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William Gumede: Turkey should be SA's wake-up call

The democratic and economic meltdowns of Turkey should serve as a wake-up call to South Africa.

Turkey was the world’s 18th largest economy, initially hailed as a Muslim "democracy", and experienced high economic growth rates for years. 

But at the heart of the abovementioned crises are Turkey’s weak economic and political fundamentals. These were compounded by populist, and in some cases rhetorical, responses to deal with these crises – which gave popular emotional satisfaction, but were unconvincing to markets.

Turkey's President Recept Tayyip Erdogan took a populist track – albeit religious populism – when his power base was challenged, unleashing the country’s current political, economic and religious downturns.  

A strong start

Erdogan co-founded Turkey’s governing Justice and Development Party (AKP) as a moderate Islamist party, with a secular vision, and became Prime Minister in 2003 after his political ban was lifted, his party having won the election late in 2002.

AKP party strategists called the party "conservative democrats". The AKP became the first Islamic party to win power since Mustafa Kemal Pasha, called Ataturk, modern Turkey’s founding father, established a Turkish republic in 1923.

Ataturk replaced religion with the army as the central pillar of society, closing down religious schools and courts and instituting Western-style law.

For decades, Turkey not only experienced years of high growth, but was also seen as the new Arab giant which governs secularly, democratically and more transparently.

At the beginning of his leadership term, Erdogan was hailed in the West as a democrat among Arab dictators.

A turning point

However, ahead of the 2007 snap elections, Erdogan turned decidedly more populist, took on the military, accusing it of political meddling, attacking critical civil society organisations and opposition parties for allegedly supporting "illegal organisations" and pushing a more hardline Islamification strategy.

Erdogan, initially seen as a moderniser, changed tack and began to woo conservative Muslims, introducing hardline reforms which included making abortions tougher, restricting the sales of alcohol, and pushing for the Islamisation of public life.

He outlawed criticisms of the president. He imposed strict curfews in south-eastern strongholds of the Kurdistan Workers’ Party (PKK), which is fighting for Kurdish independence.

The repressive turn saw ordinary citizens rise up against Erdogan for being too paternalistic, too authoritarian and for crushing opposition.

Rot sets in

Corruption in Turkey, the world’s 18th largest economy, noticeably increased.

In 2017, Turkey ranked 81st out of 180 countries in Transparency International’s 2017 Corruption Perception Index. Turkey has scored as the country with second-highest corruption levels among the 36 Organisation for Economic Cooperation and Development (OECD) member countries.

By 2016, Erdogan attacked opponents, and suppressed the media and civil society criticism and used the military to crush dissent. Erdogan built a 1 000-room palace in the opulent style of the ancient Ottoman sultans.

In July 2016, he accused moderate Islam leader Imam Fethullah Gülen and his followers of staging a failed military coup against him. He accused Gülen of running a "parallel state" and imprisoned academics, judges and security personnel accused of being Gülen supporters.

His attack on the country’s intelligentsia, middle classes, businesses and civil society organisations, which he accused of working with his supposed rival Gülen, deprived the country of human and financial capital, ideas and entrepreneurship.

Bailouts

It immediately marginalised a significant domestic policy, financial and entrepreneurial capacity, and therefore slowed growth.

The state, having marginalised local private productive capacity, increasingly had to draw on foreign capital to finance investment.

In 2017, economic growth reached 7.4%. However, growth was based on public spending on expanding infrastructure – using foreign loans. The country’s current account deficit in 2017 averaged 5.5% and had widened considerably by the end of Q1 of 2018. It reached $5.426bn in April, up $1.706bn from the same month the previous year.

Turkey needed even more foreign funds, making it heavily dependent on outsiders – Western capital. Most of the borrowing is done through US dollars, and inflation remained high.

Meltdown

The trigger to the economic crisis was a public fallout in 2018 between the US government and Turkey, which spooked the lira, causing a drop in its value.

