A tale of two Turkeys
Given my gloomy assessments of the Turkish economy, readers often ask me about the more positive articles they read in the press and elsewhere. We can again refer to Charles Dickens, whom I rediscovered during my recent trip to London.
It was the best of times. Turkey had grown 7.2 percent on average during the five years after the 2001 crisis. Inflation was down to single digits in 2004 for the first time in more than three decades. Real interest rates were nearly zero.
It was the worst of times. Despite having bounced from a major crisis, Turkey did not grow faster than other emerging markets. Neither the government, nor the Central Bank had the resolve to decrease inflation to levels comparable to peers. Savings had plunged, and private debt surged, thanks to ultra-low interest rates.
It was the age of wisdom. The Justice and Development Party (AKP) was wise enough to stick to the economic recovery program after it got elected and they saw the program’s fruits, as Turkey attained macroeconomic stability.
It was the age of foolishness. Macroeconomic reforms were not followed by microeconomic ones. Perhaps the government became complacent, as the Turkish economy and assets performed well because of abundant capital blows.
It was the epoch of belief. Thanks to the newly-acquired macroeconomic stability, Turkish consumers and businesses could see ahead for the first time. They had confidence in themselves and in the economy.
It was the epoch of incredulity. Turks, whether they be consumers or business owners, had no confidence in each other. Turkey came out in surveys as one of the countries with the lowest level of interpersonal trust.
It was the season of Light. Finance Minister Mehmet “Nominal” Şimşek was well aware that the latest tax amnesty, supposedly prepared without his consent, created moral hazard. Economy czar Ali Babacan had made a habit of emphasizing the importance of the independence of the Central Bank, which was often criticized by Prime Minister Recep Tayyip Erdoğan.
It was the season of Darkness. Şimşek and Babacan were being excluded more and more from economic policymaking and would probably be left out of the new Cabinet after Erdoğan became President. Erdoğan’s economic policies were influenced by his chief economic adviser Brave Cloud.
It was the spring of hope. Turkish people had recently emerged as the most entrepreneurial after Indians in Oracle Capital Group’s Global Entrepreneurial Report. Istanbul had a nascent startup culture.
It was the winter of despair. These developments were despite, not because of, the business environment, which was stifling entrepreneurship and innovation. Why would an investor invest in a startup if he was certain of a higher, less risky return from construction?
We had everything before us. If Turkey could realize its potential there was no reason it could not emerge as the next Korea.
We had nothing before us. Without tackling pressing issues such as the low savings rate, dismal women’s labor force participation and bad education, as well as changing the country’s growth driver from domestic to external demand, Turkey would be stuck in the middle-income trap.
We were all going direct to Heaven, we were all going directly the other way – in short, you could say that the glass was half full, or that it was half empty. But water was leaking from a crack.
I hope my friend Esther’s father Jamie, a Charles Dickens fan to whom this column is dedicated, enjoyed it as much as my previous column making use of the great novelist’s wisdom.