How is the Turkish economy in 2016

Turkey

Ümit Akcay

Dr. Ümit Akcay holds a PhD in development economics from Istanbul's Marmara University. Since 2018 he has been teaching as a guest lecturer at the Berlin School of Economics and Law. His research focus is the economy of Turkey. He is currently working on a research project comparing the political economy of financialization in Poland, Brazil and Turkey. Information on his publications can be found at: https://hwr-berlin.academia.edu/UmitAkcay

The current recession of the Turkish economy seems to be the final episode of the debt-driven growth model of the Turkish Justice and Development Party (Adalet ve Kalkınma Partisi, AKP for short). A possible connection between the failure of this model and the current trend towards political authoritarianism in Turkey remains open.

Stock exchange in Istanbul / Turkey. In the opinion of many scholars, the AKP was economically successful in its first term in government between 2002 and 2007, mainly because of its reform agenda. (& copy picture-alliance, AA)

The main dynamics of the rise and failure of Turkish economic policy under the AKP government can be divided into three temporal phases: first, the so-called "golden years" between 2002 and 2007, second, the effects of the global financial crisis on the Turkish economy, and third, the current one economic recession as the provisional final episode of the structural crisis in the period after 2013.
Erdoğan on the cover of TIME Magazine, September 2011 (& copy TIME Magazine)


The "golden years" of the AKP

In the opinion of many scholars, the AKP was economically successful in its first term in government between 2002 and 2007, mainly because of its reform agenda. The basis of this reform agenda was, on the economic side, an agreement with the International Monetary Fund (IMF) and, on the political side, the beginning accession process to the European Union.

The agreement with the IMF provided the framework for the economic reform program "Transition to Strong Economy"(TSE) [1]. The aim was to find a way out of the crisis in which Turkey found itself in 2001. The former Vice-President of the World Bank, Kemal Derviş, was largely responsible for the TSE program and its reforms Prime Minister Bülent Ecevit returned to Turkey and was appointed Minister of Economy.
Kemal Derviş in Ankara in August 2002. (& copy dpa)
After its election victory and the takeover of government in 2002, the AKP continued to implement the TSE program that had just begun - this included, among other things, the legal stipulation of the independence of the Turkish Central Bank (CBRT) from the government. [2]

The accession process to the European Union formed the political basis of the ACP reform agenda. As part of this process, the government gradually restricted the political influence of the military - one of the demands of the European Union. The AKP government was also supported by liberal and left-wing liberal forces in Turkish politics, who saw the AKP as a new democratizing force.

The AKP's economic reform agenda ultimately consisted of three elements:
  1. Combating inflation and maintaining strict financial discipline
  2. Making the labor market more flexible
  3. Privatization of state companies
The fight against inflation was achieved through a restrictive monetary policy. Together with fiscal austerity measures, it led to a decline in inflation and national debt. At the same time, a new labor market policy was implemented: One of the key points of the new labor law of 2003 was the introduction of flexible working conditions and part-time work as well as the possibility of subcontracting. According to the OECD, the proportion of workers organized in trade unions in Turkey fell from 29.1 percent in 2001 to 6.3 percent in 2015 [3]. One can therefore speak of the AKP's disempowerment of the trade unions at this time.

Insecure working conditions and stagnating real wages were therefore two decisive consequences of the labor market reforms. [4] Eventually the AKP achieved unprecedented success in privatization. [5] The privatizations aimed not only at reducing the national debt through the sale of state-owned companies, but also at reducing the power of organized labor structures, since state-owned companies were a stronghold of trade union organization. Together, these reforms led to a major liberalization of the labor market in Turkey. [6]

Figure 1: Net capital inflows into Turkey 2002 - 2018 ( Graphic for download) License: cc by-nc-nd / 3.0 / de /

As a result of this reform policy and an extremely favorable situation on the international financial market, capital inflows into Turkey - through direct investments in companies and through the purchase of Turkish government bonds - rose sharply between 2002 and 2007 and reached a level of 50 billion US dollars in 2007 ( Illustration 1). The capital inflows not only led to a high rate of growth and falling inflation, but also helped the AKP to form a stronger alliance against the old Kemalist establishment domestically. Between 2002 and 2007, the gross domestic product (GDP) increased by 7.4 percent (Figure 2).
Figure 2: The growth rate of the Turkish gross domestic product 2002 - 2018 ( Graphic for download) License: cc by-nc-nd / 3.0 / de /


The global financial crisis and Turkey

The global financial crisis in 2008 had different effects on Turkey. One of the immediate effects of the crisis on Turkey was the collapse of international trade and capital movements. This led to an average decline in GDP growth of 1.9 percent in 2008 and 2009. In a coordinated response, the major international central banks (the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan) lowered the Interest rates massive, which led to an enormous international flow of capital into the so-called emerging markets ("emerging markets" include China, India and Turkey). In contrast to the crisis years, Turkish economic growth averaged 8.2 percent between 2010 and 2013 (Figure 2). However, with the announcement by the US Federal Reserve that it would normalize its currency policy, these capital flows into the emerging markets subsided again. That paved the way into the crisis of the debt-driven growth model of the AKP government.

