Turkish Lira lost almost 45 per cent of its value against the U.S. Dollar in 2018. The losses accelerated notably in recent months and particularly in the second week of August, which included the two days in which Lira lost the most against USD since the 2001 crisis.
Suddenly, it became “all about Turkey” as the Bloomberg commentators said and many pundits expressed their opinions about the reasons as well as the dire consequences of a currency crisis.
The first stage of the international financial crisis in 2008-09 was followed by the Eurozone crisis (2010-12). Increasing volatility in the markets of global South, which began by 2014 can be seen as the third stage in such a periodization. We believe that the downfall of Turkish Lira against this background is a symptom of macroeconomic problems and the policy responses of the last decade. In other words, Turkey’s 2018 crisis occurred as a combination of the impact of the tightening global dollar liquidity conditions, the choices of policymakers particularly in recent years and the inability to formulate a new economic model to overcome the crisis of accumulation, unfolding right now in Turkey.
Impact of the financial tightening
The world’s biggest financial crash in the 21st century turned into then Eurozone crisis by 2010. In these years, the policy response by the Central Banks of the core capitalist countries helped periphery achieve high rates of growth. The capital inflows initiated short-lived economic boom in Turkey and the country was the second fastest growing one in the world, following China during 2010-11. The AKP governments benefited from cheap credit period until 2013 and strived to spread further the financial modes of calculation among its electorate.[1]
A low interest rate policy was key to the neoliberal populist model of Erdoğan. Its limits were first tested with the end of Fed’s quantitative easing that marked the end of the capital bonanza. As economic growth slowed after 2013, throwing into question the model of neoliberal populism, the agenda of AKP shifted towards a new model with developmentalist elements.[2]
The idea of transition to a presidential regime was put on hold, as economic policy makers started putting more effort in devising alternative mechanisms for finance and hybrid development strategies. Policy makers underlined the need to deepen Islamic bond markets and draw in the savings of households to the financial sector, by enabling the creation of new investment instruments. Islamic think tanks questioned central bank independence and targeted central bank’s sole objective of providing price stability.
Accordingly, consultants of then Prime Minister (and President from 2014 onwards) and policy makers wanted to create more deepened financial markets to help corporations with financing problems on the one hand and devised strategic incentives to key sectors producing intermediary goods in order to minimize current account deficit, on the other hand. This brand of import substitution lacked a detailed plan, but the idea behind the industrial policy by the AKP governments was related to enabling high value added production and minimizing import dependency in key sector. These attempts however, did not structurally transform the economy in a few years.
Thus, the recovery of advanced capitalist countries pushed Turkish authorities to pursue new bottles for putting their old wine. The tightening of financial conditions for periphery was on its road would make it harder for the Turkish firms to find cheap sources of finance. We see that the similar concerns are now voiced over the emerging market contagion, though the exposure to dollar drain by many peripheral countries are more manageable than Turkey.
The causes of downfall
One narrative of the Turkish crisis attributes the chaos in the currency markets to the “one man rule” consolidated last year. Accordingly, Erdoğan’s grasp of absolute power, symbolized by the 2017 constitutional referendum and his electoral success in 2018 elections, made Turkey rely on one man’s decisions and skirmishes. New presidential powers of the President inevitably made things worse, suffering from democratic retrenchment during the state of emergency. The spat with Trump is well located in this narrative, as a final episode.
The mirror image of the dissident argument is voiced by the Islamo-fascist cadres. Using the escalation of tensions with the U.S. as an alibi, these policymakers portray the recent crisis as an extension of the “economic war” launched by the West. Otherwise, it is suggested Turkey is on its glorious path to become a leading economy in not only her region but also on the global stage.
Neither of these perspectives underlines the impact of recent economic measures upon the Turkish turbulence. Since 2013, Turkish economy faces a bottleneck, which paralysed the top level AKP cadres. As we mentioned above, current account deficit continued to grow and the level of financial deepening was not enough to overcome the dependency of the economy to capital inflows for new investment as well as rolling over debt. The 2016 coup attempt and the contraction of the economy in the third quarter of the year added insult to the injury.
This bottleneck can be resumed as follows: in recent years, to promote capital inflows, interest rates were kept at higher and higher levels. But it would stifle the domestic demand in medium term as well as result in economic activities further losing pace – hence the state-sponsored credit expansion of 2016-17. Falling interest rates would provide an incentive for domestic consumption, but it will result in further depreciation of Lira. Depreciation of TL would also mean increased burden for corporations heavily indebted in foreign exchange. Thus, this bottleneck has also been a manifestation of a deep-rooted crisis of capital accumulation regime of Turkey.
