Washington Kurdish Institute
July 17, 2018
Part I of a series on Turkey’s future
In 2002, the former Mayor of Istanbul, Recep Tayyip Erdogan and his newly founded Justice and Development Party (AKP) swept the Turkish general elections and won a majority of seats in the Turkish Parliament, riding a wave of discontent with the policies of the ruling Democratic Left Party (DSP). Immense budget deficits, uncontrolled inflation, and an overreliance on foreign direct investment led to a financial crash in 2001. Coupled with a deflated currency and spikes in unemployment, Turkey sought an alternative. By 2003, Erdogan, who was previously unable to head the government due to previous criminal convictions, became Prime Minister, and the stage was set for 15 years of rule. Erdogan embarked on a campaign to rebuild the Turkish economy through government spending projects, attraction of foreign investment, and consistent faith in low interest rates. Turkey came out of the storm of the 2001 collapse with a rapidly rising GDP, spurred on by low interest rates and incentives for business startups. These measures at first appeared to be beneficial for the Turkish economy, however, in the long run, they engendered an oncoming fiscal storm for the country.
Erdogan has dutifully pursued his policy of deregulation and low interest rates even past the point of recovery from the crash. The result was been runaway economic growth and skyrocketing inflation. Previously under Erdogan, inflation occurred only once, in 2011, was below 5%. In early 2014, the Turkish Central Bank, in defiance of Erdogan, hiked interest rates overnight from 7.75% to 12%, as a radical measure to combat the increasing devaluation of the lira. In response, Erdogan was quoted that as saying he is “as always… against a hike in interest rates”. The policies pursued by Erdogan for most of his rule have been geared towards stimulating short-term growth, however that level of expansion is not sustainable, a fact the Erdogan (who became President of the country in 2014 after 11 years as Prime Minister) seems to conveniently ignore or explicitly deny. Coming out of the 2008 Recession, Turkey hit rates of GDP growth previously unheard of, measuring as the highest performer in the Organization for Economic Cooperation & Development (OECD) in 2010 and 2011. The spike in expansion following the recession was not a long-term phenomenon, with Turkish growth showing signs of slowing by 2013. Increasing government spending and subsidies, along with artificially low interest rates became a tool to keep the economy running at an unnatural pace. The irony, of course, is that a similar reliance on foreign investment and a refusal to control interest rates were some of the factors which provoked the 2001 financial crisis which brought Erdogan to power.
The population of Turkey, despite the ostensible explosion of wealth, has seen mixed results from the policies of President Erdogan. Unemployment has been a persistent problem in modern Turkey, hovering around 10% for most of Erdogan’s reign. The unemployment for young people has proven to be more abysmal, even with the government-touted economic growth of the past 15 years. From 2001-2015, youth unemployment rpse from 12% to 20%, with a spike to 28% in 2009. Private savings among the population have sat at historic lows. Furthermore, perhaps the most alarming trend of the Erdogan regime’s financial policy has been the exacerbation of income inequality and the distribution of wealth. In 2000, Turkey’s wealthiest 1% of the population owned 38% of wealth, while in 2014 that number rose to 58%. Under Erdogan, the rich of Turkey have gotten richer, while the poor have gotten comparatively poorer, despite booming economic expansion. Inequality reduces social mobility, breeds crime, and puts strain on the welfare systems of a nation, none of which bode well for long run socio-economic projections. The startling jump in inequality and rise in unemployment show that despite the superficial growth of the Turkish economy, that wealth has not been effectively distributed to the population. The combination of a failure to distribute existing wealth and an unwillingness to control inflation through raising interest rates has made the situation in Erdogan’s Turkey volatile and fundamentally unstable.
L’état, c’est Erdogan.
It is not uncommon in Turkey’s history for economic difficulties to lead to military coups. It is also not unusual for the economy to overheat due to increased government spending after such military intervention. It is also not uncommon for Turkey to cover current account deficits with short-term external borrowing, steadily increasing the debt.
The difference this time? The coup failed, and rather than reset the leadership, the opposite occurred – the AKP leadership cracked down and consolidated its own power by using and renewing state of emergency laws to rule by decree, bypassing parliament and oversight and purging over 100,000 people from the military, police, media outlets, schools, and businesses, firing or arresting those seen as oppositional to the leadership. The result with one man holding most of the power: increasing cronyism, patronage, graft, and decreasing property rights, rule of law, education, and prospects for Turkey’s younger generations.
Turkey was not long ago counted among the promising MINT (Mexico, Indonesia, Nigeria, Turkey) countries, a group of emerging markets seen as ripe investment opportunity. Since the coup, Moody’s, a credit rating agency, downgraded Turkey to sub-investment grade: Ba2, or junk. According to Moody’s “The government appears still to be focused on short-term measures, to the detriment of effective monetary policy and of fundamental economic reform.”
In 2016 following the coup, GDP fell for the first time since 2009, but in an attempt to still look like investment worthy, Turkey revised its calculations to make its macroeconomic prospects look healthier, though it did nothing for people’s everyday lives in Turkey as the lira continued to lose value.
