Herbert London: What We Can Learn From The Turkish Economy

Feb 5, 2014

The confluence of bad news items has thrown the Turkish economy into a tailspin. Once the darling of Wall Street and a model for emerging markets, Turkey is now in the economic doldrums. Since the world downturn in 2008 Turkey has been faltering. The miracle of economic prosperity from 2002 to 2003 attributed to Premier Erdogan, now seems like a chimera.

Turkey has had a currency in free fall; the Turkish lira lost about a third of its value against the dollar in the last few months. Its central bank is torn between keeping interest rates low in order to promote economic growth or let interest rates rise to cope with intense inflationary pressure. This is the dilemma facing many emerging markets reviving fears of a financial contagion that could derail global expansion.

Turkey’s central bank finally surrendered to rising interest rates in an effort to head off the lira’s tumble, doubling its benchmark lending rate to 10 percent from 4.5 percent. However, this step has great risks. The unemployment rate for those under 30 is about 35 percent. Without economic growth that condition will worsen. There have been demonstrations on the streets of Ankara and Istanbul over economic issues as well as the corruption scandal that has tainted several members of Erdogan’s cabinet and Erdogan himself.

Erdogan’s relative political stability emerged from the seven to eight percent GDP growth from his election in 2002 until the global downturn in 2008. He is now skating on very thin ice. Those days of phenomenal growth are over for now.

Admittedly Turkey’s economy isn’t important enough to disrupt global financial markets. Its gross domestic product is $822 billion or around five percent of the U.S. GDP. Nonetheless, Turkey could prove to be a bellwether for other emerging markets trying to cope with capital flight, rising inflation and stagnant growth.

As interesting as the economic dilemma facing Turkey’s central bank is the political fragility of the Erdogan government. A faltering economy isn’t likely to produce popular support for Erdogan’s party. While political opposition is fragmented, Turkey does have a history of military coups to resolve political stalemate.

Recognizing this possibility, Erdogan has purged the military and the police of potential adversaries. But under present conditions, a coup cannot be ruled out. Since Saudi Arabia has made major investments in Turkey in the hope this infusion of capital would stabilize the government, present conditions must make the Saudi leadership very uncomfortable. As a consequence, the House of Saud could turn off the financial spigot thereby accelerating the decline of the lira.

Nariman Behravesh, chief economist at U.S. Global Insight, noted “They (the Turks) do not have an easy time of it.” Alas, the tough choice facing the Turkish government between controlling inflation and promoting economic growth is the same issue confronting the United States and western economies. The conditions may not be as stark as those found in Turkey, but they are real and not easily addressed. It isn’t easy being an economist on a “tightrope” trying to maintain your balance.

Herbert London is President of the London Center for Policy Research,  a senior fellow at the Manhattan Institute and author of the book The Transformational Decade (University Press of America). You can read all of Herb London’s commentaries at www.londoncenter.org

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