the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics: June 2023

Reflections on Erdogan`s Electoral Win and an Economic Policy Postscript

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Michael Sakbani, Ph.D. is a former professor of economics and Finance at the Geneva campus of Webster-Europe and Thunderbird-Europe. He is a senior international consultant to the UN System, the EU and Swiss banks. His career began at the State University of NY at Stoney Brook, then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation and Special Programs. Published over 140 professional papers and co-authored six books.

The “Intelligent Economist” voted in 2020,2022 and 2023 michaelsakbani.blogspot.com as one of the top 100 blogs in the world. Dr. Sakbani is a research contributor to Brill and Kudos which disseminates his publications to research institutions world- wide. Dr. Sakbani won numerous awards and prizes for scholarly distinction.

Reflections on Erdogan `s Electoral Win and a Postscript

Dr. Michael Sakbani

The Turkish elections are over. The autocrat in power since twenty years has won again. His score, slightly above 52 % is almost the same as that of his 2018 , though he is just as unpopular as ever among the Turks with more international exposure. One would think reading the European and to lesser extent the US press, that the wrong guy was elected.

Why is Erdogan so undesirable in Europe and the West in general?

The press is never in a vacuum by itself. There are state interests behind its stance. Put simply, Erdogan and the Turkey he leads is no longer a docile, obedient member of the Western family. There is an opposition of interests at this time between the West and Turkey. And the West sees Erdogan as responsible for that. A second aspect has to do with values. The West does not accept a semi Islamist in position of power in Turkey. This value aspect is deeply ingrained in Europe since the Crusades. Erdogan is somebody who does not fit even though he has done many things that are good for Turkey and also good for the West: he has brought Turkey out of underdevelopment, he has put the meddlesome Turkish Generals in their proper place, he wanted for long to enter the EU, and he has affirmed Turkish links to NATO. But he is ambitious beyond Turkey`s proper station in the eyes of the West.

There are also some personal issues: the man does not keep his mouth shot when belittled!!! In short, he does not have the manners of the underclass.

The Press wonders how he was able to win after 20 years in power, and terrible economic problems largely of his own doing. How did the Turkish voters vote for him when their pocket-book is so harmed?

Were the election not free; did he play with the results? Certainly not. They were free but unfair: he used all the incumbent prerogatives and hogged far more TV time than his challenger. A whole slew of journalists are in his jail, and the opposition, once so entrenched since Ataturk’s time in the Press and judiciary is now the outsider. It failed at the polls despite a six-party coalition formed to sink him personally.

The amazing thing is that Erdogan has not been doing well since 2016, the year of the Fettullah Gulan-CIA coup. His years of economic policy achievements ended then and the coup was the opportunity for the autocrat in him to come out. But if he lost his economic touch, how come he was still able to appeal to 27 million Turks to vote for him?

This great politician was able to lead the Turkish voters to look at a different vista. This vista has four appealing aspects that might explain his success in turning the scene around. The first is that under him, Turkey became an economic power, even though it lost its way in recent years. Turkey has advanced under his AKP from underdevelopment to the 19 th world rank in GDP. The second is that he shaved off Ataturk’s militant secularism and brought in conservative Anatolia to govern with the rest of Turkey. Anatolia, religiously conservative and up till recently feeling disfranchised in Ataturk`s Turkey, now shares in Turkey`s governance and one can say prosperity. The third is that his period of economic mismanagement has been full of grand projects: roads, infrastructure, growth of exportables, military industry, construction exports, education and free public health. And the last is his standing up for Turkey when it is slighted by the US and the EU.

The West which once was for most Turks the world to join has become the west that does not want the Turks .Turkey has been knocking at the door of Europe since 1970`s without a response while Bulgaria, Rumania, Malta and others, countries rather malgoverned, economically less well off, and not up to all the standards, have been let in. And Turkey who sacrificed in Korea a whole brigade to protect the of US troops withdrawal, and who has been ever loyal to the US. finds the US arming separatist terrorist Kurdish righters on its Southern border, refusing to sell it the Patriot missile system, refusing to sell it F:1 6 fighters and jettisoning it off the F: 35 project while selling all these to Greece and Israel. Turkey has pleaded with the US for 12 years to stop arming these Kurdish groups, but the US never took seriously its pleas. As a founding member of NATO with the second land army in the alliance, Turkey was not supported when it it needed NATO solidarity to face Russia. Erdogan skillfully weaved these themes in his campaign and successfully withered his big faults.

