Eser Karakaş
Sep 11 2018

It is disheartening how easy the solution is

Turkey is facing an economic crisis. The lira has fallen about 40 percent against the dollar this year. Inflation has reached almost 20 percent and central bank benchmark interest rates are more than 20 percent.

The currency crisis has yet to hit production and employment, but that is just around the corner.

Foreign direct investment, crucial to the Turkish economy, is in decline.

But both the reasons for the crisis and its solutions are quite apparent. There are two principal macroeconomic reasons. The first is also a structural characteristic of the Turkish economy; the income elasticity of imports is very high, hence when the economy is growing, imports - including energy – increase rapidly. But income elasticity for exports is very low so economic growth generates a bigger current account deficit.

Turkey has low savings rates or at least is not capable of financing the politically desired levels of investment with its domestic savings. But an economy's national average savings rate has inertia, so even when you try to change the national savings rate through government policy, it has side effects such as the contraction of internal markets or low levels of domestic consumption.

It is not easy for an emerging economy like Turkey to become a breakout success without sustainable, environmentally conscious growth, but the country must also be able to cope with the inevitable consequence of it; a current account deficit.

The terms of these inflows to finance the current account deficit are apparent. For the most part, Western countries green light global investment funds that finance growth in emerging economies and choose nations that are compatible with their own value system. They look for countries with the rule-of-law that do not oppose Western values. For Turkey, the green light is its eventual EU membership, or even its commitment to attempting to meet the demands of EU membership.

The macroeconomic issue is straightforward; Turkey must adjust the composition of the country's monetary and fiscal policies for high growth and needs to attract foreign investment and finance the inevitable current account deficit by generating good will by improving its rule-of-law.

I do not want to get into Turkey's educational issues, which is a micro deficit, but we must admit the quality of our current human capital is worrisome.

I cannot see a permanent and lasting solution for this crisis outside this framework; high GDP growth, high quality education, deficit spending, re-establishing the rule of law and attracting foreign investment.

Those who say they have a solution outside this framework consistently avoid talking about improving the rule-of-law, or about Turkey's EU membership process.

It is this simple.

Well, why the reluctance to acknowledge the causes of the crisis and its solutions?

This is where it gets complicated.

The answer requires analysing the rentier aspect of Turkish politics and economy. The key to successfully overcome this multidimensional crisis is re-establishing the rule-of-law, but the institutions and rules of a modern democratic constitutional state and the open market economy are both adversaries of rentier capitalism.

Re-establishing the rule-of-law in Turkey would not only wipe out the politically manufactured rentier capitalists, but will also make it more challenging to finance politics through this rentier-based public procurement system.

And just like the financial crisis of 2001, the political class favours maintaining this rentier capitalism to re-establishing the rule-of-law to end the crisis.

This is one of Turkey’s most fundamental problems.