Mark Bentley
Dec 12 2017

Erdoğan voodoo and Turkey’s record growth

There is a limit to talking up your book. Or, arguing for a scenario that, if true, would end up making you money.

Similar to the phrase “put your money where your mouth is”, you can only push an argument so far before someone calls you out on it. A bit like bluffing at poker. You might look a fool if you are not holding the cards.

The limits to “talking up your book” – a common tactic used by traders and salesmen in the financial world -- also hold true for politicians – the public will only believe so much, so often, unless they benefit financially. Across the world, including in Turkey, the reality is often very different for the elite than for the millions who are without a job, or impoverished.

One wonders, therefore, if President Recep Tayyip Erdoğan would put his money where his mouth is and invest in a Turkish business these days, particularly in agriculture or house building. Would he believe his own rhetoric if he were earning the minimum wage of $367 per month, like 5 million others, or was one of the 21 percent of Turkish youths without work?

Yesterday, the government announced that Turkey’s economy grew 11.1 percent in the third quarter from a year ago, the biggest increase of any country, globally, apparently.

Turkey annual growth rate

And Erdoğan, like every great tradesman or salesman, was right on cue. After a speech to commemorate international Human Rights Day, he proclaimed, triumphantly but conspiratorially:

“We've given the most beautiful response to those inside and outside agitators trying to make the country look weak".

Erdoğan, if true to form, will cite this “sexy number” in almost every speech he makes over the next three months, and beyond. And, no doubt, his favourite whipping boy will be the “agitators” - Turks or foreigners, and preferably Jews or “terrorist sympathizers”, who argue for a different reality, and against what has now become known as “Erdoğanomics.”

Erdoğanomics, could be considered as the polar opposite of Reaganomics - what President George H.W. Bush once referred to as Voodoo Economics. But Erdoğan’s politics also has its fair share of voodoo.

Back in the 1980’s, Reagan was trying to stimulate an economy that lay stagnant. The apparent solution, Reaganomics, advocated four main instruments:

  1. Reduce government spending and encourage private investment
  2. Lower taxes on income.
  3. Slash regulation.
  4. Lower inflation and tighten the money supply.

Fast forwarding 30 years, Erdoğanomics says:

  1. Boost government spending (to make up for a slump in private investment)
  2. Raise taxes
  3. Increase regulation (give the best contracts and tax breaks to your own business circles)
  4. Encourage inflation and the money supply

Erdoğan’s own brand of Reagan’s “voodoo” also extends to his rhetoric. Or, as the Merriam Webster Dictionary defines voodoo -- “highly improbable suppositions” or something that is “extremely implausible or unrealistic.”

Just like Erdoğan’s supposition about “the agitator”, his argument that some kind of economic miracle is happening in Turkey has little factual basis.

While the economy did grow an annual 11.1 percent last quarter, the reality behind this headline number is somewhat different.

The June-September period of 2016, or what economists would refer to as the “base period” in this case, included an attempted military coup that ravaged consumer spending and investment. It was no surprise, therefore, to see 20.7 percent year-on-year growth in the service industry, or an 18.7 percent increase in construction.

Secondly, growth did not accelerate in the third quarter of 2017, it almost halved. That is according to seasonally adjusted quarter-on-quarter data, the gold standard for measuring an expansion or contraction in developed countries.

Growth slowed to 1.2 percent between July and September, decelerating from the second quarter’s 2.2 percent.

Turkey quarterly growth

While construction and consumption performed well in the period, growth was negative in manufacturing (-1.3 percent), financial and insurance activities (-18.5 percent), real estate (-1.3 percent) and agriculture (-0.2 percent).

The overall expansion was the slowest since the third quarter of last year – the aforementioned coup period – when the economy shrunk 2.6 percent, quarter-on-quarter.

Looking back over the past 12 months, the lion’s share of growth came in the October-December period  – 4.9 percent. The expansion slowed thereafter, despite a government-backed programme to refinance 230 billion lira ($60 billion) of loans owed by troubled companies.

The growth rate in Turkey, rather than setting a record in real terms, compares unfavourably to many other countries. When comparing quarter-on-quarter data, 19 economies including the United States, China, South Africa and India expanded faster than Turkey’s. Five of them are in Europe.

At the same time, the outlook for fourth quarter growth is shaky. Inflation of 13 percent is the highest in 13 years, consumer confidence has dropped for four straight months, business confidence is at its lowest since February, industrial output growth has slowed to almost half July’s peak, and bankruptcies are at the highest level since the start of the year.

Yesterday, Economy Minister Nihat Zeybekçi said the government would approve an additional 70 billion lira in investment incentives before Jan. 1 to help drive growth.

So, the question is – is Erdoğan talking up his book? Surely not…