And what about foreign policy? Erdogan here had his strongest cards. He did not support Puttin`s invasion of Ukraine (he sold Ukraine arms) but would not boycott Russia either. Turkey has a balance of payment surplus with Russia. Its southern tourist areas receive 6 million Russian tourists a year. Its stance on the war qualifies it as a mediator and a peace maker. And on this score, Erdogan successfully mediated the agreement to ship Russian and Ukrainian grain to other countries and held three peace-mediating meetings between Russia and Ukraine. His policies with the Turkaic republics of central Asia and with Putin`s Russia have brought gas and oil pipelines lines through Turkey to circumvent Central Europe. That is big and considerable transit fees for the country.

These were Erdogan`s shrewd tricks of leadership which convinced 27 million Turks to forget their daily pocket-book problems and vote for a national leader the like of whom they have not seen since Ataturk. The Turks abroad were perhaps one issue voters: they reviled in national pride and voted for the man at the helm

It was the misfortune of the opposition that they came up with Mr. Kemal Kelishdaroglo, the dusty honest accountant to face the charismatic Erdogan. There were others to choose from, but political fate ordained that kelishdaroglo is to face his 12^th defeat before Erdogan.

The Problems Awaiting

Now that Erdogan is to stay for five more years in power, the time has come to face his domestic problems. Heading the list is the cost of living problem. While he cannot entirely solve the energy and food inflation brought about by the war, he can face his empirically false and unorthodox beliefs on monetary policy and economic growth.

Erdogan has to learn that a country with large and chronic current payment deficit needs foreign investment and hot- money inflows. That cannot happen with negative real interest rates. The lira has gravely suffered on this account; it has lost 80 percent of its value on the exchange markets in the last five years. This was not because of a conspiracy against Turkey but because of his failures in monetary policy and in attracting foreign direct investment as well as portfolio and hot-money inflows. Moreover, a negative real interest rate soon will dry up loanable funds. The result is a “deux-coups” galloping inflation and credit crunch.

President Erdogan thinks that low interest rates boost economic growth. That is highly unproven. Low interest rate affects construction and inventory carrying costs, but not investment in capital plants and equipment. There, the marginal efficiency of capital (internal rate of return) needs only to be higher than the interest rate and that is empirically often the case.

One of the problems of Turkey is that its growth pattern is not a good one. Construction has contributed mightily to Turkish GDP growth. That might be good for employment but not for the acquisition of new technology. Econometric evidence shows that two thirds of growth is accounted for by new technology and not by the increase of labor or capital. For a decade now, Turkey has been rarely going up the technology ladder.

Shortly before the elections, Saudi Arabia, the UAE and Qatar deposited billions of dollars in Turkey`s central bank to help Erdogan stave off attacks on the Lira. These are gimmicks and in a short time Turkey has to pay back these deposits in addition to its debts.

The jailing of dissenters and journalists and the imperious ways of incumbency are another area that need attention and change. A world class Turkey cannot have submissive judiciary, restricted Press freedom and imperious executive in the big league it wants to join. President Erdogan must aim his promised constitutional amendments at removing the issues that split Turkish society. His presidential system has many problems: it concentrate power in the President hands. The single chamber legislator cannot check these powers. Nor can the rather centralized power of the state be checked by the nonextant local or provincial power. He has overridden local elections when they did not suit him. Under his practice, the judiciary and the Central Bank are not independents and the freedom of the Press is not protected. Silly charges of demeaning the President and the state have shackled these freedoms.

Beyond that he has to face the Kurdish problem of Turkey. Kurdish nationalism is indeed a 19^th century ideology. The average Kurd has many things to gain being a part of Turkey and not a part of a land-locked, multi- tribal independent Kurdistan at war with its surrounding neighbors. Let us recall that Istanbul, Ankara and Izmir each, has more Kurds than Diyarbakir. It is not difficult to undermine the PKK and Ocalan’s amateurish economic- sociological ideology by treating the grievances of the average Kurd.

The Syrian refugees are another domestic issue which will not diappear. Erdogan has hinted that he will repatriate a million of them to areas in Norther Syria by building 250 thousand housing-units financed by Qatar. This is a project with doubtful prospects,because it will creat problems and it has many underlying faults. He has used poor refugees in his military adventures in Azarbayjan, and Libya and Europe gives him five billion Euros a year to keep them from immigration. Besides, syrian refugees are needed in the Turkish labor market. How is he going to jujggle these contradictory facts.

