Weekly Hurriyet Column: The economic consequences of Mr. Erdoğan

Below is my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website.  As for the title, no cheesy movie titles for a page: I am paying homage to the great master.

I am now noticing that the column needs some serious clarifications/expansion, partly owing to my usual space constraints, and partly due to, I must admit, bad planning and prioritization on my part. Therefore, I will need to post an addendum in the next hour or so, so that I can link to it in a comment to the column.

Anyway, on to the column:

With less than two months to go before the elections, it is appropriate to review the ruling Justice and Development Party’s, or AKP’s, economic policies, with a special emphasis on their second term in office.

When the AKP came to power in 2002, Turkey was in the process of implementing an economic recovery program, put in place after the 2001 crisis. There were valid concerns that the rookie government would be unable or unwilling to continue with these policies.

AKP proved the doubters wrong big time. Commendable execution of this well-planned program towards economic stability, with an expansionary fiscal contraction and banking reforms as its pillars, coupled with very favorable global conditions, did wonders for the economy in the AKP’s first term in office.

While it is difficult to prove empirically, that macroeconomic performance was the driving force behind the party’s stellar performance at the 2007 elections. In fact, Yapı Kredi Bank economists have shown that the middle classes have been increasing their share of consumption in the past few years. A short drive through the newly-booming districts of İstanbul such as Ümraniye and Güngören, which have developed into buzzing consumption centers, would confirm their findings.

The hope was that, with the macroeconomy more or less in order, the new AKP government would concentrate on the micro reform agenda after their resounding victory in the 2007 elections.

That was not the case. Not much has been done to improve the investment climate in the last four years. As the economy czar Ali Babacan candidly admitted during the IMF-World Bank meetings in Istanbul in 2009, the government could not use the global crisis to jumpstart the reform agenda, as some countries have done.

Instead of reform, we have been spoon-fed first-rate spin-doctoring. First, the government dragged its feet on the IMF Stand-by Arrangement, or 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, which was announced to great fanfare, only to be postponed several times before finally being brushed under the carpet.

Part of the problem seems to be Prime Minister Recep Tayyip Erdoğan, who has said several times that he has “the last say in economy matters.” I have been told that the Treasury and the IMF were steps away from an SBA, and that Babacan was very enthusiastic towards the fiscal rule even a couple of weeks before Erdoğan shelved it for good.

It seems that the PM’s authoritarian style spills over to economic policymaking as well. Besides, he has an interesting view of economics, underscored by his recent remarks that “low interest rates beget low inflation,” rather than the other way around, as the economics profession mistakenly believes.

AKP’s policymaking is showing cracks, but the opposition has failed to produce anything better so far despite promising early efforts such as the family insurance scheme by the main opposition Republican People’s Party, or CHP. We have yet to see their election manifesto.

The Nationalist Movement Party’s economy agenda, on the other hand, is vague. Parts of it look like a carbon copy of the one from the 2007 elections. Their macroeconomic projections are baseless, and they offer no clue how they will reach their goals. I am also not particularly impressed by promises such as making the Turkish army the third strongest in the world and keeping the Central Bank in Ankara.

At the end of the day, unless the CHP pleasantly surprises us in the next few days, I won’t blame you if you decide that a few cracks are better than a gorge.

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