Erdoğan Risks Path To Economic Depression, Experts Say

“By deviating from democracy [Recep] Tayyip Erdoğan is putting Turkey on the path to economic collapse.”

This is a quote from a commentary on a Turkish daily's words this weeks that strike the right tone regarding major blows to rule of law in Turkey amid intense government pressure on opposition figures, including the free media.

A police raid of the headquarters of Turkey's best-selling daily Zaman on Sunday, Dec. 14, and the detention of prominent journalists have sent shockwaves around the world, with experts even questioning Turkey's political role in Europe and Ankara's ability to maintain economic stability under growing authoritarianism at home. Observers are now saying they fear that a vicious cycle of political and economic depression in Turkish history due to decades-old structural problems in democracy has yet to repeat itself. Some recently dubbed this the “Turkish Disease,” referring to the fact that a relative improvement in economic and social prosperity leaves its place to deep depression each and every 10-15 years.

Turkey's bleak record on rule of law and doing business worsened even further over the past one year due to two separate corruption probes implicating President Recep Tayyip Erdoğan, his family members, ministers and close friends. The government earlier this month closed two separate court cases on corruption after having replaced thousands of police officers and prosecutors with others. Turkey's perceived corruption level worsened the most out of all the countries in a global perceived corruption index in 2014, dropping five places to 45th, according to a Transparency International (TI) report earlier this month. Turkey's economic fate in the weeks ahead also hinges on US monetary policy, particularly after US Federal Reserve Chairwoman Janet Yellen implied this week that the bank is running out of patience to hike benchmark rates. An earlier-than-expected rate hike by the Fed could lead to a further outflow from emerging markets into US assets in pursuit of better returns.

“Erdoğan is putting Turkey on the path to economic collapse. He may not be aware of it but there it is. This is because no economy can survive in today's global system in a country like Turkey without democracy,” was how columnist Cengiz Çandar evaluated the issue in the Turkish daily Radikal this week. “The political crisis that Turkey has unnecessarily been pushed into both at home and abroad is steadily going to lead to economic depression. … Look at where Russia is and Putin, who is Erdoğan's political twin. Russia's economy is collapsing. If you can see how and why Russia is collapsing you will be able to sense the direction that Turkey is going to be dragged in as a result of Erdoğan locking horns with the EU (and the West in general) on the wrong playing field,” Çandar added.

Turkey assumed the rotating leadership of the group of 20 biggest developing and advanced economies on Dec. 1 and aims to use the role to bolster the voice of low income nations and promote itself as a trade and diplomatic power. Observers say the government has to first put things in order at home while emphasizing that Erdoğan is depriving Turkey of a long-time story that Turkish entrepreneurs have easily sold to partners in global markets: an EU candidate democracy. Erdoğan is also losing one of its most influential cards at home: stable economic growth. Turkey's economic growth slowed more sharply than expected in the third quarter to 1.7 percent year-on-year. The consensus by leading agencies and unions is that Turkish growth will remain below 3 percent for 2014, even below a government target of 3.3 percent -- which was earlier revised down from 4 percent.

Legal deficit

Legal loopholes that hinder doing business in a healthy and competitive market atmosphere is one of Turkey's core problems that need to be addressed immediately, prominent professor and columnist İbrahim Öztürk told Today's Zaman.

“The arbitrary practices and clear political intervention in the judiciary has weakened Turkey's ability to remain an attractive market for foreign investors. … People used to refer to Turkey as a shining star for investment a few years ago, but this image has waned, risking to be replaced by an authoritarian regime; now we offer a slippery ground for investors to play on it and survive,” Öztürk said.

Recalling the anonymous term “Turkish Disease,” Öztürk emphasized that the Turkish economy performed relatively worse when compared to upper-middle-income peers. According to World Bank data compiled by Öztürk, Turkish average annualized inflation was 7.9 percent between 2003 and 2013, while the average figure was 4.3 percent in upper-middle-income markets. In the same period, the Turkish economy expanded by 5 percent, while the average growth for the upper-middle-income class was 6.2 percent. Unemployment in Turkey was 10.3 on average between 2000 and 2012 while the upper-middle-class average was 6 percent in the same period. The ratio of the current account deficit (CAD)-to-gross domestic product (GDP) was 5.7 on average between 2005 and 2012 in Turkey, the highest in emerging markets, the same data showed.

Turkey's economic woes were also fueled by a currency crisis in Russia which broke out this week following months-long Western sanctions on Moscow. Russia is one of Turkey's major trade partners and exporters to this country are already feeling the pain from a devaluation in the ruble. Experts have said Russia, isolated and alone, might choose to default on some of its debt. This possibility has sparked an investor retreat from Russia but that pullback has also caused investors to flee other emerging market currencies that are deemed risky. They include Turkey, Brazil, South Africa and Indonesia, noted John Higgins, chief markets economist at Capital Economics, Reuters reported this week.

The prospect of a spillover of the Russian crisis into neighboring markets has become more serious over the past week and Turkey is in this risky area, Economist Erhan Aslanoğlu told Today's Zaman. Each country in this region has its own domestic political risks; however, the Fed rate hike and Russian crisis trump other factors in creating a concern for the Turkish government regarding a possible bottleneck in markets, Aslanoğlu added. The Turkish lira sank to an 11-month low this week before recouping some losses, and the central bank is under intense political pressure to intervene in interest rates.

Losing the EU card?

The ongoing blows to rule of law, which undermines a reliable market atmosphere, may cause Turkey to lose its story of joining the EU, according to Uğur Gürses. Erdoğan used the EU adventure to attract foreign direct investment (FDI) and hot money to Turkey especially between 2007 and 2013; however, a recent clash with the unions does not bode well for future of relations with the EU, Gürses added.

Between 2007 and 2008 Turkey was able to attract as much as $20 billion in FDI, official figures show. In the first nine months of this year, FDI to Turkey dropped to $4.9 billion from $6.4 billion in the same period a year ago. The total FDI to Turkey is estimated to stand at a weak $6 billion this year. Gürses said last week's media crackdown adds fuel to Turkish woes of falling into an economic depression which would be accompanied by 1-2 percent growth, high unemployment and inflation. “There is not a strong government economic reform program that foreign investors can rely on. … Nobody is going to buy a story for Turkish markets that lacks realistic reforms and the EU as a critical anchor,” said Gürses.

The EU remains the largest trade partner for Turkey despite government efforts to diversify exports and imports away from the union. Turkey dropped four places on the World Bank's "Doing Business 2015" index, which measures the ease of doing business in 189 countries, a report in October revealed. Turkey was ranked 55th out of 189 countries in terms of ease of doing business for 2015. It was in 51st place for 2014.

Professor Daron Acemoğlu, a leading Turkish-American economist with the Massachusetts Institute of Technology (MIT), told a meeting in İstanbul on Friday that any step towards authoritarian practices bodes ill for Turkey's economy. “Everything is under the state's control [in Turkey]. … There is not a stable work model and this frequently results in ups and downs in the economy,” Acemoğlu said. Earlier this year, he had said increasing government-sponsored pressure on the press and journalists is alarming for institutions in Turkey and that the pressure will have deep economic costs. Acemoğlu added that Turkey needs to follow liberal policy that will provide equal opportunities to entrepreneurs from all over the globe.

(Cihan/Today's Zaman)