Anxious Turkish investors eyeing opportunities abroad (Al-Monitor, February 16,2018)
ARTICLE SUMMARY Mounting political tensions, uncertainties and declining rule of law in Turkey are pushing…
Turkey’s economic growth is dependent on foreign resources, causing the volatility of the markets. However as the foreign funds continue to come, the symptoms of the structural problems remain hidden. DAILY NEWS photo, Emrah GÜREL
What is the state of affairs in Turkey after 10 years of Justice and Development Party (AKP) governments? Some observers, especially foreign ones looking from outside, indicate that they don’t see a great deal of problems. In order to explain the real situation to these observers, I use the metaphor “a bone disease with no symptoms,” or osteoporosis, as the experts say. Osteoporosis itself has no symptoms, its main consequence is the increased risk of bone fractures, which especially occur in the wrists and hips. But the fractures in the vertebrae are asymptomatic and doctors have difficulty in diagnosing them. They lead to a loss of height and a stooped posture, etc. Sometimes this is without pain, and even if the patient has pain, he or she usually cannot relate it to the bones.
What is happening to the Turkish economy is also a case of osteoporosis. Throughout the AKP’s administration the economy has been growing, even if it is somewhat fluctuating. But this growth contains fragilities and vulnerabilities.
For instance, it creates weaknesses in terms of international competition. Real growth is not in exports but rather in the domestic market, and it is the domestic market that overrules. The exports are also themselves very dependent on imports. This is a manifestation of osteoporosis. The economy shrinks (or loses its size in commercial terms) and stoops. Since growth is based on foreign resources, when foreign funds withdraw, the economy experiences exchange rate shocks and the bones are instantly shattered. It is possible to examine the osteoporosis of economic growth using three indicators: foreign capital inflows, the growth rate, and the current account deficit. The economy grows, if – and only if – there is entry of foreign capital. Foreign capital is needed for debt management, the sustaining of production, and consumer loans.
The exchange rate has been undervalued for years in order to encourage the entry of foreign capital. However, this is a major weakness that causes osteoporosis. Low exchange rate secures the entry of foreign capital, but it also encourages imports and discourages exports and/or makes them dependent on importation. Exporters are increasingly using imported inputs with the illusion that Turkey has succeeded in having some $150 billion of exports, while obscuring the fact that this is only made possible through the $240 billion of imports. The result? The manifestation of osteoporosis, in other words, a huge current account deficit. This deficit went up to $75 billion in 2011 and, although it was reduced, it totaled $47 billion in 2012.
In order to hold back the osteoporosis, or to slow it down, the government has hit the brakes from time to time, as in 2012 when the previous year’s growth rate of 8.8 percent was suddenly reduced to around 2 percent. Inevitably, such sudden drops cause a snapping of the bones. Doors are kept wide open for foreign capital entry, even in years of almost no economic growth, because the economy is in a way addicted to drugs. Foreign exchange reserves are supported with loans, and are then flaunted to family and friends by stating that “foreign exchange reserves are at a historically unmatched level.” Actually, this is done to camouflage how external debts, especially short-term ones, lead to vulnerability.
The IMF, especially with the coming of the global crisis, developed a test comprised of vulnerability indicators, in an effort to assess the damage done to economies by osteoporosis. Countries with economies under stress are assessed using this test. The ratio of short-term debts, public sector debts to GDP, and the ratio of household debts to disposable incomes are calculated to gauge the stress and exposure to risk. Turkey, according to this test, is found to be among the few most vulnerable countries.
Treatment of osteoporosis
To treat osteoporosis, experts recommend an intake of adequate amounts of calcium, through calcium-rich nutrition and calcium supplements. Sunlight is also important. However, experts say this is not on its own enough; those at risk should be physically active as well. If this approach is applied to the economy, obviously the consumption imported goods instead of domestically produced ones – in other words inactivity – causes a weakening of the bone structure.
An economy based on spending foreign currency revenues on consumption, instead of having a foreign currency revenue generating production, cannot nourish its bones. The economy cannot benefit from sunlight, but rather suffers from darkness and etiolates. The economic structure cannot withstand even the slightest stress. The treasury is kept strong (through financial discipline) in an effort to prevent fractures and fissures, but this is nothing but a crutch. To achieve this, the bones of one class are strengthened through unjust indirect taxes and privatizations, while the bones of the majority are crushed. Even if the skeleton seems strong from the outside, it deteriorates from inside. Altogether, Turkey is shrinking with osteoporosis.
Would not the politics, diplomacy and the social fabric of a country where the economy suffers from osteoporosis also be vulnerable?