June 10 (Bloomberg) -- Prime Minister Recep Tayyip Erdogan returned to Turkey last week little chastened by the protesters occupying the central squares of cities around the country. Judging by his demand that the “vandalism and utter lawlessness” end immediately, he may yet choose to crush them.
He can if he tries. In the process, though, he would badly damage the country’s economic prospects. We’re not just talking about the recent sharp fall on the Istanbul stock market and a bump of more than a percentage point in the yield on 10-year government bonds. These problems will pass.
We’re talking instead about the economy’s medium-term health, which depends more on the success of the middle-class Twitter generation now squatting in Taksim Square than on the construction boom that triggered the protests. In that respect, sending back in the riot police would be a big mistake.
For all of Erdogan’s success in boosting growth, Turkey needs a new business model. Otherwise, it won’t escape the so-called middle income trap that stalls many emerging economies when they reach per capita gross domestic product of about $10,000. True, Turkey’s per capita GDP has almost tripled since Erdogan came to power in 2003, to $10,500 at the end of last year. Yet that figure has barely increased since 2008, and growth itself fell to 2.2 percent last year, from a spectacular 8.8 percent in 2011.
To change that picture, Turkey needs young, educated, technology-savvy Turks to produce high value-added companies. In other words, Erdogan should be helping the 20-somethings in Taksim Square to start software businesses, not tear-gassing them into leaving the country for better prospects elsewhere.
At the moment, Turkey is a highly efficient assembly economy with few natural resources. Whenever exports of Turkish-made Renault cars or Bosch washing machines grow, imports balloon as factories devour more energy, raw materials and semi-finished goods from abroad. The main way to finance the resulting current account deficit is with large and inherently volatile inflows of short-term investment from abroad.
The IMF and the Organization for Economic Cooperation and Development say the way to cure this perennial problem is for Turkey to make the economy more competitive and boost domestic savings. That means removing obstacles to business, making the labor market more flexible, investing heavily in a better targeted education system and broadening the tax base. We agree.
The government, however, has a different plan -- one that involves supporting demand with low-interest rates, while pouring investment into construction. Government inspired projects include oil and gas pipelines, two nuclear power plants, a $29 billion airport for Istanbul, a third bridge across the Bosporus, a shipping canal that will cost at least $12 billion, an entirely new city, a $6.5 billion east-west highway, and numerous urban redevelopment projects such as the one that triggered anger in Taksim’s Gezi Park. Oh, and an all-Turkish-made car.
Some of these projects are good, cost-effective investments (for instance, the government needs to provide only a $6.3 billion guarantee for the build-and-operate airport tender). Nuclear power can replace energy imports and help to reduce the current account deficit. Construction, however, is by definition nontradable; most of it won’t rebalance an economy that’s already too dependent on the sector. Nor will it change the nation’s business model.
Instead, the government’s priority should be investing in research and development and in education, with construction focused on projects that can develop a higher value-added economy. Erdogan’s grand projects take government funding and focus away from these priorities and, as we are seeing, can also anger parts of the population, who think that they’re getting cemented over.
Never mind the irony that it was Erdogan and his ruling Justice and Development Party who made possible the high expectations now bringing Turkey’s relatively affluent youth out into the streets. His increasingly authoritarian ways have made him their enemy. Erdogan appears genuinely baffled by this reaction, attributing it to the knee-jerk hostility of the secular establishment that he spent most of his life fighting.
Turkey’s prime minister should understand that these protesters are not the generals that he confronted, and in many cases jailed. They are not “terrorists,” “vandals” or “bums.” They are Turkey’s Twitter generation, and he needs them.
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