Friday, 05 December 2008

Turkey on the Brink of Economic Crisis

Published in Articles

By M. K. Kaya (vol. 1, no. 19 of the Turkey Analyst) 

The effects of the global economic crisis are increasingly making themselves felt in Turkey as well. After having initially taken the position that Turkey would somehow remain shielded from the global unrest, the AKP government has gradually been forced to acknowledge the vulnerability of the Turkish economy. However, with continued political instability and with the upcoming local elections, the AKP government is having severe difficulties in mustering the required ability to manage the unfolding economic crisis.

BACKGROUND: Up until now, the main success story of the AKP government had seemingly been its economic performance. The government of Recep Tayyip Erdogan had managed to decrease the inflation rate to a single digit level, although there are question marks regarding the way the official inflation rate is calculated. Yet, an increased GDP, a powerful currency, and annual growth rates around 6 percent seemed to speak of a healthy economy in steady progress. For a while, fundamental economic weaknesses escaped wider attention: The US$50 billion current account deficit, the structural problems inherent to the social security system, and not least the debts that the municipal administrations had accumulated were however of a kind to undermine the perception of an economy in good health.

The abundance of liquidity, the privatization revenues and the high interest rates that served to attract foreign capital made it possible to compensate the current account deficit. In addition, the fact that the banking sector of Turkey remains strictly controlled since the 2001 economic meltdown in the country seemed to supply Turkey with a secure protection against a global crisis which had originated in the financial sectors. And the strict adherence by the AKP government to the IMF programs since it came to power in 2002 contributed to it being positively judged by the global markets.

The AKP government was rewarded for its economic performance in the general elections of 2007. Yet, Turkey was headed towards economically troubled waters well before the global economic crisis hit the country. The structural problems in the economy were bound to surface sooner or later. The political crisis over the issue of secularism, which was triggered by the presidential election in 2007 and which lasted until the ruling of the Constitutional court not to close down the AKP in August 2008, has further destabilized Turkey. It was a well known fact that the political instability had already contributed to making Turkey less attractive for foreign investments before the outbreak of the global crisis.

IMPLICATIONS: The global crisis first began to affect Turkey when foreign investors started to withdraw from the Turkish market. Consequently, the U.S. Dollar – which had been fluctuating around 1.2 Turkish Lira for a long time - went up to 1.7 YTL. This number, which amounted to a substantial de factodevaluation, was the first signal that Turkey was being seriously dragged into the crisis.

After having initially assured that the Turkish economy was in good shape, representatives of the government and of the bureaucracy in charge of the economy were forced to admit that serious counter-measures against the crisis were indeed called upon. Using foreign sources to a great extent, the Turkish banking sector also started to adjust, diminishing its activities as a consequence of the crisis. However, there is still no comprehensive policy laid out by the government as a response to the quickly unfolding crisis.

Meanwhile, the economic situation has also been aggravated by the unexpectedly early spill-over of the financial crisis into the real economy. During November, the Turkish economy shrank by 18 percent compared to November of the year before. And the downward spiral is expected to continue well into the next year as a result of the threatening recession in the countries of Europe – Turkey’s principal export markets. Already, many companies working with short-term commercial loans have started to lay off workers and delay salaries.

There are two major explanations to the tardiness of the AKP government in planning for and executing significant counter-measures to the crisis. Initially, there was, as mentioned above, overconfidence in the health of the banking sector as a result of the strict controls in place after the 2001 economic crisis. That sustained the illusion that Turkey would succeed in passively riding out the storm. The second and increasingly more important factor has to do with political problems and administrative inefficiencies within the government. This in turn inevitably affects the workings of the bureaucracy responsible for the management of the economy.

One problem is related to the leadership of Prime Minister Erdogan. Erdogan seems to assume that replacing incapable bureaucrats and cabinet ministers would be perceived as a sign of weakness. However, a number of cabinet ministers, many of whom have held their seats for six years, are in a state of exhaustion. To that, it should be added there is a general perception that the two new ministers responsible for the economy – Nazim Ekren and Mehmet Simsek – are not quite up to the task at their hands. Furthermore, the fact that Prime Minister Erdogan has a tendency to get involved in harsh conflict, rather than to seek calm compromises, renders the handling of the economic crisis even more difficult. As Erdogan has a modus operandi of rejecting the views of economic circles and of civil society organizations which happen to run counter to the government line, this inhibits the evolution of an atmosphere of constructive dialogue about the direction of the economy.

The upcoming, 29 March 2009 local elections will also exact their toll on the economy. Desiring a clear victory, Erdogan has opted for an increase in government spending. Obviously, this choice, although it may come to be electorally rewarded just as it was in the general elections of 2007, runs entirely contrary to the demands of the economy.

Finally, the issue of secularism remains a factor of insecurity. A re-ignition of the conflict cannot be ruled out. It is still unclear what lessons the leadership of the AKP has drawn from the rulings of the Constitutional court, whether these ultimately will serve to restrain the Islamic conservatives from mounting further challenges to the secular order, or if the AKP by contrast will opt for a renewed confrontation, this time taking direct aim at the Constitutional court.

CONCLUSIONS: Turkey has experienced a number of severe economic crises since the middle of the 1990s – in 1994, 1997 and 2001. Turkey is thus battle-hardened. Although the AKP government to a large extent has replaced experienced bureaucratic cadres with loyalists, the bureaucracy remains institutionally capable of generating necessary counter-measures. After a while, the government will have to apply the measured packages prepared by the bureaucracy. An agreement with the IMF can eventually also be expected to be reached after such a process of bureaucratic evaluation.

However, despite all measures it is certain that, like much of the rest of the world, the Turkish economy is headed for recession. A 15 percent decrease in exports and a 20 percent decrease in imports are predicted. The current lay-offs in the workforce and the increase in businesses going bankrupt are further signals of it. Yet, the main element which will deepen the effect of the crisis in Turkey is the country’s political development. So far, the AKP government has failed to rise to the occasion. Prime Minister Erdogan has not exercised the kind of political leadership that would help reassure the public.

Read 4453 times Last modified on Thursday, 12 June 2014

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.

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