President Erdogan will exit the scene after this term. if he wants his legacy to be celebrated, he needs to heal the polarization of Turkish politics. Democracy is a frustrating game to leaders with strong will, they have to accept other views if they want to be successful. In Erdogan`s case, he has promoted his personal piety to the public order and thought that he is the only guardian of the truth . Politicians with great legacy are those who have grace when they disagree and forgiveness when they win.

There has seen a decline in the popular votes of both leading parties, the AKP and the CHP. The AKP lost 12 percent of its vote base in this election, and the CHP has not been able to pass 25 percent of the vote for the last three decades and lost 38 seats in the Parliament. The growing youth voters will be more than a third of the voters in 2028. Neither the AKP nor the CHP, nor the nationalists provide these young voters with suitable platforms. If the separatist Kurds scored about 9 percent, and the collection of right wing nationalists and Islamists scored a quarter of the vote in 2023, it is obvious that this would not be the case in 2028. Thus, the prevailing scene should come to an end in 2028 and thereafter. New political platforms should be envisaged to keep up with the evolving Turkish nation.

(Geneva 3/6 /2023)

Postscript

Turkey`s economy ; no miracles around the bend

The hoopala is premature

After the appointment of the new Turkish cabinet, Istanbul stock exchange soard up, President Erdogan supporters filled the air waves with the great expectations hailing from the appointment of Mr. Mehmet Shimshik as finance Minister. Now some of them started talking about the beginning of the Turkish Century!!!.

Mr. Shimshik is indeed a good replacement of his non-independent predecessor. But we do not know what is the understanding between him and President Erdogan and what realistic political maneuverability he has vis a-vis the politics and politicians of the AKP looking at the soon to be municipal elections.

President Erdogan and his party bought their election`s victory by increases in salaries, all kinds of government expenditures and subsidies including rebuilding the damaged earthquake arras, which is already underway. And not to do less, increases in minimum wages. Coming after the Covid expenditure burst, the Turkish budget deficit is a cumulative extravagance of gigantic proportion. Both the AKP and the opposition, each in their own way, promised the Turkish voters earth and heavens.

The Bitter Medicine

Unfortunately, there has to be a difficult landing from this stratosphere. The Turkish economy is in absolute need of cutting government expenditures, increasing corporate taxes and curbing consumer spending if inflation is to be brought down. That is a bitter medicine to swallow for all the AKP politicians six months before the municipal elections.

Inflation is now running at least at 50 percent -the government claims its rate is 40 percent- and unless there is a serious effort to balance the accounts, it will burst higher. The decline in international energy prices and the moderation of the prices of food-imports are welcomed developments. They will ease Mr. Shimshik tasks, but these are exogenous unpredictable developments.

Mr. Shimshik will not be able to deal with the other problem of the deterioration of the Lira until inflation goes down to single digits. The Turkish Central Bank has spent some $30 billion in intervention to support te Lira at 19 to the Dollar. Mr. shimshik will likely stop this intervention and let the Lira depreciate to the level of $ 25-26 against the Dollar.

The real interest rate is now a negative 42 percent. Unless it goes up to positive territory, that is, it goes up by 42 percent or more, it would not help the Lira. Increases of interest rates at such a scale would depress aggregate demand, bring about a recession and severely depreciate the assets of the Turkish banks. The previous economic policies were financed by heavy acquisitions of Government bonds by the banks at the nominal rate of 8.5 percent. Thus, a turn- around of interest rates to positive real territory would severely depreciate banking assets and throw the country into a banking crisis.

The other part of medicine concerns re- establishing investors’ confidence, in particular, foreign investors. Portfolio foreign investment in Turkish financial assets has drastically declined from 30 percent to about 1 percent only. The other item in the capital balance, Foreign Direct Investment (FDI), will not revive until Turkey establish a record of stability, sane economic policy and perhaps some Constitutional reforms.

Turkey also needs to wean off itself of GDP growth propelled by construction investment. That type of growth does not bring in new technology, which is the engine of growth. Empirical evidence shows that technology accounts for two thirds of GDP growth.

So, the road is long towards correcting the malaise of the Turkish economy. Four years of unwise policies have caste a long shadow over what Mr. Shimshik, or any other Finance Minister, can do.

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the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

Contributors

Friday, June 02, 2023

Reflections on Erdogan`s Electoral Win and a Postscript