Monday, 31 August 2009

Turkish Government Evades Confronting Structural Problems

Published in Articles

By M. K. Kaya (vol. 2, no. 15 of the Turkey Analyst) 

Turkey has been severely affected by the global economic crisis. The country is in deep recession. However, it is still uncertain whether an agreement with the International Monetary Fund will be reached. The agreement with the IMF was expected to be signed after the local elections in March 2009, but the Turkish government continues to postpone the issue. The non-existence of an agreement with the IMF is above all a testimony to the lack of any economic administration to speak of. To implement the measures that are necessary if Turkey is to avoid another economic collapse means that the AKP must be prepared to sacrifice its hold on power.


BACKGROUND: Following the local elections – which represented an electoral setback for the governing AKP – Prime Minister Recep Tayyip Erdoğan went through with a large cabinet reshuffle. Significantly, the reshuffle affected the management of the economy, with the ministers in charge of portfolios concerning the economy being dismissed, such as Nazım Erken, Kemal Unakıtan and Kürşat Tüzmen. Former foreign minister Ali Babacan, who had held the treasury portfolio between 2002 and 2007 (a period during which the Turkish economy was deemed to be a success story), was elevated to deputy prime minister in charge of the economy. The previous minister responsible for the treasury, Mehmet Şimşek, was reassigned as minister of finance, although his performance at the treasury had been subjected to criticism. Zafer Çağlayan and Cevdet Yılmaz were assigned to other economic portfolios.  

Ali Babacan

The revision was not restricted to the ministerial level; a large scale revision was also undertaken in the higher economic bureaucracy. All the undersecretaries were reassigned or retired, except for the undersecretary of the treasury, İbrahim Çanakçı. The changes reflected Babacan’s ambition to make a fresh start by establishing his own team. However, the new economic team is still to announce any new important economic measures.

Meanwhile, the latest statistics show that the Turkish economy is very far indeed from any recovery. In the first quarter of 2009, the economy shrank by 13.8 percent, while the unemployment rate rose to 15.8 percent. Between January and June exports decreased by 30.6 percent, compared to the same period the last year. Turkey’s economic performance rates as one of the worst among the OECD countries. Although there was every reason to suspect that Turkey would indeed take a hard hit, Prime Minister Erdoğan initially sought to downplay the consequences of the global crisis, contending that the crisis would barely have any impact at all on the Turkish economy.

The details of the ongoing negotiations with the IMF have yet to be shared with the public. Still, Erdoğan has used harsh language in reaction to the demands of IMF, indicating that the negotiations are not going smoothly. Above all, since the beginning of the negotiations, Ankara has expressed complaints about the IMF’s demands concerning public spending. While, in order to support economic revival, public spending is being encouraged in many other countries, the demands from IMF regarding Turkey go in the opposite direction.

IMPLICATIONS: Cuts in the public expenditure called for by the IMF would in particular hit social security, health care and agricultural subsidies. During the period between 2002 and 2007, these sectors were the main beneficiaries of the increase in state revenues that the economic growth generated, as they were given priority in budget allocations. The improvements made in the health care and social security systems significantly contributed to the AKP’s landslide re-election in 2007.

Another important aspect of the budgetary problems that have been brought to attention as a result of negotiations with the IMF consists of the spending (or debts) of municipal administrations. Although the debts or debt schedules of these administrative units are not fully disclosed, it is generally assumed that they are indebted far higher than their incomes, perhaps up to 5 to 10 times more. For the ruling AKP, the IMF’s demand that stricter budget controls be applied is politically controversial. Since the Istanbul and Ankara municipalities were taken over by the Islamist Welfare party in 1994, the local administrations have played a key role in paving the way for the national political ascendancy of the Islamic conservative movement. The AKP has successfully mobilized the social solidarity networks established by the local administrations in order to secure its electoral standing. There can be no doubt that the AKP will continue to resist any changes that would undermine that advantageous position.

Agricultural subsidies have also been instrumental in securing votes for the AKP in rural areas. The IMF’s demands regarding these subsidies are therefore also problematic for the ruling party. Decreasing or abolishing such subsidies given to the people in the rural areas, who have already been hit by the effects of the global economic crisis, is sure to further sap support for the AKP.

The IMF’s demand that an independent tax revenue administration be established is another bottleneck in finalizing the negotiations. Turkey is practically the only member country of the OECD lacking such an administration. However, subjecting the Turkish taxpayer to strict revenue control carries the obvious risk of eroding support for the governing party, not least among small and medium size business owners.

CONCLUSIONS: The decision-makers in the governing AKP have basically sought to postpone a solution to Turkey’s structural economic and political deficiencies. Interpreting the current crisis as a result of the workings of external, global forces, they have privileged an analysis that rests on the assumption that the beginning of a recovery in the international economy, in particular in Europe, will make the handling of the internal structural problems less painful or even redundant.

The Turkish government has not only failed to reach an agreement with the IMF, but it has also abstained from announcing a mid-term economic program. The economic administration failed to foresee the effects of the global crisis and did not implement any effective counter-measures. The absence of an agreement with the IMF and of a mid-term economic plan increases the malevolent effects of the global crisis on the Turkish economy. It is clear that a mid-term plan being applied with or without any agreement with the IMF will have political repercussions for the governing AKP. Yet, with the prolongation of the present uncertainty, indeed the lack of any economic administration to speak of, Turkey’s economic prospects look dim.

Nevertheless, capital continues to flow to Turkey, attracted by high interest rates. There is an expectation that an agreement with the IMF will eventually be reached. The decrease in the current account deficit, because of decreasing imports, enables the system to function without collapsing. However, the particular conditions that enabled the AKP to pursue the social and economic policies it did during the period of 2002 and 2007 will not return.  New social and economic measures will eventually force themselves on Turkey, with considerable political impact. Large portions of the Turkish electorate will feel let down, even betrayed, by a governing party that tries hard to avoid confronting the bitter reality of the economy.

Ironically, the AKP, after once having risen to power as a “savior” following Turkey’s economic collapse in 2001, is now itself on the brink of thrusting Turkey into a similar crisis. The AKP may indeed have run out of luck. In a sense. Turkey’s governing party faces the choice of saving itself or the country. To implement the measures that are necessary if Turkey is to avoid another economic collapse implicitly means that the AKP must be prepared to sacrifice its dominant hold on power. Yet, ultimately there is no relief in postponing responsible economic administration.

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.


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