Turkey's Crackdown on the Economy

Photographer: Kerem Uzel

Political turmoil in Turkey is putting new stress on an economy that was already coping with depressed export markets, weak investment and sagging business confidence. The economy has many strengths and great potential, but to make the most of these it also needs political stability, the rule of law and a commitment to international economic engagement. The July coup and its aftermath have put all three in doubt.

President Recep Tayyip Erdogan prevailed against the coup-plotters, drawing on support from much of the political opposition. Turks rallied to the government in defense of democracy. From this position of strength Erdogan should make establishing the conditions for greater prosperity a main goal.

At the moment the prevailing mood among investors is alarm. The lira plunged to a record low against the dollar and investors have dumped equities in the biggest sell-off since 2008. In a sweeping purge of suspected opponents, the government has dismissed tens of thousands of people from positions in the army, civil service, academia and judiciary. Dozens of media outlets have been ordered closed. The scale of these measures is extremely disturbing.

In a new twist, this week the head of research at one of Turkey’s big financial firms was stripped of his license over a report on the impact of the attempted coup; he is now facing criminal charges. The head of the banking regulator said it disapproved of “reports that would turn expectations and the atmosphere negative.” Efforts to prohibit such reports are far more likely to do that than anything analysts might say.

On Erdogan’s watch, the economy has made real progress. The proportion of people below the official poverty line has fallen from some 30 percent of the population in 2002 to less than 2 percent. Life expectancy, years of schooling, output and formal employment have all gone up at respectable rates. Growth recovered well after the crash of 2008, especially bearing in mind the slump in demand abroad. Turkey has been steadily closing the gap with the world’s advanced economies.

But there’s a lot still to do. Per capita incomes stand at less than half of the industrial-country average, and inequality is high. Though Turkey is catching up, the pace of convergence has slowed. A persistent external deficit underlines the need to make Turkish producers more efficient, and to embed them more firmly in international production networks. That requires investment. Retaining the confidence of domestic and foreign investors will therefore be crucial.

At its best, the ruling AK Party has been an effective economic reformer. Recent policy announcements promise new spending on infrastructure, which is welcome so long as it’s done right, and ministers acknowledge the need for more ambitious structural reforms, including in the labor market. But creeping authoritarianism, pressure on the central bank, lack of transparency and failure to deal with corruption were holding Turkey back even before the attempted coup. Alarm aroused by the purge will make things worse.

Erdogan’s crackdown is cause for concern in its own right. If it hobbles the economy into the bargain, the government will have snatched defeat from the jaws of victory.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.