BREAKINGVIEWS-Erdogan keeps keys to Turkey's long-term future

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own) By Una Galani DUBAI, May 21 (Reuters Breakingviews) - The modern face of Turkey's largest city and financial heart is on full display to anyone sitting on the open-air terrace of a trendy upscale café along the Bosporus in Istanbul. Carpaccio and wine are served, as house music contends with the call to prayer from the local mosque. Turkey's economy is shining after a decade of political stability and reform under Prime Minister Tayyip Erdogan and his Islamist-rooted Justice and Development Party (AK Party). But with an end in sight to Erdogan's run as prime minister, Turkey's financial elite hope that continuity will prevail. Erdogan has become more popular as Turks have become richer. The country's GDP per capita has tripled and the AK Party now enjoys the support of half the electorate. Long forgotten is the "lost decade" of the 1990s, when Turkey was plagued by overspending and a 70 percent inflation. Economic growth, after reaching Chinese proportions in 2010 and 2011, looks more sustainable now at about 4 percent. Turkey has paid its last dues to the International Monetary Fund. And a rating upgrade last week underscores its healthy economic policy and sound financial sector. Erdogan and the AK Party have ambitions that stretch for another decade. They want to take Turkey to the league of the 10 largest economies in the world by 2023, which will mark the 100th anniversary of the Turkish Republic. They see the future of Istanbul as a global financial centre and a hub for international air traffic. That reflects both the growth potential of the young, 75 million-strong population and the determination of Erdogan and his party to remain in power. A Kurdish solution Erdogan is keeping voters guessing about what he intends to do when his term ends, but he is expected to contend for the presidency next year in a move that could allow him to remain at the helm for another decade. The rules of the AK Party prevent him from running again as prime minister in 2015. The current President Abdullah Gul, also a co-founder of the party, doesn't always see eye to eye with Erdogan but it is deemed unlikely that the pair will engage in an open, destabilising confrontation. The more likely outcome is a job swap that would mirror what happened in Russia last year with Vladimir Putin and Dmitry Medvedev. In Turkey, the president function is ceremonial for now, but Erdogan is pushing for a constitution change that would make it more powerful. For that he needs additional parliamentary support, which he could secure if his efforts to broker a lasting peace deal with Turkey's Kurdish militants are successful. The Kurdistan Workers Party (PKK) began this month to withdraw from Turkish territory. Soon it could formally end a three-decade long, bloody fight for self-rule, in return for greater recognition in Turkey's charter - amongst other things. Peace dividend The benefits from a lasting peace deal with Kurdish militants would facilitate Erdogan's political manoeuvring. The Kurdish conflict has cost Turkey over $300 billion and some 40,000 lives. Economists estimate that military spending amounts to 2.3 percent of GDP - that's higher than any country in Europe. Stability would encourage long-term investment in the east. Exploiting the region's lower cost of labour, Turkey could increase its competitiveness in manufacturing and exports and relax restrictions on foreign direct investment. Peace would also deepen the energy and trade relations with neighbouring Iraqi Kurdistan - which are raising alarm in Baghdad. That would also help Turkey deal with its current account problem. The country's lack of natural resources, coupled with a low rate of domestic savings, means that, however well the economy is run, Ankara depends on flighty foreign portfolio inflows to fuel its economy. Long-term FDI only finances a small slug of the total current account deficit, currently at around 6 percent of GDP. That's not a problem when global risk appetite is high, but creates volatility when investors' nerves fray. Turkey has relied on unorthodox monetary policy since 2010, in order to deter hot money and try to keep inflation under control. Other measures are also being taken. Another "wealth amnesty" aims at luring back into the country some of the estimated $130 billion in funds which affluent Turks keep abroad. Turkey has also started making limited contributions to private pension schemes, with the hope to boost domestic savings. It won't insulate Turkey from external shocks but it should make it easier for the consumer-driven economy to bounce back quickly from any recession. No alternative Istanbul's financial elite are not AK Party sympathisers. They worry that the judiciary is too weak. They worry that the government is trying to make the country more religious. They lament Erdogan's rising authoritarianism, which they see as a missed opportunity to complete the country's democratic foundations. They fear the cost of Ankara overreaching in its regional foreign policy, especially towards Syria. And they dread the consequences of Turkey abandoning its modern face - from reforms to meet European Union entry requirements to the hip waterfront cafés where both women and men can drink, smoke, and wear what they want. Yet even with those uncertainties, it is hard to find a banker or a executive in Istanbul who isn't bullish about Turkey's prospects. It is up to Erdogan to prove them right on their hopes and wrong on their fears. - For previous columns by the author, Reuters customers can click on (Editing by Pierre Briançon and David Evans)