To Break Free of the West’s Grip, Erdogan Is Ready to Break Turkey

Turkish President Erdogan is counting on the tumbling lira to turn his country into an export powerhouse and keep him in power in 2023. It won’t work

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Turkish President Recep Tayyip Erdogan and (backdrop) Afghan refugees collecting waste at a makeshift dumping ground last month.
Turkish President Recep Tayyip Erdogan and (backdrop) Afghan refugees collecting waste at a makeshift dumping ground last month.Credit: Mohamed Azakir/Reuters and Bulent Kilic/AFP
David Rosenberg
David Rosenberg

It’s tempting to picture Turkish leader Recep Tayyip Erdogan as a Shakespearean villain ruing the suffering he has brought on his country through his insane economic policies, as he wanders lost and broken among the 1,150 rooms of his presidential palace.

But that doesn’t seem like the Erdogan we know. Stubborn, self-righteous and surrounded by fawning yes-men, it’s more realistic to assume he is confident that all will end well – or at least that he can’t possibly be wrong.

Certainly, that is how the Turkish leader presents it in public. A crashing lira, double-digit inflation and breadlines? That’s a small price to pay for a brilliant future when, as he put it last month, “Turkey may for the first time in its history have the opportunity to follow an economic policy in line with its own needs and realities.”

His remarks – and similar ones he’s made in recent weeks, all of which are reportedly carefully thought out – have sent the lira into a free fall. That in turn has driven inflation to over 21 percent, caused the foreign investment Turkey badly needs to dry up and pushed millions of Turks into poverty.

But the Turkish leader by all accounts is convinced the plunging lira will soon be delivering economic and political benefits. How is that possible?

Erdogan’s economic policies are a mulligan stew whose ingredients include strident and paranoid nationalism, electoral politics and some oddball theories, most notably that high interest rates cause inflation. But Erdogan also throws into this strange mix a dash of conventional economics: that a devalued currency will make exports cheaper in dollar terms, spurring manufacturing and creating jobs. Low interest rates, another cornerstone of Erdogan’s economics, will give businesses an extra incentive to expand.

In fact, alongside the wreckage Erdogan’s policies have left in their wake, they have racked up some successes that generally go unacknowledged.

The first is that the Turkish economy has been growing by leaps and bounds. In the third quarter, gross domestic product expanded by 7.4 percent year on year – the fastest among the G20 economies. Erdogan thinks growth will reach 10 percent for the year. This growth isn’t trickling down to ordinary Turks, but Erdogan likely assumes that it eventually will, as the weak lira gradually works its magic.

A demonstrator holding a placard reading "We can't make a living" during a protest against economic policies of the government, in Istanbul earlier today.Credit: UMIT BEKTAS/REUTERS

To a degree, it already has: Turkey’s unemployment rate is actually falling, though it remains at a very high 11.2 percent as of October.

The second element is Turkey’s chronic current account surplus, which has long been a weight on the economy – among other things because it makes the country reliant on foreign capital and has increased its foreign debt to unsustainable levels.

Erdogan’s goal is to use the weak lira to export Turkey’s way out of a trade deficit, and this isn’t a distant dream: Turkish exports were up by more than a third in November over a year earlier, and the current account deficit has moved into surplus over the past three months

It’s enough that the economics of Erdogan’s weak-lira strategy aren’t perfect (we’ll get to that in a minute), but they are fundamentally tarnished by the political calculations behind them. He hopes that by eliminating Turkey’s current account deficit, he can liberate Turkey from the demands of international financial institutions and organizations that finance it, on condition that Turkey adheres to the laws of conventional economics and respects the rule of law.

No self-respecting authoritarian likes to be told what to do, least of all by foreigners. But in Erdogan’s case, the resistance goes way beyond the usual gripes shared by politicians and nationalists the world over of Westerners telling them how to run their countries.

He sees their interference as a global conspiracy to stifle Turkey’s economic development and inevitable rise to the status of a great power. In his own words: “We see the games being played on the exchange rate and interest rates. ... With the help of Allah and the support of our nation, we will emerge from this economic war of independence with victory.”

And if his worldview wasn’t problematic enough, Erdogan’s policies are guided by domestic political considerations that are entirely at variance with good economic policy-making.

The fact is, he is in a bit of a pickle (admittedly one of his own making, but a pickle nonetheless). If he were to adhere to conventional economic nostrums and raise interest rates in order to put a brake on the lira’s plunge and bring down inflation, the economy would almost certainly sink into a recession – and maybe a deep one. That would be a very uncomfortable situation for him to be in ahead of elections in June 2023.

Police officers detaining a man during a protest against the economic crisis and high cost of living in Turkey, in Istanbul last month.Credit: BULENT KILIC - AFP

Erdogan’s dream of closing the current account deficit and waving Western bankers goodbye, turning Turkey into an export powerhouse and winning a thumping election victory in 2023 from grateful voters, is almost certainly not going to play out. And that’s because the economics behind them are faulty.

The obvious one is Erdogan’s insistence that high interest rates cause inflation. Under his orders, Turkey’s central bank cut them last Thursday by 100 basis points, to 14 percent – meaning that in real terms they are a negative 7 percent, or more. Yet inflation is roaring ahead and may reach 30 percent next year – five times the official target and undercutting economic growth.

The strategy of boosting exports via a weak lira makes economic sense, but it won’t be effective nearly to the degree Erdogan needs for it to succeed. That’s because rising world commodities prices, especially for oil, have boosted Turkey’s import bill too. Turkish manufacturers are too dependent on imported energy and other inputs to fully benefit from a weak lira; too much of the benefits of a favorable exchange rate are being eaten up by higher costs. Turkey’s producer price index soared nearly 55 percent in November from a year earlier.

Erdogan should realize that the chances of realizing his dream are very slim, but ideologically he is too smitten by the policies he’s pursuing to dispense with them easily, and politically he doesn’t have much choice but to gamble against long odds. The small successes he can point to may be clouding his judgment even more. Relief for suffering Turks, it seems, will only come in 2023 if he goes down in election defeat.

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