Osman Orsal / Courtesy Reuters Ottoman of the people: an Erdogan election poster, Istanbul, June 2011

Six Markets to Watch: Turkey

How Erdogan Did It -- and Could Blow It

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For much of last year, Turkey’s economy seemed almost on top of the world. In May, as huge construction projects moved ahead, Ankara paid off its remaining debt to the International Monetary Fund, ending what seemed to many Turks a long history of humiliation. The country received an encouraging investment-grade rating, and foreign funds poured in like never before.

In a flurry of appearances that month, Prime Minister Recep Tayyip Erdogan feted record-low interest rates, a slide in the unemployment rate from 15 percent to nine percent since 2009, and, above all, the growth that Turkey has enjoyed “due to reforms carried out over the past ten years.” He underlined his point -- and his driving ambition -- on an exuberant visit to Washington. Addressing the U.S. Chamber of Commerce, he noted that when his Islamist-rooted Justice and Development Party (AKP) came to power in 2002, at least 20 other economies were bigger than Turkey’s in terms of dollar output. “Now, we are 17th,” he exulted, “and in due course, we are going to be among the ten largest economies.”

The Turkish economy has indeed come a long way during Erdogan’s decade in office, propelling Ankara’s ascent to greater global prominence. In the late 1990s, Turkey was running 90 percent inflation and attracting almost no foreign investment. As recently as 2002, Turkey was using up almost 90 percent of its tax revenues to pay the interest on its debt. Today, these problems have all but disappeared.

But the optimism of May has

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