30 August 2018

How Turkey Dumbed Itself Down

BY DURMUS YILMAZ, SELIM SAZAK

For most of the 2000s, Turkey was one of the world’s fastest-growing economies. The country’s ambitions soared even higher than its achievements: Ankara openly aspired to be the world’s 10th-largest market with a $2 trillion economy, exports reaching $500 billion, and a per capita income of $25,000. Every buzzword that global financial elites invented for their favorite combination of high-potential emerging markets—such as Goldman Sachs’s MINT and the Economist Intelligence Unit’s CIVETS—had a T for Turkey.


In the past month, the euphoria turned into anguish. The country plunged headfirst into an economic turmoil the likes of which it had not lived in a generation. Year to date, the lira lost almost 37 percent of its value against the dollar—around half of it during the roller coaster of the last month. Thirteen of the 35 Turks listed in Forbes’s list of the world’s wealthiest people have seen their fortunes fall below the billion mark. Turkish companies now hold more than $200 billion in debt, close to 10 percent of it due by the end of next year—much of it held by European banks. Spanish banks hold more than $80 billion in Turkish debt, French banks are owed close to $40 billion, and Italian banks about $20 billion. Turkey’s economic malaise can easily give Europe, and the entire global economy, a deadly flu.

Many observers attribute these troubles to its president, Recep Tayyip Erdogan, and there is no denying that he is part of the problem. Crises of the kind Turkey is facing are especially prevalent under populist strongmen, whose growth fetish comes at the cost of higher inflation, artificially undervalued currency, poor fiscal discipline, and unresponsive monetary policies.

But to say that Erdogan is like other authoritarian leaders is to obscure the peculiarities of the Turkish story. Erdogan clearly subscribes to unorthodox economic theories—including an oft-repeated insistence that high-interest rates cause price inflation. But it’s only recently that such ignorance has had a tangible effect. If anything, Erdogan only managed to rise to unprecedented power because of his own earlier success at handling the economy. Before asking how bad Turkey’s economy will get, it’s important to understand where exactly it went wrong in the first place.

In 2002, Erdogan rose to power by riding the wave of discontent set off by the worst economic crisis in Turkey’s modern history. When he was elected prime minister, the biggest question was whether he would abandon the program put in place by Kemal Dervis, the World Bank economist and future U.N. development chief tasked with getting the country out of the ditch. Dervis was parachuted in to bring Ankara’s house in order. In typical fashion, he privatized state-owned enterprises, slashed budget deficits, toughened banking regulations, and abolished foreign exchange controls. His austerity policies earned plaudits abroad, but the IMF’s bitter pill crushed the backs of many at home.

In contrast, Erdogan was a protégé of Necmettin Erbakan, the Islamist ideologue who briefly served as prime minister in the early 1990s. Erbakan’s “just order” doctrine was a curious combination of Islamic conservatism and economic statism. Erbakan was an anti-capitalist: He championed interest-free banking and promoted state-led import substitution industrialization. (Although he was also an ardent anti-communist, as one would expect from a Cold War-era Islamist.) Many feared that Erdogan would adopt his mentor’s playbook, pausing and perhaps even undoing his predecessors’ reforms.

These fears did not come to pass. Erdogan continued the reform agenda to a tee. The credit for this smooth transition rested with his economic team in the early years. Most of them were economists by training. Many had studied or worked abroad. They were firmly committed to the orthodoxies of liberal economic thinking. They are also long since gone.

Erdogan’s decision-making in his earliest years in government was likely a product of political insecurity. Power had fallen into the lap of his Justice and Development Party (AKP) thanks to a quirk of Turkey’s electoral system, which requires parties to receive at least 10 percent of the ballots cast. In the 2002 election, the AKP won only one-third of the vote. (Factoring in the turnout rate, only a quarter of eligible voters had cast their ballot for Erdogan.) Yet the party received two-thirds of the parliament seats, because only two parties cleared the threshold.

Erdogan and his political advisors knew full well that if they were to remain in office, they had to convert their luck into practical success. Good governance was crucial not only for the country’s security and stability but also for the longevity and legitimacy of its new leaders. Here lay the secret of the AKP’s early success: sound policies, stable leadership, and skilled personnel.

The administration’s outward-looking face was Abdullah Gul, then one of Erdogan’s closest confidants. As a trained economist who had spent nearly a decade at the Islamic Development Bank before entering politics, Gul had a keen grasp of how the global economy worked. The U.S.-trained economy minister Ali Babacan and the Merrill Lynch banker-turned-finance minister Mehmet Simsek were his protégés, and much of the praise for Turkey’s economic miracle lay with them.

Some of the problems that have since grown chronic were apparent even then. For example, Deputy Prime Minister Abdullatif Sener, a professor-turned-bureaucrat who was Erbakan’s finance minister in the mid-1990s and one of the AKP’s co-founders, resigned in 2009 after publicly accusing Erdogan of corruption; he is now a member of the opposition. Generally speaking, however, Erdogan understood the importance of both economic growth and stability and went to great lengths to build and keep investor confidence.

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