From 2008, Turkish politics liberalized the taking out of loans in foreign currencies for companies, especially for manufacturing companies [7]. The deregulation should allow the Turkish economy to benefit from the favorable international financial conditions. The fatal consequence: a sharp rise in the level of debt in foreign currencies. Since then, Turkey's debt structure has changed dramatically (Figure 3). The debt level of Turkish companies doubled after the crisis in 2009, while national debt remained at a low level. While household debt in relation to GDP was almost zero until the 2001 crisis, it rose tenfold from 1.8 percent of GDP in 2002 to 19.6 percent in 2013. (Figure 3)
Figure 3: Turkey's debt structure 2001 - 2018 ( Graphic for download) License: cc by-nc-nd / 3.0 / de /

The crisis of the debt-driven growth model

The 2001 IMF program also helped the AKP's debt-driven growth model to rise. The main aim of the stabilization program was to keep inflation under control. A restrictive monetary policy is normally the basic political stance of conservative central banks, since their aim is to control inflation. However, special international economic conditions temporarily suspended this necessity. Between 2010 and 2013, Turkey benefited to a large extent from such favorable international credit terms, as it received even greater capital inflows in this period than in the period between 2002 and 2007 (Figure 1).

Figure 4: Capital inflow and economic growth in Turkey 2002 - 2018 ( Graphic for download) License: cc by-nc-nd / 3.0 / de /
The turning point came in 2013 as the expansive monetary policy of the industrialized countries, which led to enormous capital inflows into the emerging markets, ended. Since then, the AKP government has been faced with a serious dilemma: A rate cut to accelerate economic growth became impossible because it wanted to prevent the devaluation of the Turkish lira (TL) at the same time. The downward trend in capital inflows is one of the key factors behind the crisis in Turkey's debt-driven growth model (Figure 4). While the AKP government managed to postpone two economic bottlenecks between 2014 and 2016 with the help of the European Central Bank's zero interest rate policy and a state-controlled credit growth policy (Figure 5), the third bottleneck ended in a recession and a complete currency crisis in August 2018.

Figure 5: GDP growth in Turkey 2013 - 2018 ( Graphic for download) License: cc by-nc-nd / 3.0 / de /
The transition from the parliamentary system to a presidential system after the parliamentary and presidential elections in June 2018 led to great political uncertainty, as it made a complete restructuring of the state institutions necessary and bundled a large number of decision-making powers with the president. This political uncertainty coincided with tensions between Turkey and the United States over American citizen Pastor Andrew Brunson, arrested in Turkey in August 2018. As a result, the Turkish lira lost around 40 percent of its value between January and August 2018. [8] In the following months the economic situation deteriorated increasingly. Between January and October 2018, inflation soared from 10.3 percent to 25.2 percent, while consumer credit rates soared from 18.5 to 38.2 percent. According to the Statistics Institute of Turkey, the unemployment rate rose rapidly to 14.7 percent by February 2019. [9]

The AKP responded to these dramatic developments with a renewed credit expansion under the leadership of the state banks (Ziraat Bankası, Halkbank and Vakıfbank) to prevent an economic recession, especially in view of the upcoming local elections on March 31, 2019 (Figure 6 ). However, the renewed credit expansion exacerbates the current crisis [10] because a renewed credit cycle not only "increases Turkey's current account deficit and foreign capital inflow immensely" [11] but also increases corporate debt.
Figure 6: Drawn / valued credit flow in Turkish Lira ( Graphic for download) License: cc by-nc-nd / 3.0 / de /

Final remarks

The AKP's debt-driven growth model ensured positive economic development in the first few years of the new millennium, as it benefited from the favorable credit terms on international markets. The model continued to work due to the huge capital inflows between 2010 and 2013 after a two-year recession in 2008 and 2009. The turning point came in 2013, not only for the AKP's economic model, but also for Turkish democracy, as it has since suffered a setback in every aspect of democratic life. Another important milestone in the current democratic decline in Turkey is the undermining of the unionized workers' organizations through reforms for a flexible labor market in the so-called "golden years" of the AKP Political conflict in Turkey changed With the organized workforce almost disappearing, the political struggle among the ruling elites intensified, as did the struggle for power and influence in the state institutions of Turkey.

This text was written in English and translated into German.