China, Ruanda or Singapore show that autocratic regimes can stay in power for a long time - provided that they can be effectively controlled and removed by a "selectorate". Recep Tayyip Erdogan's "career", however, has more of a role model in the emerging countries of Latin America. Rudi Dornbusch and Sebastian Edwards created the typical phantom image of the macropopulist in 1991, with the four phases he usually goes through:
· As a rule, populists exploit widespread unease among the population about inadequate economic performance, often as a result of an austerity policy demanded by the IMF. A blatant unequal distribution promotes dissatisfaction, because the poor and middle class usually pay the bill for the fund's stabilisation programmes. At the same time, a successful IMF programme will lead to higher foreign exchange reserves and lower budget deficits. Cash is seductive - the call for expansion is getting louder. The situation described by Dornbusch and Edwards was exactly right when Erdogan first took office in 2003.
· Growth by stimulating demand (to increase popularity) and redistribution (to ensure proximity to the people) have top priority in the second phase. Erdogan, the underdog from Istanbul's rough neighborhood Kasımpaşa, finds his support especially among the "Dark Turks" - the poor and orthodox Anatolian masses.
· Parallel to the postulate of growth and distribution, the macro populist typically (under)assesses the macroeconomic risks of price inflation, consumptive deficit financing and external imbalances as secondary. If necessary, from the populists' point of view, dampening inflation calls for suppression of corporate profit margins as well as price and rent controls - that is phase three. Macropopulist governments generally avoid massive wage increases being offset by currency devaluation. The artificial undervaluation of imports (and implicitly of tradable agricultural products) puts the unruly urban population at rest, as this increases the purchasing power of their wages.
Beside the last point, the sketch of Dornbusch/Edwards applies to Turkey. So far, the country has been characterised by an open capital account and flexible exchange rates. This can probably be explained by the fact that Erdogan is more committed to rural Anatolia than to the urban area of Istanbul. In contrast to the dictum of Friedrich August von Hayek that capital controls mean the "Road to Serfdom", Turkey went this direction under Erdogan with free movement of capital.
But what about phase four of the phantom image - namely the end of the macro populist regime?
When Erdogan took office in 2003, Turkey was undergoing a reform process led by IMF and Economics Minister Kemal Dervis to overcome the severe financial crisis of 2001. The fruits, for example in the form of a steep rise in per capita income, were harvested primarily by the ruling party AKP led by Erdogan. Outside agriculture in particular, the AKP generated strong employment growth in poor Anatolia. The absolute poverty rate (below $4.30 per capita income) declined steadily. Erdogan's economic achievements were considered a blueprint, especially in the Arab region. Measured in terms of the top half of OECD member countries, Turkey was able to catch up economically. This convergence process slowed just before the failed military coup in 2016, though (Fig. 1).
Figure 1: Turkey´s Convergence, GDP/cap
- in % of the mean upper half OECD by GDP/cap –
Source: OECD (2018), Economic Survey Turkey.
China has shown that autocrats need high economic growth for legitimation. In order to maintain his rule and a strong economy, Erdogan used pro-cyclical monetary and fiscal policies to fuel overall economic demand, after the global financial crisis in 2009 and then again after the military coup in mid-2016. In addition to generous money supply and high deficits in the state budget, public loan guarantees for private companies fueled output. Infrastructure investment was booming but increasingly debt-financed (Fig.2). Although private banks and companies in particular have incurred increasing foreign currency debt, they often represent state contingent liabilities.
Figure 2: Investment and Debt, Turkey (% of GDP)
Source: OECD (2018), Economic Survey Turkey.
As a result of the increasing legal arbitrariness under Erdogan, the high current account deficit was less and less underpinned by direct investment. The demand stimulated by Erdogan met supply-side capacity bottlenecks, resulting in rising inflation that could not be effectively combated by the government controlled central bank. The erosion of investor confidence increasingly weakened the Turkish lira, which further fueled inflation.
The rising demand for gold from the Turks, who increasingly distrusted the arbitrariness of Erdogan's rule, had the same effect. Since 2017, annual inflation has been in double figures. So it was only a matter of time before Turkey became the victim of a currency crisis, especially since the strong US dollar put a global burden on emerging markets. Emerging economies can be defined not only by their poverty or economic growth - but also by their dependence on the dollar exchange rate through balance-sheet asymmetries and commodity markets.
In the hot summer of 2018 nothing could stop the Turkish lira´s crash (Fig. 3). After his re-election in June, Erdogan had announced that he would have a stronger influence on economic policy in the future; in July he appointed his son-in-law as Minister of Finance. At the same time, the USA and Turkey overdid themselves with punitive tariffs, which further weakened the lira. Finally, the three major rating agencies put Turkey's creditworthiness even deeper into the junk status. When the lira crashed on 13 August, the Turkish currency, although already severely undervalued, was now worth just under 50% less than in June. Erdogan's macro populism had failed.
Figure 3. Turkish Lira/Euro, Summer 2018
Is Erdogan at the End as Many Hope?
For the time being, he does not want to resort to classical austerity measures. Restrictive monetary policy, especially higher interest rates to support the currency and fight inflation, is an abomination for Erdogan. The central bank is on a short leash, and interest rates are "mother and father of all evils" for Erdogan.
Indeed, higher interest rates would at best support the Turkish lira in the short term - in the medium term the largely credit-financed economy and the banks would collapse, which in turn would probably weaken the currency. The IMF could support the Turkish central bank by adding to its rather meagre foreign exchange reserves, in order to secure the refinancing of the Turkish economy's foreign exchange debts. Erdogan doesn't want to hear about that either: "We know very well that those who propose a deal with the IMF are actually proposing to give up our country's political independence," he said. Erdogan does not want to be domesticated from outside.
Erdogan not only has orthodox instruments at his disposal to keep himself at the top until his desired departure in 2025, especially since Turkey has become member of the BRICS Plus grouping since the BRICS summit 2017 in Xiamei..
The Russian Foreign Minister recently visited, and the Qatari ruling family has already promised USD 15 billion. That is only about 10% of the liabilities due next year. But in the area of global development banks (AIIB, NDB) and with China's new Silk Road, powerful resources have opened up outside the multilateral financial system dominated by the West. The "charm" of these new donors to autocrats like Erdogan is that the governance rhetoric about democracy, human rights and the rule of law plays little role. Even Germany, in the hands of Erdogan as a result of Merkel´s migration deal, wants to help out.
Erdogan could also have recourse to capital controls. Prime Minister Mahathir responded to the speculative attacks of George Soros' Quantum Fund in 1997 with strict capital controls during the so-called Asian crisis, thus saving Malaysia from ruin. However, capital export controls only make sense for Erdogan if Turkey's external deficit is reduced to a level that can be financed by the new donors. However, this should be achieved with a degree of austerity that does not upset Erdogan's position of power.
Alas, Erdogan is far from over.