The cost of postponing interest rate adjustment and renewing state sponsored credit expansion became much more notable in 2018, when TL continued to depreciate despite 5 per cent interest rate hike (see the Figure). The FX liabilities of the real sector reached 339 billion USD by May 2018. Before the elections in June 2018, current account deficit to the GDP ratio exceeded 6 per cent and the money needed to rollover private and public sector debt for the coming 12 months surpassed 180 billion USD. The desperate search for new funds did not yield any result and the portfolio flows financing the deficit economy of Turkey lost pace by 2018.
Turkish Lira gained some ground in the third week of August but the level of depreciation against USD from the 6th of August to the 14th was above 25 per cent. Stagflation is ahead and thousands of firm will go bankrupt as the FX liabilities cannot be managed against the backdrop of this depreciation.
What’s next?
We believe that the capital accumulation regime in Turkey, which benefited from capital inflows in 2002-07 and 2010-13 came to a definite end in 2018. AKP was successful in managing the tensions and rested growingly on the authoritarian techniques to deal with the social ramifications. By suppressing labour organizations, deferring strikes, assuming partial costs of the newly employed staff in particular and intervening into the economy via bypassing the parliament in general, policy makers served the major business groups as well as the SMEs under the state of emergency (July 2016 to July 2018). It seems that they can no longer go on as they used to.
Entertaining new-developmentalist ideas in the post-2013 era, such as selective incentives to the sectors producing intermediary goods did not result in a detailed road map for overcoming the crisis, which was then at the doorsteps. Since rapid growth continued thanks to capital inflows and the construction sector did not lose its steam, the policy makers relied on doing more of the same. It is partly because of the fact that the collapse of the economy in late 2008 was managed easily; the top level economic managers do not have a model or economic package for the coming months. They seem to rely on the regime’s tools to suppress mass discontent, praying that foreign capital will flow into wage-suppressed sectors and Turkish corporations will take huge steps in due course to produce technology intensive products. Keeping fingers crossed, however, will not be sufficient to have an easy access to a new path of prosperity and high economic growth.
In a nut shell, the recent currency crisis of Turkey clearly shows that Erdoğan government is at a crossroads now. Erdogan may choose the ‘more of the same’ option and implement a standard IMF type stabilization programme that has been demanded by the dominant capital fraction in the ruling block. This option requires elimination of the most ‘zombie firms’ that were bailed out by the government after 2016 contraction. Of course, it will come with a huge political cost in the wake of the local election that will be held in March 2019.
Alternatively, Erdoğan may follow a new-developmentalist framework and initiate a kind of import substitution industrialization strategy. We should underline that there is no clear blueprint or a concise plan for a new-developmentalist project, although there are some initial attempts and ad hoc initiatives of various ministries. A full-fledged transition to a new developmentalist path would require a more substantial change in the ruling block against the interest of currently dominant fraction of capital, and a change in the mode of integration of Turkish economy to the financialized capitalism which may necessitate to impose capital controls.
Thus, current problems are much more complicated than the increasing interest rates or Erdoğan’s ideological approach as has been suggested by the international media outlets. The currency crisis now set the country as a stage for further socioeconomic turbulences. The opposition in Turkey has to struggle not only against Erdogan’s authoritarian populist rule, but also technocratic neoliberal authoritarianism, creeping in IMF’s structural reform suggestions.
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Authors:
Ümit Akçay (Ph. D., Berlin School of Economic and Law), and
Ali Rıza Güngen (Ph. D., Turkish Social Sciences Association)
References:
[1] Güngen, Ali Rıza (2018) “Financial Inclusion and Policy-Making: Strategy, Campaigns and Microcredit a la Turca”, New Political Economy, 23 (3): 331-347.
[2] Akçay, Ümit (2018) “Neoliberal Populism in Turkey and Its Crisis”, Institute for International Political Economy Berlin, Working Paper No: 100/2018, http://www.ipe-berlin.org/fileadmin/downloads/working_paper/IPE_WP_100.pdf
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This piece first appeared on the Critical Macro Finance website:
https://criticalfinance.org/2018/08/18/liras-downfall-is-a-symptom-the-political-economy-of-turkeys-crisis/