Monday, December 6, 2010

Weekly Hurriyet Column: WikiLeaks cable on Turkish economy

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News media webeditor since March, you won't see much of a difference between the two. No cheesy title this time around, but the last line is paying an indirect homage to This is Spinal Tap. That's the line that appears at the very end of the movie. 

As for the usual addenda: Because of the space constraint of the column, I could not get into all that I wanted to: For one thing, I would have loved to mention is the widespread perception that the government is flexing its tax muscles to go after companies/people it has issues with, the Dogan tax levy being the case in point. Note that I am not claiming anything, but when I discussed this almost two years ago, I was able to show that markets did perceive that the AKP was after the Dogan group after all.
 
Jumping to another topic, my favorite Turkish daily Radikal ran a story today, noting that the CBT gubernatorial race had begun. The article, like my column, singles out Erdem Basci as the strongest candidate for the post. Although Radikal and Daily News are both part of the Dogan Group and Daily News had a very good relationship with the new Radikal's predecessor Referans, let me assure you that this was no coordinated effort. Nor do I think that the journalist  behind the story decided to do it after seeing my column. Nevertheless, it kind of shows me that my journalistic nose is improving:)....

Returning to the Babacan versus Erdogan issue mentioned in the column: I was exchanging emails with a few economists/finance professionals a few hours ago. I am sure none of them had read my column, but nevertheless the conversation turned to Erdogan versus Babacan in economics policymaking. These guys feel that there are two camps in economics policymaking on many issues: The Erdogan and Babacan camps. Given Erdogan's love for intra-party democracy!, I don't think there is much discussion going on; it would be more like Babacan trying to convince Erdogan that capital controls would not be useful, or the fiscal rule is a good idea, etc...
 
BTW, I got a couple of emails from friends and readers asking whether any of this was real or all was made up: The short answer is that all the quotes are real, and I elaborate in the more in response to a reader comment below the column, so have a look there for the details...
 
Speaking of the comments on the Daily News web page, I also elaborate a bit more on the AKP's economic successes and failures in my response to a reader who goes by the name babadog- feel free to have a look there as well.
 
I am done with the usual pre-column rambling, so on to the article:
 
 
Your friendly neighborhood economist recently stumbled upon a WikiLeaked United States’ Istanbul Consulate cable on the Turkish economy, dated Nov. 31, 2010, which he is duly passing along:

“Turkey’s macroeconomic policy is mostly on track thanks to prudential macro management after the 2001 crisis. However, macro reforms have not been followed by micro reforms, except for a few feeble attempts during the first reign of the Justice and Development Party, or AKP, government.

"Expatriate CEO XXX told us that the government is dragging its feet on the structural reform agenda: “We have led the horse to water, but we have not been able to make it drink the water,” he lamented, noting that their reform proposals have gone unnoticed. The same complaint can be heard from World Bank official XXX, who states that their findings are never put into action.

"However, economics policymakers are first-rate spin doctors. They are adept at hypnotizing the markets with rumors for months. First, the government dragged its feet on the IMF stand-by Arrangement (SBA) for months, whereby hearsay that the SBA was about to be finalized would conveniently resurface every time Turkish assets tumbled.

"Then, the government’s new opiate for the masses became the fiscal rule. Markets chose to ignore the few economists who were pointing to the deficiencies in its institutional set-up or noting that the government would never engage in fiscal restraint in an election year. Nevertheless, smart maneuvering ensured markets did not even stir when the rule was, for all practical purposes, annulled.

"Part of the problem seems to be PM Recep Tayyip Erdoğan, who recently said that he had “the last say in economics matters.” XXX from the Treasury confided in us that they and the IMF were steps away from an SBA, and that economics czar Ali Babacan was very enthusiastic towards the fiscal rule even a couple of weeks before the PM shelved it for good. These remarks lead us to believe that it was the PM who decided against both, or at least was convinced so by his phalanx of sycophantic advisors.

"It seems that the PM’s authoritarian style spills over to economic policymaking as well. Besides, he has an interesting view of economics, accented by his recent remarks that “low interest rates beget low inflation,” rather than the other way around, as the economics profession mistakenly believes. XXX from the AKP told us that Babacan spends a lot of time and energy trying to persuade the PM. His success is crucial for the clear-steering of the Turkish economy.

"Interestingly enough, the main opposition Republican People’s Party has been unable to spell out a coherent economics agenda so far. As in politics, these elitist ankle-biters are suffering from status-quo bias. Moreover, they have serious issues with main free market economics ideas such as privatization and foreign investment, leaving the business community with no viable alternative to the AKP.

"Among all this white noise, the Central Bank has been doing an excellent job in fine-tuning the economy and resisting demands from exporters as well as certain government ministers for lower interest rates and a weaker lira. The same Istanbul high-finance community that looked down upon Governor Durmuş Yılmaz when he was first appointed is now quick to praise him.

"In this sense, the appointment of the new governor when Yılmaz’s term expires in April is crucial. It is rumored that he will be replaced by Erdem Başçı, a current VP who used to play marbles with Babacan when they were kids. While he is competent, a more complacent Central Bank would not bode well for economic management.”

For those of you who thought this was real, it wasn’t.

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes, and a contributor to Roubini Global Economics. Read his economics blog at http://emredeliveli.blogspot.com.

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