Streetwise Professor

August 10, 2018

There is Much Ruin in a Country, Turkish Edition

Filed under: Economics,Politics — cpirrong @ 6:58 pm

In June, I spent 9 days in Turkey.  For someone as interested in history as I am, it was a phenomenal visit.  From the Hittites to the tomb of Midas in Gordium to Ephesus to Cappadocia, it is a series of historical marvels, and I only scratched the surface.

Since I am fascinated by Mustafa Kemal Ataturk, one of the most interesting historical figures of the 20th century,  one of the highlights of my visit was a trip to his mausoleum and museum in the Atakabir in Ankara.  The visit was particularly timely, given that Ataturk’s legacy and handiwork is currently at risk.

The political environment in Turkey was febrile during my visit.  I left exactly one week before the (snap) presidential election, and the deep political divisions in Turkey between the Islamist followers of Recep Tayyip Erdoğan (concentrated in central Anatolia, where I visited) and the remaining adherents of Kemalism (mainly in the west, centered in Izmir, where I visited as well) were on full display.

I had some thoughts (hopes, maybe) that enough Turks would realize that Erdoğan would use an election victory to Islamize and revolutionize (and not in a good way) the country further, and would deny him an outright victory that would allow him to realize his Ottoman pretensions.  But the tribal loyalties to Erdoğan are too wide, deep, and intense, and he won a victory.  Not a landslide, but not all that close, either.

And true to form, he took a couple of point election win as an invitation to act out his political and economic fantasies.  Turkey has fared well growth-wise for the past decade-plus, but it exhibits many of the fragilities of an emerging market, and especially a fast-growing emerging market.  Navigating this situation requires prudence, and some willingness to let the monetary authorities rein in excess.

But these are two things that Erdoğan quite clearly lacks, and indeed scorns.  In particular, he has a fixation about interest rates, which he believes are evil, and should be zero.  His natural inclinations are egged on by some of his biggest business supporters, who are construction magnates addicted to cheap credit.

Fear of Erdoğan’s monetary profligacy had already caused substantial declines in the lira prior to the election, and his statements shortly before the election on Bloomberg TV about taking control of monetary policy caused a further selloff. Then post-election, he appointed his son-in-law as finance minister.  (I guess it could have been worse: at least he did not appoint his truly idiotic son.) That stoked fears even more.

Then, post election, he has gotten into a confrontation with the US over buying S-400 air defense systems from Russia, and over the arrest of an American pastor accused of treason.  He has refused to give an inch on the preacher, despite warnings from the US, and a shot across the bows in the shape of sanctions imposed on two Turkish government ministers.

This is an utterly stupid and pointless conflict, and likely reflects Erdoğan’s obsession with FETO and the Gülenist movement led by his former confrere, and now archenemy, Fetullah Gülen–an obsession that has been at a fever pitch since last July’s abortive coup.  One needs to pick battles carefully, and this is not one that a rational man would choose to fight.

The escalation of this conflict has been mirrored by further declines in the lira.

Perhaps Erdoğan could have gotten away with this with Obama, or a Bush, or a Clinton in the White House.  But it is beyond insane to wave a red flag in front of Trump, and Trump has responded predictably to what he perceives to be a challenge.

Today Erdoğan gave a speech that was intended to ease fears, but it didn’t.  It fed them, as his answer to the currency crisis was for Turks to sell foreign currency and buy lira.  Great plan! Except the Turks who adore Erdo don’t have dollars and euros, and the Turks who have dollars and euros pretty much hate Erdo.  So the speech triggered an implosion in the lira.

At which point Trump put the boot in, announcing punitive tariffs on metal imports from Turkey (steel being a particularly big industry there), embellished with a Trumpian suck-on-this-one-Recep tweet.  The free-fall intensified. Now a full-fledged crisis looms, and Erdoğan is constitutionally temperamentally incapable of dealing with it, as this would require him to make a humiliating public climb-down on firmly held beliefs and positions–the most notable of these being the greatness and destiny of Recep Tayyip Erdoğan.

So Erdoğan has doubled down, ranting about economic warfare and economic hitmen.  That may play in Anatolia, but it won’t in the currency and capital markets.

