian revolution. "I am very comfortable because I am feeling my government support there," he says. "For example, today President [Abdullah] Gül went to Egypt, and two to three days ago they contacted all the investors in Egypt and asked whether or not we had problems. So we are feeling very safe, because we know the government will be together with us."
The Erdoğan government has been relentless in its drive to promote Turkish industries around the world. The AK Party has made a habit of visiting foreign countries, from Russia to Ghana to Indonesia, accompanied by hundreds of businessmen and occasionally a couple of businesswomen. Kısacık says the trips were almost like a coming-out party for people from the countryside who'd been shut out of corporate circles in Istanbul and Ankara. "The plane is very interesting because you are meeting lots of businessmen on a four or five days' journey," he says. "The President and Prime Minister are talking one by one with all businessmen, and asking questions about problems in those countries, then they will talk with the leadership of the country. They're working like businessmen."
In April, 60 Turkish businessmen flew with their foreign trade minister, Zafer Çaĝlayan, to trade conferences in Delhi and Mumbai. Standing before Indian executives and government officials in the floral-patterned conference room of the New Delhi Oberoi Hotel, Çaĝlayan demanded to know why the Indians hadn't been buying more Turkish products.
"Turkey's exports to India are too small," he said. "You're buying products from other countries that we also sell. … You should check out the prices in Turkey. Don't be afraid to invest in Turkey."
Turkey's emphasis on trade reflects broader strategic goals. For the past five years, the AK Party's foreign policy has been premised on the notion of having "zero problems with neighbors." It's a departure for a country that had long endured conflict on its restive borders—with Syria, Georgia, Armenia, Iran, and Iraq—and which had run a mostly statist, closed economy until the 1980s. That was when Turkey began liberalizing its economy and aggressively pushing trade with Central Asia and the Middle East. Under Erdoğan, Turkey has gone even further, eliminating visa requirements to make the country more attractive to foreigners.
"In Africa, I think it's more that in history we never did anything bad to them," Kısacık says. "In some countries they even have relatives that were Turkish, and this gives us an advantage. China might scare them because it's so big, and from Europe they have bad experiences. With Turkey they haven't had any problems." He adds: "Our prices are much better than American and European prices, and our quality is better than China, so we are between both."
Erdoğan's export-focused approach has been tested during the Arab Spring, which has disrupted billions of dollars of business for the Turks. The Libyan civil war, for instance, has led to huge losses for Turkish construction companies, some of which were building universities and hotels for the government of Muammar Qaddafi. Europe remains the biggest market for Turkish products, accounting for 50 percent of the country's exports. Most go to Germany, France, and Britain, where the Turks are among the leading producers of cars, televisions, and home appliances. Turkey is the world's largest cement exporter and its construction sector is second to China's. That's because Turkish companies have a no-frills, formality-be-damned mentality that allows them to get projects done faster than their European counterparts, say many Turkish businessmen. "All we need is this," says Mustafa Mente of the Turkish Exporters' Assembly, pointing to his cell phone.
Disappointing growth in Europe, however, has forced Turkish companies to find new consumers. The Turks are looking farther south and east than they've ever done—to Africa and large markets such as Indonesia, China, and India. "The global financial crisis woke us up to the fact," Çaĝlayan told the Indians, "that we need to do business in every corner of the world."
To court the East, the Turks have a fairly elaborate shtick. Their promotional video, which the delegation played at the conference in India, boasted not only of the country's economic credentials, but also of Turkey's loveliest historic sites and its most successful people. "When I consider when I was really young, I can say Turkey was a really different country," says the head of the Turkish Exporters' Assembly, Tahsin Öztiryaki. "Same for India. We are living in the same psychology. We are raising our voices around the world."
Executives from Turkey's biggest industries—construction, textiles, iron, steel, and agriculture—made the trip to India. Some came from massive holding companies, live in expensive Istanbul neighborhoods, and speak several languages; others hailed from mid-size Anatolian cities, speak little English, and had yet to penetrate the Indian market at all. They needed their government to shepherd them in.
"The AKP think like businessmen," says Erdinç Ulusoy of STFA Construction, one of Turkey's oldest companies. "It comes from the background of Erdoğan, who was mayor of Istanbul and had to develop the city. They are turning the entire country into a construction site. They have a vision for the next 10 to 15 years."
