Turkey's 'Miracle' Being Tested
06/12/2013 7:00 am EST
With each day of increasingly violent demonstration in Istanbul and other Turkish cities, the threat to the country's "economic miracle" becomes increasingly stark, writes Frank Kane of The National.
Whatever the Taksim Square protesters want, be it trees or regime change, there is one thing business leaders and global investors certainly do not want in Turkey: a return to the political and economic chaos that preceded the election in 2002 of Recep Tayyip Erdogan as prime minister.
Yet with each day of increasingly violent demonstration in Istanbul and other Turkish cities, strikes by the country's unions, plunging stock markets, and capital flight, the threat to Erdogan's "economic miracle" becomes increasingly stark.
The big question is whether ten years of booming economic growth under Erdogan, and a certain degree of modernization of the country's economic and financial infrastructure, has removed the flaws in the Turkish economic model that bedeviled the country for decades until 2002.
The jury of expert economic opinion is still out on that basic issue.
Turkey in 2001 was an economic basket case. Inflation was running at 80%, the lira suffered savage devaluation, stock markets plunged, and foreign investors packed their bags with dollars and escaped.
It is Erdogan's remarkable achievement that he has presided over a decade of economic recovery that has left Turkey as the economic powerhouse of the Middle East and Central Asian regions, attracting investment from all around the world (not least the Arabian Gulf), and promoting the Turkish economic model as an inspiration to other regional policymakers.
Before the demonstrations began last week, Turkey's economic fortunes looked sound:
- Inflation had been reduced to single digits
- The lira had been stable or appreciating for most of a decade that had also seen a tenfold increase in the value of Turkish stock markets
- Despite occasional qualms about "hot money" oiling the economy, Turkey was a magnet for foreign investment
- It was one of the few economies in the world that more-or-less shrugged off the 2008 global economic crisis
But some experts believe the fundamentals of the economy have changed little in the Erdogan decade. At the heart of the doubts is the fact that Turkey's boom has largely been boosted by domestic demand for imported goods to fuel the lifestyles of increasingly affluent middle classes. (Ironically, exactly the same kind of people protesting in Taksim.)
Demand for imports led to recurring current account deficits that distracted financial policymakers, and also prevented the long-term creation of a savings and investment culture in the country.
With scant indigenous resources left for serious investment in the country's economy, the gap had to be filled by foreigners. Their contribution to the Turkish economy—what the fund management industry calls "portfolio investment," but what the critics call "hot money"—is put seriously at risk by the latest political disturbances.
There is about $150 billion of foreign "hot money" in the system at the moment, and it is too early to estimate how much might have already been withdrawn or might be withdrawn if the disturbances continue. Economists estimate outflows would have to reach around $25 billion before they begin to unhinge the whole economy.
Then, the implications for the wider economy become very serious indeed. A run on the lira and a rush to dollars—the natural consequence of "capital flight"—would force the authorities to increase interest rates and restrict credit growth.
For Turkey's army of consumers, the good days would be over, and forecasts of 4% growth in GDP this year would look increasingly optimistic.
Volatility is born into the Turkish system. Witness the wild swings in GDP over the past two years, with growth gyrating between 8% and 2%, or the recovery in stock markets yesterday morning after a 10% fall of the previous day.
But skeptics doubt that the Erdogan era has sufficiently reformed the institutional framework of the economy and public finances to deal with a renewed and more serious bout of volatility caused by the disturbances.
Erdogan guaranteed the political stability necessary to achieve economic prosperity. If he cannot continue to do that, the consequences for the Turkish economy are increasingly uncertain.