Turkey's Main Challenge Is 'Erdoganomics'
On the day Turkey shot down a Russian jet this week, it also formed a new government. That went little noticed, given the frisson of a NATO-Russia clash, but it may be as important as any economic sanctions Russia might impose in retaliation for its loss.
The makeup of the new cabinet helps to answer two questions that have been open since President Recep Tayyip Erdogan's ruling Justice and Development Party regained its majority in elections this month: Will Erdogan co-opt Turkey's parliamentary system to run Turkey's $800 billion economy himself? And will he impose his sometimes eccentric theories on economic and monetary policy?
The first answer is: yes. The new cabinet is made up largely of presidential loyalists, in some cases embarrassingly so. The new minister for energy and natural resources will be Erdogan's son-in-law, Berat Albayrak. Turkey plans $125 billion in energy sector investments by 2023, so that's a big job.
The answer to the second question -- who will determine economic policy -- is more mixed. Deputy Prime Minister Ali Babacan, who guided Turkey's economic policy-making with only minor interruptions since the Justice and Development Party first came to power in 2002, is now out. Mehmet Simsek, a former Merrill Lynch economist and finance minister since 2009, has been bumped up to take Babacan's job. Business trusts both men and will be hoping that Simsek can deploy the same political weight that Babacan wielded, as he played defense against what's sometimes called Erdoganomics.
One of Erdogan's theories is that higher interest rates cause inflation, the opposite of what basic economics (and empirical data) suggest. He has also said, in line with his religious beliefs and a preference for production over finance, that real interest rates should be maintained at zero. He has accused those who disagree with him of being part of a conspiracy, called "the interest rates lobby," which seeks to make money on higher rates.
Neither Babacan nor Simsek agreed and the central bank governor, Erdem Basci, was largely able to resist political pressure to lower rates to potentially damaging levels. Basci has now lost one of his protectors, and his term ends in April. Who replaces him at the central bank will be in many ways definitive for an emerging economy that has seemed to be losing direction.
"The challenge is to find someone with the right academic credentials who will also be agreeable to the president," said Emre Deliveli, an Istanbul-based Turkish economist and consultant. "If someone close to Erdogan and without proper credentials is chosen, central bank independence is gone."
Another part of Erdoganomics is to pump money into the construction industry as the lead growth engine for the economy. This is one reason why Erdogan has developed what he once called "crazy" projects to transform Turkey's physical environment by 2023, the anniversary of the Republic's founding by Mustafa Kemal Ataturk. Those projects include a third bridge and highway over the Bosporus; a third airport for Istanbul, which would have the highest passenger capacity in Europe; a new city; and a canal to take shipping traffic away from the Bosporus.
Binali Yildirim, one of Erdogan's closest allies, returns to the job he has held since 2007 -- transportation, maritime and communication minister -- to oversee these projects. Finance Minister Naci Agbal is a technocrat from inside the ministry (a mild positive), while the new economy minister -- in reality the trade ministry -- is a politician loyal to Erdogan.
Ultimately, it will be up to Simsek and Prime Minister Ahmet Davutoglu to defend Turkey's market economy. Davutoglu intends to chair "mini-cabinets" on the economy, according to Bloomberg News, which is promising: Clearly, he understands the challenge. And the program he outlined on Wednesday included some plans that were encouraging -- for example to create a more flexible labor market -- as well as others that weren't, such as support for an "executive presidency" in Turkey, which would strengthen Erdogan's hand.
The danger is that in terms of brute politics, Erdoganomics makes sense. An economy goosed by low interest rates and rapid construction is one in which Erdogan stands a chance of reaching his unspoken goal for 2023: to refound Turkey as a mildly Islamist nation in which religious conservatives have displaced the nation's big secularist business families as the dominant economic power. As shorthand, Erdogan becomes a new Ataturk, founder of a new Turkey.
Low interest rates keep growth, and this project, bubbling. Massive government construction and energy contracts allow the government to redistribute wealth in the direction of its supporters -- even without the corruption allegations Erdogan has suppressed. Selective tax inspections enable Turkey's new elite to trim the wealth and power of the old. The difficulty, of course, is if an over-stimulated economy crashes, or a misdirected one dooms Turkey to remain a middle-income economy.
Many of these polices are not new to Turkey. Before Erdogan's arrival, the country had long experience with clientelism (at the time in favor of secular businesses and the military), as well as politically driven monetary policies. The outcome was volatile inflation and low average growth rates.
Simsek certainly understands the risks of returning to similar policies. He and Davutoglu may be able to resist the tide against Erdoganomics without Babacan and they will have a fanclub of investors wishing them well in the effort. Turkey's long term economic health depends on their success.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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