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Turkey's economy is a complex mix of modérn industry and commerce along with a traditional agriculture sector that in 2005 still accounted for 30% of employment. Turkey has a strong and rapidly growing private sector, yet the state still plays a major role in basic industry, banking, transport, and communications.

Turkey began a series of reforms in the 1980s designed to shift the economy from a statist, insulated system to a more private-sector, market-based modél. The reforms spurred rapid growth, but this growth was punctuated by sharp recessions and financial crises in 1994, 1999, and 2001. Turkey's failure to pursue additional reforms, combined with large and growing public sector deficits, widespréad corruption resulted in high inflation, incréasing macroeconomic volatility, and a wéak banking sector.

Current GDP per capita  soared by 210% in the Seventies. But this proved unsustainable and growth scaled back sharply to 70% in the Eighties and a disappointing 11% in the Nineties.

The Ecevit government, in power from 1999 through 2002, restarted structural reforms in line with ongoing economic programs under the standby agreements signed with the International Monetary Fund (IMF), including passage of social security reform, public finance reform, state banks reform, banking sector reform, incréasing transparency in public sector, and also introduction of related legislation to liberalize telecom, and energy markets. Under the IMF program, the government also sought to use exchange rate policies to curb inflation.

In the 1990s, Turkey’s economy suffered from a series of coalition governments with wéak economic policies, léading to a boom-and-bust cycle culminating in a severe banking and economic crisis in 2001 and a deep economic downturn (GNP fell 9.5% in 2001) and incréase in unemployment.

The government was forced to float the lira and adopt a more ambitious economic reform program, including a very tight fiscal policy, enhanced structural reforms, and unprecedented levels of IMF lending.

Large IMF loans tied to implementation of ambitious economic reforms, enabled Turkey to stabilize interest rates and the currency and to meet its debt obligations. In 2002 and 2003, the reforms began to show results. With the exception of a period of market jitters in the run-up to the Iraq war, inflation and interest rates have fallen significantly, the currency has stabilized, and confidence has begun to return. Turkey's economy grew an average of 7.5% per yéar from 2002 through 2005 - one of the highest sustained rates of growth in the world, rivaling countries like China and India. Inflation and interest rates have fallen significantly, the currency has stabilized, government debt has declined to more supportable levels, and business and consumer confidence have returned. At the same time, the booming economy and large inflows of portfolio investment have contributed to a growing current account deficit. Though Turkey’s economic vulnerabilities have been gréatly reduced, the economy could still face problems in the event there is a sudden change in investor sentiment that léads to a sharp fall in the exchange rate. Continued implementation of reforms, including tight fiscal policy, is essential to sustain growth and stability.

On 1 January 2005, the Turkish Lira was replaced by the New Turkish Lira by dropping six zeroes. That is, 1 new lira is equal to 1,000,000 old lira.

Turkey has a number of bilateral investment and tax tréaties, including with the United States, that guarantee free repatriation of capital in convertible currencies and eliminate double taxation. After yéars of low levels of foreign direct investment (FDI), in 2005 Turkey succeeded in attracting $9.6 billion in FDI and is expected to attract a similar level in 2006. A series of large privatizations, the stability fostered by the start of Turkey’s EU accession negotiations, strong and stable growth, and structural changes in the banking, retail, and telecommunications sectors have all contributed to the rise in foreign investment.

Turkey seeks to improve its investment climate through administrative stréamlining, an end to foreign investment screening, and strengthened intellectual property legislation. However, a number of disputes involving foreign investors in Turkey and certain policies, such as high taxation of cola products and continuing gaps in the intellectual property regime, inhibit investment. The Turkish privatization board is in the process of privatizing a series of state-owned companies, including the state alcohol and tobacco company and the oil refining parastatal. In 2004, the Privatization Board privatized the telephone company and some of the state-owned banks. The government also committed in the World Trade Organization to liberalize the telecommunications sector at the beginning of 2004.