Newsletters
It is said that just before Sultan Mehmed II’s siege of Istanbul, the Byzantines were preoccupied with debating the gender of angels. Similarly, Türkiye has been debating the equilibrium exchange rate for months.
Indeed, the argument about the exchange rate centers on whether the Turkish lira is overvalued. This approach assumes that the exchange rate was at its “balanced” value on a certain prior date. For example, if you think the Turkish lira was at a balanced value in 2023, it is now 20-30% overvalued. If you think it was at a balanced value in 1996, there is almost no overvaluation.
Who knows which date is a better reference point for the approximation to the balanced value? Harry S. Truman, frustrated by his advisers who repeatedly told him, “on the one hand … but on the other hand…,” famously said, “Bring me a one-handed economist.”
Theoretically, no date is more "optimal" than any other when calculating the balanced exchange rate.
The debate over overvaluation really stems from the weakening competitiveness of Türkiye’s manufacturing industry. Data recently released by the Istanbul Chamber of Industry on the top 500 industrial companies shows that running a profitable manufacturing business in Türkiye has become the exception. Most manufacturing companies are now operating at a loss.
How did we end up here? Mostly, Turkish manufacturers produce mid- or low-tech products integrated into the broader supply chains of major original equipment manufacturers (OEMs)—whether in consumer durables, automotive, or textiles.
While the emerging defense industry generates higher value added, its scale remains modest. Without incorporating dual-use applications into its production, the defense sector's growth will remain limited to contributing to Türkiye’s aggregate export volume.
Deindustrialization is a far broader and more complex phenomenon than what we see in Türkiye today. In fact, one could argue that Türkiye has managed to keep a larger share of its manufacturing base intact compared to peers at similar income levels.
Ultimately, the exchange-rate debate matters only because it distracts from the far more critical question: what Türkiye should be manufacturing and exporting in the first place.
How do deindustrializing economies survive? Generally, they diversify into high-value-added service exports. The key phrase here is "high value added." I am not talking about tourism or logistics, but rather professional services like engineering, healthcare, and manufacturing-adjacent sectors such as marketing and finance.
Several Turkish companies are already excelling in high-value services. Consider two examples.
The first is Medikal Point, a hospital group based in Izmir. They bring patients from Africa to Türkiye for treatments. Not for hair transplants, as is the case for many medical tourism centers in Türkiye, but for serious health issues like oncology or orthopedics.
Many common medical conditions are only diagnosed in Africa, but they often can't be treated there because the doctors capable of handling these cases prefer to emigrate to countries like France.
As a result, several African governments allocate public funds to send patients abroad for treatment. A Turkish entrepreneur realized that the cost structure and quality of medical services align well with these needs.
Another example is Karpowership. Its model is simple to describe, but hard to execute. Karpowership turns ships into floating power plants and then takes them to countries with urgent energy needs.
The need may stem from rapidly growing demand, weak grid infrastructure, remote regions, or the need for baseload capacity as renewables become a larger part of the system.
Building a traditional power plant requires a complex combination of financing, engineering expertise, and institutional trust—resources that developing countries often struggle to assemble simultaneously. For Karpowership, however, these barriers are far less restrictive, provided there is an accessible coastline or riverbank nearby. For instance, Karpowership’s vessels have successfully operated along the Congo River.
The strength of Karpowership’s model lies not solely in the technology. It is the balance-sheet risk taken before the demand becomes visible. The ships are built—mostly in shipyards in Izmit—and kept ready before the emergency fully arrives. That creates agility. And for Karpowership, agility becomes a moat.
Turkish entrepreneurs have one rare advantage: they know how to operate when the environment is difficult, unstable, and strange. They learned it at home. Türkiye has been an excellent training ground for uncertainty: currency shocks, regulatory shifts, geopolitical pressure, supply bottlenecks, and so on.
Why are there so few companies like Medikal Point and Karpowership in Türkiye?
Historically, state support has focused almost exclusively on goods that are "made" domestically. "Made," in this context, implicitly means "manufactured." Yet services are just as exportable as manufactured goods, and often carry a stronger competitive advantage.
At the same time, no manufacturer can predict what the exchange rate will be three or five years from now, even though that rate will define their competitive standing.
The government of Türkiye does not direct its business community to higher value-added activities. However, Turkish businesses need guidance and strategy. Strategy goes beyond economic policymaking. It is a holistic government endeavor.
When South Korea shifted its focus from exporting television sets to exporting cultural powerhouses like K-pop, it did so through a concerted, government-led strategy. By contrast, when Türkiye runs national branding campaigns, we still rely on images of the geological formations in Cappadocia. We rarely highlight the agility, resilience, and problem-solving drive of Turkish entrepreneurs.
The countries that succeed over the next decade will not be those stubbornly defending yesterday’s manufacturing industries, but those that discover exportable capabilities forged in environments of uncertainty.
The Byzantines debated the gender of angels seven centuries ago. If we remain locked in this mindset, we may well spend the next 700 years endlessly debating the equilibrium value of the exchange rate.
Set as preferred source
Set as preferred source
5 min read