Turkey’s economy in an artificial boom, but will have a very real bust
While many report Turkey’s booming economy, the growth is being forced down by the top, rather than the markets. Massive infrastructure projects as well as local business ventures are being funded by enormous foreign currency loans. With businesses charging in depreciating lira, but having to pay interest and loans in increasingly expensive dollars and euros, many firms are looking at liquidation, bankruptcy or collapse, the private sector’s foreign debt equal to a third of the economy. Unemployment, which should be at a low during a time of economic growth, remains steady.
But the enemy of Turkey’s economy is not rising debt or the plunging lira, but rather increasing cronyism, patronage, and graft. Since the most recent elections in which Erdogan won the presidency once again, a post that has recently been given a wealth of increased powers, he has named his son-in-law finance minister, and has the power to appoint central bank rate-setters, which does not bode well for responsible governorship.
Erdogan has criticized the Central Bank for raising interest rates, forcing politics onto the situation, even threatening to take over the Central Bank, to keep rates from being raised and frightening away investors, despite the promise of low rates. Now, however, under the new increased powers of the president, Erdogan has the legitimized ability to appoint central bank governors himself, making it much easier for him to direct and control monetary policy. Since Erdogan believes that interest rates as a cause rather than a cure for inflation and has used his position as president to make direct appeals to Turkey’s citizens to exchange any savings they had in dollars and euros to Turkish lira.
Under Erdogan’s one-stop-shop for economic policy, he has continued to borrow without restraint, continued to raise debt levels to new and worrying heights, inflation and the economy growing and growing without restraint in the short term to achieve political goals at the expense of the country’s long-term economic health.
Erdogan has not allowed the Economic and Social Council to convene since 2009. The Council was a coalition established in 1995 by center parties from both right and left who gathered representatives from labor, public and private sectors to enable good governance. Since Erdogan proclaimed the state of emergency, he has made economic decisions mostly by degree, bypassing deliberations by parliament. The Turkey Wealth Fund (TWF) was stillborn. Created in the fog immediately following the 2016 coup (but actually with cabinet approval) and run by Mehmet Bostan and other advisors backed by Erdogan and his family, it has accomplished nothing but draw criticism and suspicion. Sovereign wealth funds are usually created by states who have surpluses, usually from natural resources. Turkey is in debt, and created the fund by transferring $160 million of public assets with no results to show for it, though it was supposed to fund public investment, it appears to have only taken resources away. The TWF is exempt from the Court of Accounts oversight, which audits public administrative bodies. The lack of transparency around the fund makes it easily misused for political purposes or allow favored companies to profit at the expense of others, and monetize state assets without oversight, rather than solve structural problems. There was progress with fund leadership and Singapore’s urban-planner, Surbara Jurong to create an industrial hub in the Kurdish majority area of southeastern Turkey, but deal has yet to be finalized.
Property rights, considered a pillar of economic development, are also uncertain since the coup, with 879 businesses worth over $11 billion in assets having been seized by the government in the months following the coup, with party loyalists taking over the running of these firms. This visible seizure of property and overt cronyism causes uncertainty among international investors who view this erosion of rule of law.
Turkey is over dependent on short-term investments to address its deficits, but with foreign investment withdrawing from an increasingly unstable economic system, Erdogan will need to look elsewhere to fuel his economy. Meanwhile, Turkish citizens still face ruinous high prices and levels unemployment.
Consumer confidence, or lack thereof, is an indicator of economic performance, and it does not matter if Erdogan takes a leaf from Putin’s playbook and blames it all on a western plot to emasculate Turkey, or if they rework the books again to make it look as if the economy is doing better than it is; the people of Turkey will not see their quality of life improve, they will not be able to afford to consume at the same levels as in the past.
More importantly, students will not have the opportunities their parents did. Under the state of emergency, the president gave himself the power to appoint university presidents, this following the purge of thousands of academics, taking away the autonomy of education and crippling their ability to conduct independent research. Turkey’s Science Board said in statement, “Allowing a central authority … to decide on how every institution—especially universities where specialization is at the highest level—should conduct its affairs means to entrust the entire country to the supposed infallibility of a single individual in a world where economy and technology advance at an immense pace… This goes against democracy and rationality.”
Not only will education fail to be what the people of Turkey need in order to keep up economically and technologically, but nor will they have access to a free press, essential for a functional democracy and political accountability.
Turkey, according to Moody’s, cannot improve or even maintain its current rating without “pursuing credible macroeconomic policies supportive of financial stability and sustainable growth within an adequately transparent and predictable policy-making environment.”
The long-run outlook for the economy does not look good, not because of the current economic problems, which could be recovered from, but the erosion of the integrity and independence of institutions. Without this integrity and independence, without parliamentary deliberation that is necessary for a transparent policy-making environment, without returning to rule of law instead of state of emergency decrees, the economy, along with the state, will fail.