Once upon a time the military would have stepped in.  But Erdoğan has neutered it as a political force.  Some of the neutering took place after the coup, but the utter incompetence of the coup suggests that his earlier efforts to destroy the foundations of Kemalism had made considerable progress.  (The coup was so botched that it is not unreasonable to think that Erdoğan let it proceed, knowing it would fail and that he could exploit it.  Indeed, it’s not outside the realm of possibility that he facilitated it.  He has certainly been the beneficiary.)

Erdoğan is sometimes compared to Ataturk.  Ataturk was a transformative figure, and Erdoğan certainly wants to be one, and has indeed already engineered considerable transformation of Turkish state and society (although in this he was aided greatly by demography, which has seen the population of the Anatolian heartland explode and the population of the Rumelian regions stagnate.)

But although Mustafa Kemal had grand visions to Make Turkey Great Again, he was remarkably prudent in his actions.  Most importantly, whereas Erdoğan has pretensions to make Turkey a regional hegemon, and indeed, a new Ottoman Empire, Ataturk concentrated on nation building at home.  He was incredibly wise in avoiding entanglements in the looming European war, and his successor İnönü followed that lead and stayed out of WWII. Erdoğan’s involvement in Syria was a catastrophe from the word go, and his religiously-driven antagonism towards Israel, a natural ally, has been foolish in the extreme.

Under Ataturk and his successors, by focusing on domestic changes, Turkey had the breathing space to construct a functioning state and avoided the disaster that afflicted every other country in Eurasia from 1939 to 1945.   Erdoğan is not so wise.

Where does it end?  I can’t seeing it end well.  Erdoğan will likely be able to rely on his fervent political base to remain in power, and has shown no reluctance to crush opposition by any means necessary.  He has already used, and likely will continue to use, the economic crisis to stoke the us vs. them passion that has been an important part of his political success.  Turks are nationalistic (a legacy of Ataturk, ironically), many past the point of chauvinism.

We see too many examples from around the world (Venezuela, Syria, Iran) of how autocratic leaders can survive economic crisis.  Turkey is not even close to becoming one of those basket cases, and if a Maduro can hang on, so can Erdoğan.  As Adam Smith said, there is much ruin in a country, and Recep Erdoğan is likely to show how much ruin there is in the Turkish nation.

An aside. Trump has been playing Godzilla the currency markets.  Yes, Turkey is the worst (well, not counting hyperinflating Iran and Venezuela), but most other emerging market currencies have been cratering, and the dollar has been advancing.  Of particular interest is the decline in the ruble (and the simultaneous sharp drop in Russian stock prices).  Sanctioning Russia over Skripal, and the threat of more, have caused the RUB to fall by around 8 percent, 5 percent on Thursday alone.

Obviously he’s in Putin’s pocket.

Well, if he is, he’s picking it.  So much for collusion.

Putin has been conspicuously silent through this, and Russia has made sounds about trying to reach some rapprochement with the US.  Of course, Medvedev was trotted out to denounce the US.  But that just illustrates that Putin is playing it smarter than Erdoğan: Medvedev is meaningless, and his only role is to take the heat for Putin.  `

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  1. Yep. Agree. Turkey is amazing. Very fond memories of Cappadocia (wine, landscape and rainbows); Ephesus too.

    So .. we’re at a most intriguing juncture of history and geopolitics. Turkey is holding US pastor hostage. Wants to buy S-400 from Nato adversary. US is sanctioning its Nato ally (leaving aside the question of whether or not Nato is useless) and Congress is refusing to supply F-35s in which it (Turkey) has already invested $1.25 billion.

    Don’t you get the feeling that the geopolitical tectonic plates are grinding and shifting beneath our feet?

    Unfortunately, Trump likes to makes his conflicts personal … ensuring that if he wins, the savor of victory will be juiced by the humiliation of his foe. This does not offer Erdogan much in the way of an off-ramp. So no de-escalation in sight. We’ll know Nato is finally crumbling if and when the US gets booted from Incirlik.

    One has to admit that this offers an intriguing opening for a whole host of players: Putin, obviously, but also Xi. The Iranians too. Grab the popcorn and sit back in the armchair: the show is about to get interesting!

    Comment by Simple Simon — August 11, 2018 @ 9:29 am

  2. “Putin has been conspicuously silent through this”

    Define silent. He has publicly denounced the new sanctions as “illegitimate”, whatever that means.

    Comment by Ivan — August 11, 2018 @ 2:05 pm

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