US President Donald Trump in August 2018 imposed sanctions on Turkey for jailing a US pastor on terrorism charges, with the US raising tariffs on Turkish steel and aluminium exports to the country. Turkey and the US have had tense relations before the fallout over the jailed pastor, specifically because Turkey opposed the US sanctions against Iran.

Turkey is the world's eighth-largest steel producer. It exports some US$1,5bn worth of steel and aluminium to the US – so the increased tariffs were, in the bigger scheme of things, likely not the main reason for the country’s economic meltdown, but the trigger.

The US sanctions triggered foreign lenders to start selling their Turkish lira holdings, fearing the combination of economic, political and international crises the country faces would lead to a meltdown.

In mid-2018, Turkey fell into a currency crisis, with the Turkish lira dropping almost 45% of its value. Inflation rose to 16% and more. The central bank has an inflation target of 5%.

Turkey’s current account deficit at the time of the crisis sat at 6% of GDP. This was among the highest current account deficits for any emerging market country. Global credit rating agencies Moody’s and Standard & Poor’s downgraded the country.

Foreign debt levels were similarly high. About 70% of the country's debt is denominated in foreign currency – either US dollars or Euros. By late August, interest rates on Turkey’s ten-year government bonds topped 20%.

The large current account deficit, dependence on foreign finance and ballooning foreign debt made Turkey vulnerable to sudden withdrawal of funds by foreign investors. The government had to hastily introduce economic reforms, including reducing infrastructure expansion, raising interest rates and setting limits to how far the lira should fall against the US dollar.

There are differences in Erdogan’s ruling circle over how to tackle the crises. Erdogan differed strongly with the country’s central bank over aspects of the economic reforms, creating even more investment uncertainty.

He opposed raising interest rates to curb inflation. He appointed his son-in-law Berat Albayrak as Finance Minister, which raised investor eyebrows.

He appointed himself chairman of Turkey’s sovereign wealth fund. The fund was established to leverage the country’s estimated US$200bn valued SOEs. The fund has stakes in SOEs such as Turkish Airlines, Turk Telekom and state oil companies.

Poor management, lack of a clear strategy and uncertainty over the role of the state as a shareholder have all undermined the effectiveness of the fund.

Politically, he bolstered the powers of the presidency and turned the office into an "executive presidency" following the June 2018 elections.

Erdogan has the power to make board and executive appointments to the central bank and SOEs. He tightened his grip on the executive, parliament and army; and pursued critics even more vigorously, causing even more political instability, which in turn, of course, causes economic uncertainty.

Erdogan has deflected blame. When the central bank raised interest rates to strengthen the value of the lira, Erdogan labelled rising interest rates "a tool of exploitation". He has accused the US and the West of "economic warfare" against Turkey.

But Turkey’s economic problems are self-inflicted.

Lessons for SA

Patronage appointments of allies without key competencies to key institutions have undermined the government’s capacity to respond to the crises.

Poor management of and corruption within SOEs, have been a drain on public resources.

SOEs often have to be bailed out with foreign loans; yet without bringing in capable new management, the foreign loans disappeared into a black hole, while the rescued SOEs continue to fail.

Populism and political marginalising of opponents undermine productive capacity. It has scared many locals who could have ploughed their savings, skills and know-how into solving the crises. Many investors have left for other markets.

Taking out foreign loans to finance infrastructure development and failing SOEs – then attacking the foreign investors, who could easily move their money out, does not appear very strategic.

State-led stand-alone infrastructure projects – which had not been linked to an integrated industrial strategy, and which did not generate catalytic new industries, but were financed by foreign borrowing – increased financial losses.

Lastly, deflecting blame for the crises to outsiders meant that the country is unable to focus on how to address its own crisis.

William Gumede is Associate Professor, School of Governance, University of the Witwatersrand, Johannesburg; and author of South Africa in BRICS (Tafelberg)

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