Adam Tooze:  What is Erdogan’s game?

Cover Picture:  Dr Cemil Ertem, chief economic advisor to Presidency, mentioned in the article



Erdogan has long cultivated an economic ideology that consists of a brew of convenient fragments of Muslim doctrine, productivism, hostility towards outside pressure. He is prone to associating any critics with external threats. As he made clear in recent weeks:


“Of course we know that price rises are causing problems in the daily lives of our people. Of course we are aware of the volatility in the exchange rate, the instability in prices and the uncertainty this creates,” he said. “But we will resist these just as we resisted tutelage, terrorist organisations, putschists and global power barons. I am telling you, there is no going back.” He attacked Tusiad, the country’s largest business association, which on Saturday urged the government to return to the “established rules of economic science” to restore stability and prevent further damage to business and the public. “Hey, Tusiad and your offspring,” he said. “I’m telling you, you have one job: investment, production, employment, growth . . . You cannot interfere in what we are doing.” The previous day, the head of Turkey’s Union of Chambers and Commodity Exchanges (TOBB), which represents small and medium-sized businesses and has in the past been supportive of Erdogan’s approach, warned that the financial turbulence was “worrying and negatively affecting many of our companies”. Rifat Hisarciklioglu, TOBB’s president, called on the government to take “urgent steps” to stabilise the markets and restore a more predictable environment for business. “Don’t expect anything else from me,” he said in a televised speech on Sunday night. “As a Muslim, I will continue to do whatever the religious decrees require,” he added, in a reference to prohibitions in Islam on usury.


Warring with Turkey’s secular business interests is now a key device through which Erdogan rallies his electoral troops.


He is egged on by advisors such as Cemil Ertem who systematically promotes the idea of politico-economic autonomy. Middle East Eye has  accessed  a briefing paper prepared by Ertem, titled “The New Economic Model: Reasons and its Benefits” that may well be exerting a significant influence at this moment.


The main message given by Ertem’s presentation is economic independence. Over and over, he emphasises that it is impossible to be economically independent while carrying out a financial policy based on high interest rates or International Monetary Fund recommendations. Ertem asserts that a policy of high interest rates has triggered a vicious circle of low exports, lower employment, high imports, growing external debt and a country with an external dependence, which again requires higher interest rates, completing a full circle. “As a result, the country is posting a high current account deficit and depending on short-term hot money inflows and raising the external debt,” he says in the presentation. “This economic model, due to its external dependency, is laying [the] ground for economic attacks.”

The chief economic adviser says his new model, based on lower interest rates, will increase exports and decrease imports, leading to a current account surplus and higher growth with high employment. He believes it will make Turkish exports more competitive with a depreciated lira. “We will incentivise foreign direct investments instead of short-term hot money inflows, and stabilise the foreign finances,” Ertem says. “And that’s how we will become a stronger country that is protected from the external financial shocks.”




It does indeed systematically promote growth through construction rather than manufacturing, agriculture and exports. But rather than these structural elements, Ertem in his advice to Erdogan apparently stresses the political and geopolitical dimensions of dependence.


Providing examples of when the lira has depreciated previously – such as during the 2013 Gezi Park protests, the 2016 coup attempt, US sanctions in 2018 over a pastor’s arrest, and in 2019 due to a Turkish military operation in Syria – Ertem argues that geopolitical developments can be used as a tool to undermine economies based on foreign dependency.


The political logic may be important because it helps to explain timing. After all, what needs to be explained is why now? Erdogan faces difficult elections in 2023 if not earlier. The geopolitical environment is difficult. The Biden administration is not friendly. The disintegration of liberal norms in economic policy is widespread. The IMF is no longer the force that it was when it brought Turkey to heel in 2001.


Since the local elections of 2019 Erdogan has been struggling to keep his grip on the Turkish electorate. Does the policy shift of 2021 signal a bid for redemption by way of a new strategy of “running the economy hot”?


Is the economic logic of Erdogan’s wager, as Policy Tensor suggests, to achieve a “permanent devaluation of the lira, effectively lowering unit labor costs in Turkey thereby making Turkish workers more competitive.”


Certainly the devaluations of recent years have had an effect. “exports jumped 33 percent in November, reaching $21.5bn, while the current account posted a $3.16bn surplus for October.  Unemployment has also decreased, by about two percentage points, from 13.1 percent to 11.2 percent in October year-on-year. GDP grew by seven percent in the third quarter of 2021.”


But can this be sustained? If domestic inflation keeps tracks with devaluation then there is no gain in competitiveness.


