Has Turkey squandered its post-Ottoman Empire national ambition?
By Nitin Bajaj, Two-Year MBA ’20
*Opinions in this article are of the author and do not necessarily reflect those of Cornell, Johnson, or the Emerging Markets Institute.
In 1920, after the end of the first World War, the allies forced the Treaty of Sevres on Turkey to liquidate the Turkish sovereignty over the erstwhile Ottoman Empire. After a few years of reluctantly resigning to the fate of the treaty and secretly concocting policies from its place of exile in Anatolia, the nationalist government of General Ataturk negotiated and signed the more favorable Treaty of Lausanne in 1923; this led to the formation of the modern Republic of Turkey. Soon after, Ataturk articulated the national ambition of the then incipient Turkish state—that of transforming it into a modern and secular nation state that will not only be emblematic of Europe rather than the Middle East, but will also seamlessly get integrated into the West over the following decades.
After joining NATO in 1952 and straddling at the crossroads between Europe, Asia, and the Middle East, Turkey served as an essential bulwark against the Soviet incursions. Its national political scene, nonetheless, fluctuated between military rule and multi-party democracy—often governed through a compromised hybrid system. In 2002, the Islamist Justice and Development Party (AKP) won power and wide-spread political mandate. For the next one decade, the then prime-minister, Recep Tayyip Erdoğan, put Turkey on a rapid path toward an EU membership through widespread economic, institutional, and judicial reforms. Turkey’s GDP grew from $238 billion in 2002 to $764 billion in 2008.
Erdoğan’s rabbit hole—a self-inflicted crisis
Fast forward to 2018, Turkey is staring down Erdoğan’s rabbit hole of charlatanism and virtual autocracy with an imminent economic recession and currency crisis. Since 2013, Turkey’s economy has contracted by more than $100 billion, according to World Bank estimates. Two main reasons precipitated this self-inflicted crisis. For one, high growth rates in the country have depended entirely upon foreign borrowing. Second is the rejection of economic orthodoxy at the highest policymaking levels. President Erdoğan (he transitioned into the role of president in 2014) believes that high interest rates cause inflation and has entirely owned the monetary policy apparatus, rendering technocrats as puppets. Erdoğan has engineered a number of constitutional changes as well as widespread purges, altering the country’s political system to allow all of the power to flow to him. This has contributed to an economy characterized by an inadequate savings rate, massive current account deficit, lots of foreign currency debt (Turkey has borrowed about $100 billion from international banks), double-digit inflation and a currency in free fall; the Turkish Lira lost 20 percent of its value in August 2018, and corporate foreign-currency debt has more than doubled since 2009. The year-over-over consumer prices in August grew by 18 percent, while the Lira has lost 40 percent of its value since December of 2017. The GDP growth rate has slowed from the 2013 peak of 8.5 percent, right when it was on the brink of becoming a trillion-dollar economy, to a meagre 2.5 percent in 2017.
This is no surprise given the indiscriminate dismantling of the county’s institutions through authoritarian tactics and nepotism: Erdoğan’s son-in-law, Berat Albayrak, currently serves as the country’s finance minister and national media is notoriously unfree.
A misguided relationship that might compound the crisis
Compounding the severe economic crisis is the fact that Turkey’s long-held strategic relationship with the United States is also coming to an end. The alliance with Turkey is one of the closest that the United States has had for over half a century; Turkey is a host of an important American air-base—the Incirlik Air Base in Adana hosts 5,000 U.S. Airforce personnel. In the recent years, as the Turks complicated the U.S.-led fight against the Islamic State and aided Iran in evading sanctions meant to arrest its nuclear weapons development, the relationship soured. In August 2018, President Trump has vowed to slap tariffs on Turkish metals while Turkey promised to retaliate in-kind with tariffs on American automobiles and alcohol, amongst other things. The European countries have been uncharacteristically quiet in their criticism of Erdoğan given their worry of Turkey opening up its refugee floodgates to Europe. Turkey hosts the largest number of refugees in the world. An estimated population of 4 million within Turkey is made up of displaced people from other countries, including 3.3 million refugees from Syria.
Misguided as the crisis in Turkey is, the backdrop is that the long-rallies of fast-moving year-on-year growth for the emerging markets—where the largest money market funds have invested a significant portion of their portfolios—might very well be coming to an end. Argentina and Egypt are suffering from double-digit inflations. Pakistan has a ballooning current account deficit. South African Rand and Indian Rupee have recently deteriorated to historic lows as the U.S. monetary policy continues to tighten.
Juxtaposition with the contemporary economic crises in other emerging markets
Unfortunately, the national institutional reforms required to prevent spreading defaults and bank teetering in the emerging markets still rest in the hands of a few, like Mr. Erdoğan, who are either oblivious or conceited to work with credible institutions like the IMF. In that vein, a juxtaposition with the severe Argentinian situation provides us more context into the potential ramifications for Turkey. As in Turkey, the economic fundamentals in Argentina remain extremely weak as it is on the cusp of a second recession in the last two years; the peso has plunged, and the rates have surged. The interest rates—as measured in the Argentine Peso—are hovering in high 20s. Despite that, the consumer confidence in the Argentinian banking system, as evident in lack of mass withdrawals, seems high. Cross-border market funding and liquid assets, both peso- and dollar-denominated, are in ample supply. A major reason for that is Argentina’s subliminal intentions to engage with the international monetary system. Recently, the Argentinian government requested the IMF to expedite an already agreed upon $50 billion credit line.
On the other hand, Erdoğan—while always considering self-preservation more important than national interests—likes blaming his troubles on foreign conspirators. Thanks to President Trump’s gratuitous tweets and sanctions in retaliation for the arrest of Pastor Andrew Brunson, Erdoğan has an easy target to pin down his country’s crisis on the United States. In addition, there is no self-correction in the Turkish economy for Erdoğan likes surrounding himself with yes-men who highlight his omniscience. Instead of heeding sane policy advice, Erdoğan has urged his countrymen to convert their dollars and euros into lira, while accepting a $15 billion investment pledge from Qatar. Small individual contributions cannot save this economic crisis; and, unlike IMF, Qatar cannot provide Turkey the much-needed international credibility.
Sixteen years after Erdoğan’s coming to power, Turkey is manifesting itself as Exhibit A of illiberal democracies. Given his value propositions, it is not difficult to see why Erdoğan finds it counterintuitive to work with institutions like the IMF, which is the paragon of western rules-based and liberal democratic system.
As seen time and again, when economics is used to preserve political power, the economy pays a heavy price.
About Nitin Bajaj, MBA ’20
Nitin Bajaj is a first-year MBA student at Johnson. Prior to joining Johnson, Nitin worked as a transfer pricing economist with Ernst & Young in its greater Washington, D.C. area office and obtained his master’s in international affairs at the Bush School of Government and Public Service at Texas A&M University. Nitin’s interests lie at the intersection of international affairs and economics; he has written extensively, in publications such as The Indian Economist, on North Korea, Brexit, Federal Reserve’s monetary policy, India’s military modernization, among other things. Nitin can be reached at firstname.lastname@example.org.