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"[1]. 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[2]:
·
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[3].
·
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?
Erdogan´s Achievements
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 –
Erdogan´s Failures
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)
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.
[2] Rudi
Dornbusch & Sebastian Edwards (1991), „The Macroeconomics of Populism in
Latin America”, NBER, January.