With import prices soaring, the economic circumstances threaten to crush domestic demand; a recent 50 per cent rise in the minimum wage will wipe out the cost advantages of the currency depreciation, according to Tim Ash of BlueBay Asset Management. “If [Erdogan] had managed to hold [the line] when there were 10 lira to the [US] dollar, maybe they had a chance but, now inflation is out of the bag, the competitive advantage will go out of the window and we are in a devaluation inflation spiral,” Ash said.


Furthermore, for devaluation to yield dramatic benefits would require an industrial policy to back it up. The people that the FT talked to, doubt that Erdogan has any such plan.


In recent months, as Erdogan launched another easing cycle, he has reportedly cited China’s economic transformation in the wake of 1978 reforms as evidence that his model would bear fruit. But Ali Akkemik, an expert on the economies of both China and Turkey at Japan’s Yamaguchi University, said that while it was true that Beijing had devalued its currency in the 1980s and 1990s, it had implemented a clear “industrial vision” that was crucial in its transformation into the world’s second-largest economy over the course of several decades. “Turkey doesn’t have any clearly defined industrial policy,” he warned. “We don’t know what industry they’re trying to promote.”

A London-based banker with expertise on both economies who asked not to be named put it more bluntly. “It is economically crazy to think that a country can build an export-oriented economy simply on the back of a trashed currency,” he said. “If that were the case, Zimbabwe would be a tech superpower.”


Nor is the political logic of Erdogan’s maneuvering as obvious as it might seem. As Atilla Yesilada, an analyst at the consultancy GlobalSource Partners, remarked: “this is not a policy that benefits any identifiable constituency, including his family . . . or his cronies”.


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Some businesses are gaining from the slide in the currency. “Most of the companies listed on the Borsa Istanbul are benefiting from the weak lira,” said Selim Kunter, an equities analyst at the Istanbul-based Ak Yatirim. He pointed to publicly listed airlines, defence groups, carmakers and chemicals producers as companies that enjoy foreign currency-denominated revenues and Turkish lira-denominated staffing costs. …. “Erdogan is prioritising exporters over households,” said Jason Tuvey of the consultancy Capital Economics. “If you think about his support base, it doesn’t really make sense at all.” Many big exporters have also been critical of the currency volatility, which they say makes it difficult to price their products and plan ahead. Tusiad, a group representing large industrial companies that account for 85 per cent of Turkey’s foreign trade, excluding energy, has warned that what the business world needs most is stability. Musiad, a business association with close links to the ruling party, recently added its voice to the disquiet in a rare critique of the president’s approach. “A businessman needs to know what the exchange rate will be in two to three months’ time and how much it will rise.”



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Even the construction sector, the usual beneficiary of AKP largesse has begun to complain. The high cost of raw materials is hurting them.


Erdogan simply “doesn’t have a game plan”, Yesilada said, pointing to the fact that Turkish authorities have spent several billion dollars defending the lira in recent weeks while simultaneously praising the virtues of a cheap currency. “We can discuss it for hours. None of it makes sense,” said Yesilada. “There isn’t any logic.”



Erdogan’s government has launched an innovative scheme to drive deposits back into lira bank accounts. As the Middle East Eye explains:


Turk Dolar: The new tool, labelled the “Turkish dollar” by some on social media, offers a solution to this problem: if investors convert their foreign currencies into lira and deposit them in a savings account with a certain term of maturity, Turkey’s treasury guarantees that it will get the same return as forex markets. And if the forex markets drop below the official interest rates, the investor will still get an official interest rate return.


The result has been to produce a significant lira rally. But it also risks having perverse effects.


“In effect, all this just increases dollarisation, as the deposit base either is in FX or now FX linked,” Tim Ash, a senior strategist at London-based BlueBay Asset Management, said. “And the public purse picks up the bill. Arguably dollarisation shifts from the private to public sector.”


A similar scheme adopted in the 1970s helped to fuel a disastrous inflation. “Baris Soydan, a prominent Turkish journalist, said in a column on Tuesday that the idea was initially brought back by officials in 2018, but they quickly abandoned it because of possible and deep ramifications on the treasury.”



Rather than beating about the bush, Barry Eichengreen simply concludes that Turkey is now en route to hyperinflation.


Hyperinflation, of course, has two ingredients. First, money creation that fuels inflation. Second, and critically, inflation that fuels money creation. Erdoğan’s deposit guarantee adds this second element. The Turkish Treasury is not going to be able to sell bonds to finance its deposit scheme. It will have to rely on central bank credit … Although there are alternatives to the high-inflation scenario, none is happy.


Excerpt only, please visit Adam Tooze’s website, linked here


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.