Now that he has a sweeping mandate, Erdoğan faces a serious challenge: how to manage an economy that's in danger of overheating. The country still imports much more than it exports, leading to an ominous deficit of 8 percent of GDP. And Turkey still relies heavily on foreign capital, which has been fueling the country's boom. "If capital flows dry up, then the economy will crash for sure," says Emre Deliveli, an economist and contributor to Roubini Global Economics, a market strategy firm.
For all its success, the Turkish economy remains a work in progress. Deliveli points out that unemployment is around 10.8 percent, youth joblessness is among the highest in the world, and female participation in the labor force, by the standards of the developed world, remains low. During the run-up to the election, Erdoğan faced harsh criticism from the opposition for promoting policies that largely benefit the elite, while the lives of the poor and uneducated have barely improved. Throughout his campaign, which was called "Target 2023" in reference to the centenary of the Turkish republic, Erdoğan vowed to make Turkey one of the world's largest economies. He outlined grandiose development plans, including new cities on the eastern and western sides of Istanbul, a metropolis already bursting with 15 million people. In Zaman, a pro-Erdoğan newspaper, the columnist Ali Bulaç wrote skeptically of the 2023 plan: "Turkey may attain the target of boosting its exports to $500 billion and becoming one of the world's 10 largest economies, but this will not save it from being a country of silently poor and destitute people."
It's easy to lose sight of such things when Western bankers are making so much noise about Turkey as a great investment opportunity. "I attended this conference on Friday, and the Finance Minister was saying, 'Ask any investor who came to Turkey in 2002. You won't be able to find one person who regrets his decision,' " Deliveli says. "From an investor's or hedge fund's point of view, it's been great. But for ordinary people?"
"The average guy is better off than 10 years ago," Deliveli continues. "Middle income people have increased their share. But the poor have not."
Looking at ambitious Turkish companies with executives jetting off to the financial capitals of the world, or at the center of Istanbul, where a trendy restaurant, cafe, or shop seems to open every day, or even at the peripheral neighborhoods popping with shopping centers intent on turning head-scarf girls into lifetime shoppers, Turkey seems like the ultimate Middle Eastern consumerist success story: a Muslim country that resembles the West. But those very trappings of wealth, which have brought Turkey and Erdoğan so much influence in the region could also herald trouble. Harvard economist Dani Rodrik, a native Turk, says Turkey's growth is unsustainable. "The fundamental issue in Turkey is an imbalance in saving and investment, and you cannot change that simply by monetary policy. You need a much tighter fiscal policy to lead the way to an increase in overall saving. The time to tighten fiscal policy is precisely when the economy is booming."
The Prime Minister may not want to risk an economic slowdown while he's pushing through his most ambitious changes yet, rewriting the constitution to strengthen his grip on power and changing Turkey's parliamentary system to a presidential one. Last winter, concerns about the economy led the Turkish central bank to embark on an experiment: It cut interest rates to discourage foreign inflows of money and raised the reserve requirements of banks feeding the consumer credit explosion. Analysts from foreign banks called the move unorthodox. And yet money is still pouring into Turkey, and domestic demand continues to rise. The danger for Turkey and Erdoğan is that the current boom may lull the government into complacency and encourage it to avoid the structural reforms—like enlarging the tax base, reducing Turkey's reliance on foreign energy, increasing labor productivity—Turkey will need to weather an economic slowdown when it inevitably comes. "Erdoğan has said 'I know this stuff better than everybody and I know that high inflation is the result of high interest rates,' " says Rodrik. "And you see that people around him cannot tell the truth. It's a spillover from his authoritarian style."
For now, that matters little to his admirers, who believe they live in an easier, cleaner, more beautiful country, led by a politician who cares about ordinary people. "I love Erdoğan so much. Before, the economy was very broken. Turkish politicians didn't do anything," says Şemsi Yilmaz, a retired pastry chef who lives across the Bosphorus from the AK Party headquarters in Sütlüce. "The AK Party made every place better." Nearby, a shiny, soaring apartment building and Carrefour shopping complex look odd beside decrepit illegal housing. "But, of course," he adds, "life in Turkey is still very hard."
Hansen is a Bloomberg Businessweek contributor.