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Guldem Atabay
Feb 06 2019

High inflation, bad democracy and the future: Turkey’s prospects

Turkey’s inflation rate of 20.4 percent as of January, its weak PMI of 44.2 and the collapse in its January car sales of a huge 60 percent, all announced on Monday, prove only the inevitable – that Turkey is buried deeply in the seas of “stagflation” and will not emerge until the second half of this year.

A classic run on the currency last year and the brutal credit crunch that followed are only just taking their toll on the Turkish economy.

Turkish consumer business confidence

While economic indicators reflect the dire situation, with growth crumbling despite the government’s endless efforts to support demand, waning consumer and business confidence is also blocking a quick reversal. Yet, this predicament did not occur overnight.  

Turkey inflation consumer core

Apart from an end to the “cheap money” flowing into emerging markets such as Turkey over the past decade, why would confidence in Turkey not recover with the peak of the currency crisis already left behind, at least for the moment? Why would the government’s efforts come to nothing, unlike previous episodes such as in the first quarter of 2009 or the third quarter of 2016, when economic contraction was just a blip and a return to growth was secured within just a quarter of the year?   

Turkey civil liberties

The start of each month comes with a load of figures to analyse for an economist; yet it was quite interesting to read a “The Conversation-UK” analysis on how “democratic backsliding” in a country weighs on its economy. That is, elected leaders expand their executive powers while weakening the legislature and judiciary, elections become less competitive and press freedom shrinks; all combining to hurt a country’s economic performance through eroding government institutions.

Turkey civil liberties

While these days Venezuela is making more of the headlines when it comes to “autocratisation and the economy”, examples in the analysis also include Hungary and Turkey. The list could be extended to cover Brazil, India, Russia and the United States as well. Together they roughly account for one third of the world’s population. Though, further analysis shows that the decline in democratisation in these countries can manifest itself in very different ways.

In Turkey’s case, the deterioration of liberal democracy has been the major driver of autocratisation as per the “Varieties of Democracy” standards.

Hungary Turkey democracy

It is interesting to spot that Turkey’s struggle to emerge from its home-made 2001 economic meltdown with the help of the International Monetary Fund and European Union was also the time when its democracy was relatively flourishing along with its economy. The “cheap money” years, starting right after the 2008 global financial crisis and coinciding with the end of the IMF programme, also marked the time when Turkey’s never-perfect democratic standards began their decline. While the cheap global money, created by global monetary easing, covered up the brewing troubles on the democratic front, the burden of democratic backsliding in Turkey become more and more tangible and costly for the government. Democratic elections, which fail to safeguard civil liberties and the rule of law when governmental institutions are weakened by an elected-turned-authoritarian leadership, is not a new concept in world history, nevertheless it is a growing phenomenon following the Great Recession years.    

In Turkey’s case, the new presidential system, in effect since July 2018, was designed to consolidate powers, diminish legislative and judicial independence, and suppress freedom of speech. The decline in democracy was rapidly accompanied by economic problems as the tide changed in the global economy from easy monetary conditions to a tighter and more expensive environment starting from 2013.

Thus, 2018 turned out to be a nasty time. The Turkish lira plunged by some 30 percent with growth turning severely negative, as the loss of collective knowledge that comes with a parliamentary regime was replaced with the presidential system of enhanced executive powers. As The Conversation-UK analysis mentions, in China and Singapore, where democracy was never the target, economic success can prevail; as these countries were never set up to be democracies. Yet, losing quality on the democracy front affects a country economically as the analysis proves, shying investors away. Especially for a country like Turkey where growth is so much dependent on external borrowing because domestic savings fail to keep pace with a galloping global economy.

In Turkey, since the start of 2018, economic policy choices have been made in a “fight with the crisis” mode that lacks coherence. Even the government’s new three-year fiscal programme, announced last September to serve as an anchor along with strong monetary tightening, is based on macroeconomic expectations that have become unrealistic due to the severity of the economic contraction. Day-to-day decisions on government spending, tax cuts and the cheap loans awarded through public banks have all proven ineffective in reversing this negative trend.

Turkey’s deteriorating democratic standards, which have paved the way for bad or ineffective economic choices like preventing tighter monetary policy when it was necessary, are turning out to be costlier than envisaged. Turkish corporates are now struggling with the heavy external debt payments, which they had taken on over the past five years to expand their operations and, consequently, to boost economic growth. Democratic standards act as a bridge to access finance for countries like Turkey; and as the cost of funding is on the rise globally, the real cost of the loss in democratic quality is now being felt.

Thus, the government’s failure to improve the general confidence level in Turkey’s economy, despite previous episodes of economic downturn, can be associated with the declining state of democracy, despite elections and the existence of opposition parties.                 

Turkey faces critical local elections on March 31. The stakes for the ruling party are high – they could lose big cities such as Istanbul and Ankara due to the country’s economic woes and ailing democratic standards. Past elections in Turkey show that economic problems do have the ability to create political surprises, especially when combined with a voter base angered by deteriorating freedom of speech.  

The report in The Conversation-UK urges governments such as Turkey’s to gear back and share some powers with opposition parties to give their economies a boost. That could ultimately help authoritarian-leaning leaders stay in power longer.

With Turkey’s production and consumption grinding to a halt amid high inflation, the post-election period will be the time for the government to get serious about considering more transparency, coherency and collectivity in economic policy making. 

Despite the government’s strong denial that it will consider an IMF program after the elections, it is inevitable that investors and analysts are talking about the possibility, given the difficulties for the private sector in repaying huge debts, most of which was borrowed from banks in Turkey.

An IMF programme, despite the debate over its usefulness for economies around the globe, is an important source of loans that can reverse the negative cycle in the Turkish economy.

The cost of an IMF deal for the government would be a return to rational and transparent economic policy. This in turn would perhaps highlight to everyone the ailing state of democracy in Turkey and its real burden on the economy.