The currency crashes, inflation shoots up. Turkey is in a deep economic crisis. That can cost President Erdogan his re-election.
Recep Tayyip Erdogan faces two stubborn opponents in the fight for the Turkish presidency. One is Kemal Kilicdaroglu – the opposition candidate who is leading in polls. The other is extremely high inflation.
Erdogan is in danger of being overwhelmed by the consequences of his pump-financed economic policy, which relies on cheap money. “Erdogan had a lot to offer his supporters in the past, but the economic crisis has hurt him,” says Seda Demiralp, head of the international relations department at Istanbul’s Isik University. “His followers still like him, they even love him. But they are unhappy that they have to pay the price.” Many voters hold Erdogan responsible for the country’s economic misery – and that could cost Erdogan the decisive votes in tomorrow’s election.
Erdogan has been the country’s president since 2014, before that he was prime minister for around ten years. During this time, Turkey initially experienced a year-long economic boom. The country benefited from the ultra-loose monetary policy of the western central banks, with which they reacted to the financial crisis. Investors looked elsewhere for yield and found it in emerging markets like Turkey. Both the state and companies took the opportunity to borrow cheaply. The result was exuberant economic growth, which, however, also boosted inflation.
When interest rates rose again in the USA, money flowed from the emerging countries into the dollar area. From 2013, foreign investors began to withdraw from Turkish investments. One consequence is that the Turkish lira came under considerable pressure. At the same time, the current account and budget deficits increased massively. In order to finance the shortfall, Turkey is dependent on money from foreign investors – but they are demanding higher and higher interest rates. Turkey slipped into an economic crisis.
Eventually, the lira plummeted. It has lost around 80 percent of its value against the dollar in the past five years. This is a problem simply because the country, which is poor in raw materials, is heavily dependent on imports, which are becoming increasingly expensive as a result of the devaluation of the lira.
“Mother of All Evils”
Inflation reached dizzying heights. Last year it was at times more than 85 percent. This meant that consumer prices had almost doubled within a year and inflation had reached its highest level in 24 years. The main reason for this was that the central bank fulfilled Erdogan’s wish for low interest rates despite high inflation. The increasingly authoritarian Turkish president had made the officially independent central bank obedient by throwing out three bosses one after the other until he found a governor who would dance to his tune.
The background: Erdogan sees interest rates as the “mother of all evils” and claims that high interest rates cause high inflation and low interest rates cause low inflation. This contradicts economic theory. But low interest rates are good for the economy – and thus for Erdogan’s popularity. The president was betting that the high inflation was temporary and only collateral damage on the way to his re-election. But this bet could go horribly wrong and cost Erdogan his office.
The last time the annual inflation rate reached the official target of five percent was in 2011, when the internationally recognized Gini index, which measures inequality in the distribution of income and wealth, also began to rise. This trend accelerated in 2013. The British think tank Legantum Institute ranked Turkey 95th in the world in its prosperity index, down 23 places since 2011.
Inflation in the country is now only around 44 percent. But it is quite likely that inflation is actually higher. Opposition politicians, economists and financial analysts accuse the government of cooking up the figures. Erdogan fired the head of the statistics agency last year, accusing him of exaggerating the extent of inflation.
Survived protests and putsch
Erdogan’s AK Party (AKP) came to power in 2002 as the economy recovered from its worst slump since the 1970s. He scored with the promise to break with years of mismanagement. As prime minister, he initially benefited from the easing of the austerity measures imposed by the International Monetary Fund (IMF). A decade of growing prosperity followed, with falling poverty and unemployment. Inflation, which had been in the triple digits a decade earlier, also fell.
Erdogan seemed untouchable. But that all changed in 2013, when protests around Istanbul’s Gezi Park swept the country, leading to numerous clashes, arrests and detentions. At the same time, the economic boom lost momentum.
The 2016 coup attempt by parts of the military led to a state of emergency. He has “formalized Erdogan’s personalist rule, which is supported by a series of obsequious advisers with questionable credentials,” says Ates Altinordu, assistant professor of sociology at Sabanci University. “The confluence of these factors created the perfect political storm for economic failure.”
Over the past decade, political divisions in the country have deepened after Erdogan turned to nationalist allies to secure parliamentary majorities. He later won a narrow referendum to introduce a presidential system that would concentrate power in his palace. Some important business officials left the AKP in protest.
“Everyone remembers the early Erdogan government when it was said that he would create an inclusive economy,” says Bülent Gultekin, a former Turkey’s central bank governor and associate professor at Wharton University. “But in reality it has made unprecedented parts of society completely dependent on the government and that is untenable.” If Erdogan wins the election and continues his economic policy, there will eventually be a complete crash. Gultekin warns, “You can put things off for a while, but eventually you’ll have to foot the bill.”