Modern Turkey is a free market economy oriented to Western markets. While the private sector continues to be the country's powerful engine of rapid economic growth, the state has a significant involvement in essential sectors such as communication, transport, and banking. Modern industry and commerce play the majority role in the economy, although traditional village agriculture and crafts are still nurtured.
By the end of World War I, the long, drawn-out collapse of the Ottoman Empire was complete. Having lost the war, Turkey was not left with much in the way of an economy. The few factories that remained were in foreign hands, agricultural output had dropped significantly, and, with the loss of the Ottoman territories, many traditional markets disappeared. The country's technology was out-dated and there was a shortage of skilled labor. The several years of struggle for independence following World War I offered little opportunity for recovery.
With the establishment of the republic in 1923, the government was faced with the formidable task of rebuilding the country's economy. Initially, the focus was on returning agricultural production to pre-war levels while building a transport infrastructure , particularly railroads. Meanwhile, steady encouragement of private enterprise was evident in various government policies and measures. The economy exhibited impressive growth levels until 1930, when the Great Depression caused the collapse of external markets for Turkey's agricultural products. This prompted the state to take a more active role in the economy, adopting a policy of etatism (an economic doctrine where individual enterprise retains its fundamental role in the economy, but active government intervention is considered necessary. It applies particularly to basic industries and public services).
The economic role of the state continued until the early 1980s, when Turkey's policy makers embarked on a new course of liberalization , abandoning protection-ist policies and initiating several reforms aimed at opening up the Turkish economy to foreign trade and investment. These new policies brought an annual growth rate averaging 5 percent over the last 2 decades of the twentieth century, giving Turkey the highest growth rate of any OECD (Organisation for Economic Co-operation and Development) country. By 2001, Turkey was one of the 20 largest economies in the world.
The path to economic growth in Turkey, however, has not been smooth. Since the 1950s, the country has suffered serious disruption to its economy every 10 years. At times, this has been due to poor political leadership, at other times, the cause has been structural inadequacies and balance of payment problems. In 1994, the country faced one of its worst recessions , bringing an end to 13 straight years of growth, but the economy bounced back strongly over the next 3 years, growing by over 8 percent. In 1998, slowdown returned as a result of the Asian and Russian financial crises; in 1999, disaster struck in the form of 2 deadly earthquakes, measuring 7.4 and 7.2 on the Richter scale, which hit northwestern Turkey right in the middle of its industrial heartland. The World Bank estimated the economic loss at approximately US$10 billion, and Turkey suffered its worst contraction since World War II. That the country has survived this miserable period is seen as a positive sign for its economic future. A larger problem is that of persistent inflation , which has been over 60 percent annually for 5 years, and remained in the double digits in 2001. The expectation of inflation has become a way of life in Turkey, bringing an inertia that has made it extremely difficult to tackle the situation.
Despite these problems, several factors have allowed Turkey to remain attractive to foreign investors. A population of 64 million with significant purchasing power represents a big and fast-growing market, with strong potential for further development. Also, Turkey lies in the middle of the rich oil-producing area of the Caspian Sea and the consumer markets in Europe, while its strategic geopolitical position at the crossroads of Europe, Asia, and the Middle East makes it a prime gateway. In addition, Turkey has close relations with the Central Asian Republics, forged by ethnic and linguistic ties, and is the leading investor in many of these countries. Last, but certainly not least, Turkey entered a customs union agreement with the European Union (EU) in 1996, thus enabling the free flow of goods to and from other European markets. All these factors make Turkey an attractive destination for trade as well as for cost-effective export industries.
Turkey's economic profile is multi-dimensional in nature. Tourism is a significant economic sector, while textiles and clothing are the most important manufacturing industries, supplying the largest percentage of goods for export. Other important industries include iron, steel, cement, chemicals, and the automotive industry. The Turkish private sector is dominated by a number of large holding companies , whose senior management is controlled by prominent families. The best known and strongest of these are the Sabanci Holding and Koc Holding companies, both of which have a significant presence in most sectors of the economy. In order to limit outside interference in company management, most large businesses only float a small portion of company shares in the public market.