Ankara's "Economic Miracle" Collapses
Changes in Turkey
by David P. Goldman
Middle East Quarterly
Winter 2012, pp. 25-30 (view PDF)
Turkey's high-flying economy, which expanded at a 10 percent annual rate of gross domestic product growth during the first half of 2011, will crash-land in 2012. Prime Minister Recep Tayyip Erdoan's "economic miracle," to use the Daily Telegraph's admiring words, depended on a 40 percent annual rate of bank credit expansion, which in turn produced a balance of payments deficit as wide as that of southern Europe's crisis countries. Markets have already anticipated a sudden turnaround in the Turkish economy. The Turkish lira (TRY) fell by a quarter between November 2010 and September 2011, making it the world's worst performing emerging market currency. The stock market has fallen in dollar terms by 40 percent, making Turkey the worst performer after Egypt among all the markets in the MSCI Tradable Index during 2011. (See Graph 1 for Turkey vs. emerging markets.) And most analysts now expect that the cyclical slowdown will uncover deep deficiencies in Turkey's labor force and infrastructure, leading to a prolonged structural slump rather than a passing recession.
The suddenness and size of this economic setback will in most likelihood erode the ruling Justice and Development Party's (Adalet ve Kalknma Partisi, AKP) capacity to govern on the strength of pragmatic success rather than Islamist ideology; will undercut its ability to use economic incentives to defuse Kurdish separatism and contain domestic opposition; and will weaken Ankara's claim to a leading regional role.
The Credit Bubble
Turkey's predicament follows a well-known pattern of Third World economic crises driven by external imbalances. The impetus behind the country's recent economic growth has been a stunning rate of credit expansion, which reached 30 percent for households and 40 percent for business in 2011. By contrast, inflation-adjusted consumer credit growth in the United States from 1984 to 2008 peaked at just 12 percent in 1995.
The banks aligned with the AKP, that is, the four Shari'a-compliant banks (or participation banks), have increased their consumer loans at a much faster rate than the conventional banks. In the year through September 16, 2011, consumer loans by the Islamic banks rose by 53 percent, according to the Central Bank's data base, compared to 36 percent for commercial banks. The Islamic banks have lent TRY 5 billion to consumers, about a quarter as much as the commercial banks.
In the past two years, the ratio of debt to disposable income in Turkish households rose from 35 percent to 45 percent. This growing demand was far in excess of what domestic output could satisfy. Graph 2 shows that the current account deficit widened accordingly as credit demand rose and the marginal dollar of consumer demand went to imports rather than domestic purchases.
As Graph 3 illustrates, this import surge was dominated by consumer durables, which rose by 60 percent between 2003 and the middle of 2011. Imports of capital as well as intermediate goods for industry, by contrast, actually fell from the 2008 peak. Turkey, in short, is running a current account deficit equal to 11 percent of GDP to promote a consumer buying spree while cutting imports of capital goods that would contribute to future productivity.
A Deeper Malaise
Turkey faces not only a sharp reversal of economic fortunes in the short term but also formidable obstacles to recovery in the medium term. The country has no natural resources with which to emulate Brazil or Russia and lacks the human capital to compete with emerging Asia. Although its universities train some excellent engineers and managers, the population as a whole is poorly educated in comparison with other middle-upper income countries. Only 26 percent of Turkish children graduate secondary school, compared to 44 percent in Mexico, 64 percent in Portugal, and 83 percent in Poland. Low-value added products (textiles, apparel, furniture, appliances, autos) dominate its export profile. Turkish industry has never succeeded in any field of high technology like that of Armenia.
Erdoan is right: Should the trend continue, the Turkish economy will collapse under the strain of caring for its dependent elderly while the country's young people will be concentrated in the Kurdish minority, fueling demands for independence from the hard hand of the Turkish state. But Erdoan's predicament is, of course, far more immediate. His government's reluctance to encourage greater savings at home does not bode well for Turkey's future. "This heavy reliance on external savings exposes Turkey to shocks," notes Standard and Poor's, "either domestic (for example if Turkey's recent high domestic credit growth resulted in future bad loans) or external (say, if rising risk aversion were to prompt foreign investors and bank credit officers to reduce exposure to Turkish entities)." According to Murat Üçer, the question is whether "Turkey can manage a soft landing or whether there'll be a correction because of external factors, which could be very ugly indeed."
If the prime minister and the AKP respond to the coming economic crisis by pushing Turkey further in the direction of Islamism, the consequences for the country's economy could be grave in the extreme. According to Bilgi University professor Asaf Savas Akat, a Turkish television commentator and long-time official of the secular Social Democratic Party,
It's important to keep in mind that Turkey is a resource-poor country We rely on the confidence of financial markets. If Turkey goes in the Iranian direction, the financial markets will shut us out. The middle class will ship their money overseas, and many of them will move overseas, like Iran's middle class did after Khomeini's revolution. The country will collapse.
As Erdoan's economic miracle evaporates, his ability to govern will diminish...............