Yahya Madra
Nov 03 2017

Turkey’s structural limits

 

At first sight, Turkey appears to be on the cusp of making some fundamental, constitutive choices. For instance, everyone is wondering whether Turkey is about to make a shift in its foreign policy axis, from the Western world and NATO, to Eurasia.

On several fronts, Turkey’s relationship with the United States and the European Union is highly strained. Ironically, in late September, when Turkish President Recep Tayyip Erdoğan met Donald Trump in New York, the president of the United States famously announced: “We’re as close as we’ve ever been.”

Since then, Erdoğan has hosted Russian President Putin and Venezuela’s leader Nicolas Maduro in Turkey and met Iranian Supreme Leader Ayatollah Ali Khamenei in Tehran, leaders of countries long at odds with the United States.

Much of this diplomatic activity appears to be centred on Kurdish-related developments in Iraq and Syria, and at the heart of the tensions between the United States and Turkey lies Washington’s ongoing military support for the Kurdish-led Syrian Democratic Forces.

Many argue that the “Kurdish” wedge between the two allies has gradually pushed Turkey towards Russia. The ongoing saga around Turkey’s impending purchase of S-400 missile defence systems from Russia also continues to function as yet another indication of this re-orientation in Ankara’s foreign policy.

Another choice that Turkey appears to be on the cusp of making is between neoliberal globalism and economic nationalism. Erdoğan, his ministers and senior advisors, and various pro-government pundits speak of shifting and sometimes contradictory imperialist designs over Turkey, of the necessity of economic independence, of the need to negotiate bilateral agreements that will diversify Turkey’s export markets away from EU (the destination of nearly half of Turkey’s total exports), and of the importance of building a national economy with construction, energy and defence as its leading sectors.

Even the higher than expected GDP growth rates are mobilised as a rhetorical tool to get back at the imperialist powers such as the United States and the EU. All this anti-imperialist rhetoric combined with the above-mentioned rapprochements with Russia, Iran, China and Venezuela makes one wonder whether these two choices are somehow reflective of a deeper transformation, an “axis shift” in Turkey.

Yet, a closer look at the saga of the purchase of S-400s tells a different story. Turkey wants to purchase the missile defence system and not only be able to modify its software, but also with a comprehensive plan to manufacture them in Turkey. However, Russia does not seem to be on the same page. Moreover, missile defence systems work only if they are integrated with a radar system. And not surprisingly, Russian S-400s are not compatible with the NATO radar system Turkey is currently using.

The curious case of the S-400s is only one instance of a broader set of structural conditions (a product of its nearly two centuries long integration with the Western world) that limit Turkey’s capability to even use the prospects of an axis shift as a credible threat against its Western partners, let alone going the whole nine yards.

In a parallel fashion, Turkey’s integration to the global economy also imposes strong structural limitations to its capability to pursue heterodox economic policies.

Given its energy deficit and the composition of its industrial sector, Turkey has a structural trade deficit; it relies on imported intermediary goods even to be able to produce for export markets. Moreover, partly due to its young population, Turkey needs an ongoing inflow of foreign capital to finance its investment commitments.

Erdogan’s Justice and Development Party (AKP) came to power in 2002 in the aftermath of a major financial crisis and a comprehensive financial reform, and until the 2008 global financial crisis, rode on the inflow of foreign capital. After the global crisis, even though its composition turned into more short-term portfolio investment than long-term foreign direct investment, given its stability and relatively high returns, Turkey continued to attract capital inflows to finance its current account deficit.

The dual deficits were not much of a problem as long as the AKP government kept to the neoliberal structures of budgetary discipline and continued to have a primary surplus. The latter did not only gradually reduce the government debt but also signalled to international rating agencies that the government would have the fiscal wherewithal to rescue the economy if the need arose.

Given these structural limitations, it is difficult to take all this talk about economic independence seriously. If anything, the so-called economic miracle of the early AKP years was possible only because Turkey was fully integrated with and therefore dependent on global financial markets.

On the way up, the integration and the inflow of foreign capital was seen as a sign that Turkey Inc. was a rising star, a global leader. Yet, on the way down, when first the Fed and then most recently the European Central Bank began to transition into tighter monetary policy, the very integrated nature of the economy meant that if Turkey wishes to keep on rolling over its debt burden and financing its current account deficit, it needs to offer higher returns. Higher returns, in turn, means slowing down economic growth; a prospect that Erdoğan, with triple elections coming up in 2019 (or perhaps even before), seems cannot afford.

Today, having reached the limits of its fiscal wherewithal to defer the economic crisis, Erdoğan and his economic team are scrambling for new ways to finance Turkey’s current account and roll over the foreign debt. It is now quite clear that the Sovereign Wealth Fund established with an Executive Order overnight in August last year was intended to function as collateral to raise further debt.

Behind the veneer of anti-imperialist rhetoric there is still a desire to sell Turkey Inc. as a stable and high return investment vehicle. Whether this is a feasible proposition or not is another question altogether.

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