Why economists are not surprised by the graft scandal

Of course, they are surprised. Even though I was expecting some kind of retaliation, I would not have dreamed of such a wide-scale operation. But most Turkey economists are probably not shocked that construction projects are part of the investigation.

Even a first-time visitor to Istanbul would notice right away that the whole city looks like one huge construction site. Interestingly, I have some difficulty explaining this real estate boom to foreign economists, who point out that home prices have not risen as much as in other countries that went through bubbles, or that the share of construction in GDP is lower than in many peers.

Prices have been held relatively at bay by the astonishing rise in supply, which has been financed by a Ponzi-like scheme: Construction companies start a new project before they sell a significant part of their completed ones. They finance this spree by borrowing from banks, which get extra business by lending to homebuyers.

And by the way, although we don’t have data on foreign currency (FX) lending by sector, my spider senses are telling me that a significant portion of the loans to construction companies are in FX. These firms would be in dire straits if the currency depreciated further, as most of their income is in liras.

I am sure Turkey is not the first country that has gone through this path. We are even lucky that mortgages are not being packaged into derivatives and then sold and resold. We have to thank our undeveloped financial system for that. But I am not sure if there is any other country where the government is supporting this process as much.

Take TOKİ, the state-run Housing Development Administration. It only answers to the prime minister, and therefore we don’t know much about its accounts, but many construction companies partner with it. That’s the only way to get access to otherwise off-limits Treasury land. The zoning goes through the municipalities, but that is easy to take care of, as my last column illustrated.

It is not only construction magnates who are thankful to TOKİ, which works with many subcontractors. Going through some of these firms last year, I found out that most of them were founded in the last few years. And for the really big stuff like the third airport, there is the government: 60 percent of the cabinet decisions in the first half of the year were about public works!

In fact, it is so easy to make money in construction, even without TOKİ or the government’s help, that many Turkish conglomerates have been rushing into the sector at the expense of manufacturing. When I say Zorlu, what is the first thing that comes into your mind? The Zorlu Center, which was built on the land of Department of Highways, or electronics brand Vestel? In a way, construction is Turkey’s “oil curse.”

You can now see why I am not surprised by the content of the graft scandal. And I didn’t even talk about the gold exports to Iran, another pillar of the operation that economists knew well about.