A Foreign Devil Called Free Trade

Turkey seems to have everything it takes to become southeastern Europe's industrial powerhouse: cheap labor, business-friendly laws, and 60 million consumers at one of the world's most strategic crossroads. Ford, Fiat, Renault, Toyota, and General Motors have turned western Anatolia into a mini-Detroit, with Honda and Hyundai coming soon. And the startup of Turkey's free-trade pact with the European Union, scheduled for next month, should trigger billions of dollars of foreign investment in Turkish factories and infrastructure in the coming years.

That bright prospect could darken in a hurry, though, if the pro-Islamic Refah Party emerges as the country's biggest party in parliamentary elections set for Dec. 24. Most opinion polls predict Refah will finish first, with up to 30% of the vote. Even if that's not enough to enable Refah to form a governing coalition--and chances are it won't be--the party will nevertheless wield potent influence as the militant main opposition force in Parliament. Given Refah's surging strength and the anti-Western, protectionist policies it is pushing, that may be enough to spook foreign investors.

The risk is heightened by the hard landing that's expected for Turkey's economy in 1996, after this year's estimated 7% growth of gross national product. The post-election government will have to make politically painful cuts in public spending and raise interest rates, most analysts agree, to check inflation that's running at around 85%. Private investments, by Turks and foreigners, are needed to cushion the fall. "Reasonable growth" of 3% to 4% would help keep Turks happy, says Eli Koen, an analyst with Lehman Brothers Inc. in London. "But if private investors stay away, we expect economic growth to shrink even more, maybe to 1% or 2%, and the recession will hit people a lot harder."

Much depends on whether investors believe that Turkey is firmly anchored to the West. Those ties could become less certain as Refah rises. It wants to derail Turkey's 30-year drive toward eu membership, in which the free-trade pact, ratified by the European Parliament on Dec. 13, is a major step. Refah calls for scrapping the accord, which has been pushed by Prime Minister Tansu Ciller of the center-right True Path Party, unless Turkish companies and workers are protected against European competitors.

TONING DOWN. Refah rarely misses a chance to thumb its nose at the West, although party leaders have recently toned down talk of withdrawing from NATO, the International Monetary Fund, and the World Bank, long attacked as tools of Jews and the Christian West. But Refah's platform still calls for Turkey to lift the embargo on neighboring Iraq and withdraw support for American-led air cover that keeps Saddam Hussein's air force out of northern Iraq.

Refah Chairman Necmettin Erbakan, 72, has learned political pragmatism in a career that started in the 1960s. Thus, in a preelection move aimed at easing business concerns, Refah softened its call for a "Just Order." Gone are proposals to replace the Turkish lira with a vaguely defined "Islamic dinar" and to enforce the Islamic rule against charging interest. But many businesspeople are troubled by remaining planks, including new taxes on earnings from bonds and equities and a halt to the planned sell-off of some state-owned companies.

Most analysts say Refah lacks the public support it would need to challenge democracy and other Western-style institutions set up by Mustafa Kemal Ataturk in the 1920s. Refah musters much of its support by emphasizing conservative family values and populist economic slogans among the poor in the slums that ring Turkey's cities.

But what's likely to keep Refah out of power, for now, is the vow of other major parties not to join a Refah-led government. That dims Refah's prospects of finding a coalition partner to assemble a 276-seat majority in the 550-member Parliament. Observers expect President Suleyman Demiral to give Erbakan about two weeks to form a government before asking the runner-up party in the election to do so. In the end, a coalition led by one of the two biggest center-right parties, Ciller's True Path or Mesut Yilmaz' Motherland Party, is expected to take power.

Erbakan may not mind waiting for another chance. If he managed to form a governing coalition now, he would have to compromise Refah's agenda. But with the country's economy heading into trouble, it may be politically more profitable to oppose policies than to govern. Refah will try to exploit rising unemployment and economic hardship to swell its ranks, building strength over the next five years until the next parliamentary elections offer him the chance to form a single-party government. For investors, and Turkey's Western partners, that is an unsettling prospect.

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