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Michael Jansen: Erdogan’s economic mess
August 20, 2018
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The fall by 45 per cent of the Turkish lira over the past eight months has sent the country’s economy into a tailspin. Turkey’s credit rating has been demoted to “junk” by global analysts who argue it is unwise to invest in the country. Turks are exporting their financial assets. While a $15 billion loan announced by Qatar last week could ease the crisis to a certain extent, the injection will not resolve it only major policy changes can do that.

The dive steepened with a row between Turkish President Recep Tayyip Erdogan and his US counterpart Donald Trump, who slapped tariffs on US imports of steel and aluminium and threatens further tariffs until Ankara releases US evangelical preacher Andrew Brunson who has been held for two years and is accused, implausibly, of involvement with both armed Kurdish groups and the Gulen movement which is charged with the mid-2016 failed coup. Turkish diplomats claim Ankara is ready to repatriate Brunson, who is now under house arrest, but wants a quid pro quo. Trump flatly rejects this demand and Erdogan has vowed to slap tariffs on US cars, electronic items, and other goods.

When Erdogan’s Justice and Development Party (AKP) took power in 2002, the Turkish economy was in serious trouble. During the 1980s and 1990s, Turkey depended on foreign investment and trade for growth rather than the expansion of domestic commerce and the creation of institutions to foster development. The country sustained a certain level of growth by selling high-interest bonds to Turkish banks which regarded these bonds as a primary investment although both interest and principal had, eventually, to be paid. In early 2001, the stock market crashed.

Under the direction of the International Monetary Fund (IMF) and the World Bank, the AKP, in power from 2002, turned the economy around. The party won praise at home and abroad for reducing inflation, cutting sovereign debt, and increasing exports by 325 per cent between 2002-2012. Turkey manufactured quality consumer goods and became a major food producer and a popular tourist destination. For five years the economy expanded by about 6.8 per cent annually.

But over the last decade, the AKP reversed reforms imposed by the IMF and World Bank and growth has slowed to 3.5 per cent, a figure most developed economies would envy but not enough for a developing country with a rapidly growing population. Inflation, now nearly 16 per cent, has been high for a decade. Wages have not kept pace.

Once again Turkey relied on external investment and did not engage in innovation or build strong institutions to promote economic growth. Furthermore, Erdogan’s entourage and hangers-on were potent sources of corruption and mismanagement. As he consolidated his rule, these factors became all the more powerful. Having friends in power opened the door to contracts for major public projects which the country could no long afford. The central bank lost its independence and in 2010 the value of the currency was halved against the dollar. Interest rates remained low, perhaps, due to Erdogan’s religious objection to usury.

Consumer debt has risen from 5 to 55 per cent. Consumption has soared. Malls and housing estates have mushroomed. Turkey’s foreign debt has climbed beyond $400 billion.

Instead of adopting austerity, the AKP government has promised voters higher wages and pensions.

Meanwhile, Turkish banks are denying credit to firms and consumers, construction has halted on half-finished buildings in Istanbul, electricity plants have shut down as they cannot afford expensive imported fuel, and pharmacies are running short on drugs needed to keep ailing customers alive.

Erdogan’s economic miracle collapsed due to his increasingly autocratic hold on the country. He sees himself as heir to the Ottoman sultans, a man blessed from above with the power to do what he wishes in Turkey. The mid-July 2016 failed coup enabled Erdogan to crush all critics and opposition by simply accusing people of having connections with the Gulen movement on which he blamed the attempt. He has dismissed, detained or suspended 180,000, about 10 per cent of Turkey’s two million public employees. He has seized assets of more than 1,000 firms owned by individuals accused of being coupists and closed 200 media outlets. He has sacked 12,000 Kurdish teachers and 24 Kurdish mayors, alleging that they have ties to the Kurdish Workers’ Party (PKK) which has been fighting for autonomy for more than 30 years. His actions have plunged the country’s political life into disarray and heightened economic turbulence.

Unfortunately, Erdogan has also indulged his sultan fantasy by funnelling radical fundamentalists into Syria, fostering a seven-year war there and occupying territory in northern Syria, risking new rounds of conflict. He continues to bomb what he claims are PKK targets in northern Iraq and has recently ordered raids against the Sinjar area in north-eastern Iraq, the homeland of the persecuted Yezidis.

Erdogan is also courting Qatar, isolated and boycotted in the region due to its dispute with the UAE and Saudi Arabia, and challenging former ally Israel, earning the displeasure of the Trump administration.

Turkish Cypriots as well as mainland Turks have been harmed by the decline of the lira. They have also been alienated by Erdogan’s policy of promoting faith-based education and his crackdown on dissent. Turkish Cypriots are paid salaries in lira although major expenditures like rents, cars and computers are costed in dollars, British pounds and euro rather than lira. Therefore, Turkish Cypriot purchasing power has shrunk, forcing them to defer purchases. To make matters worse Ankara prices in foreign currencies goods exported from the mainland to the Turkish Cypriot breakaway state, occupied by Turkey since 1974. Food prices have nearly doubled; the price of electricity has risen steeply. Inflation stands at 20 per cent.

The Turkish Cypriot north, recognised as a state only by Turkey, depends on a subvention of $497 million to finance its administration while Turkish Cypriots have to cope with an economy held captive by dire developments on the mainland and by Erdogan’s mis-management, corruption, and diktats.

Like Trump, Erdogan is self-focused, eccentric, erratic, and dictatorial and his conservative base of support, like that of Trump, remains loyal whatever he does. This makes Erdogan, like Trump, a destructive and dangerous man.

The author, a well-respected observer of Middle East
affairs, has three books on the Arab-Israeli conflict

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