The Scottish aristocrat and British Prime Minister (1963-1964) Sir Alec Douglas-Hume once said: “There are two problems in my life. The political problems are insoluble and the economic problems are incomprehensible.” His words also reflect very closely the economic realities of modern Turkey.
Recep Erdoğan and his Justice and Development Party (AKP) came to power in 2002 amid an economic crisis and widespread criticism of the economic policies of the previous government, led by Bülent Ejavit, which had seen the country’s GDP fall by 10 percent and Central Bank rates were rising by thousands of percent.
Between 2002 and 2013, Erdoğan managed to bring about major (and beneficial) economic changes. At the beginning of the 21st century the global economy saw the emergence of a new phenomenon – the “Turkish economic miracle,” in which Turkey’s GDP increased at a rate of over 5% consistently for more than 10 years. Moreover, compared to Asian countries such as China and India, Turkey started its growth from a much lower base.
Economic growth, improving living standards and supporting emerging Turkish businesses were leading goals for Erdoğan’s government. His government also pursued an aggressive fiscal and monetary policy. Because of a low level of growth in the domestic capital market, Turkey relied on attracting foreign investment (much of which was largely speculative in nature). The base rate of the Central Bank was also artificially kept below the inflation level, a sign of an interventionist approach to economic management. Since the lion’s share of foreign investment was dependent on the value of the US dollar, the Turkish economy became totally dependent on US financial policy.
In 2013, the US began withdrawing investment from developing countries, and Turkey, which was more dependent on this source of funding than many Asian and Eastern European countries, was among the hardest hit. For some time, the Turkish authorities tried to compensate businesses for their loss of investment by increasing the level of lending (mainly from foreign sources).
With low levels of private savings in the country and a rapid decline in external investment and credit, Turkey’s financial and economic situation was soon in an acute crisis. The lack of domestic funding for economic development and the state’s limited gold and foreign exchange reserves caused Turkey to become dependent on external financing.
In parallel with the growth of hyperinflation, the value of the Turkish lira began to fall, and the purchasing power and level of wages decreased. In 2005, as part of a series of financial and economic reform programs a major redenomination took place in Turkey, with six zeros removed from the lira bills. As a result, the value of the Turkish lira was artificially pegged to the US dollar. However, the lira exchange rate has dramatically declined since 2013 and reached its lowest level to date on March 18 this year, at 32.09 to the US dollar.
A new challenge for the Turkish economy in 2013 was the arrival of millions of refugees from Syria, Afghanistan and other countries in Asia and Africa. Many of them originally saw Turkey as a transit country to wealthy Europe, but due to the closure of European borders, they were forced to stay in Anatolia. As a result, Turkey’s population increased by 4 million – although this also includes natural population growth, which is generally quite high in Turkey. The devastating earthquake of February 2023 also placed an additional economic, social and financial burden on Turkey’s budget, thus negatively affecting its economic development.
As a result of the above factors, the economy has once again become an Achilles’ heel for Erdoğan. Following his victory in the closely-contested 2023 presidential election, Erdoğan changed the government’s financial team, returning Mehmet Şimşek, who had held the post from 2009-2015, to the Ministry of Finance and Treasury. As Minister, Mehmet Şimşek’s primary goals were to rein in hyperinflation and boost Turkey’s economy.
High hopes were also pinned on the newly-appointed head of the Central Bank, Hafizeh Gaye Erkan, who had gained considerable experience working for American financial companies. However, her policy of forcing the Central Bank to raise interest rates has so far failed, as parallel foreign investment is practically nonexistent. These problems led to her resignation as head of the Central Bank and replacement by another US business school graduate, Fatih Karahan, who has promised positive changes by the beginning of next fiscal year, with a reduction in inflation from 65% to 36%.
Thus, the Turkish economy has been afflicted by one unwelcome development after another in recent years: hyperinflation, low foreign reserves, a weak national currency, negligible credit ratings, interventionism and ongoing scandals related to the dismissal of the head of the Central Bank. But despite all the turmoil and disappointing forecasts, Turkey is still afloat and has not defaulted or suffered any other comparable catastrophe.
What are the reasons for Turkey’s plunge into financial crisis? Obviously, there are a number of contributing factors here:
- Problems with current operations and trading deficit. In other words, Turkey imports more than it exports. The lack of a broad national production base has led to deficit in current operations.
- High dependence on foreign investment. The lack of sufficient domestic investment capital has led to Turkish entrepreneurs becoming dependent on foreign investors. Given the changes in global financial conditions, such dependence represents a vulnerability for the Turkish economy.
- Turkey’s low level of productivity, caused by low inflows of external investment, reduces its ability to compete in world markets.
- Increasing poverty and social inequality within the country. The low purchasing power of the population, caused by low income levels. With each fall in the value of the Turkish lira and jump in the price of consumer goods, the number of poor, and those dissatisfied with the authorities, increases. Currently about 20 million Turks, or about 25% of the population, are living in poverty. Meanwhile, a small elite controls a large share of Turkey’s wealth, resulting in acute social inequality.
- Uneven distribution of economic infrastructure. Today, the key financially and economically active regions of Turkey – those with a developed infrastructure – remain the central regions and cities (i.e. Istanbul and Ankara). The business life of the rest of the country leaves much to be desired and is in need of serious investment (including in the transportation, telecommunications, banking, energy and road construction, and in private enterprises).
- Human resource deficit in the economy. Erdoğan’s team has changed significantly over his 22 years in power. For example, Ali Babacan, the author of Turkey’s economic reforms and policies in the 2000s and 2010s, parted ways with Recep Erdoğan on political grounds and formed his Democracy and Breakthrough Party in 2019. The same thing happened to another former Erdoğan associate, Ahmet Davutoğlu, the author of the doctrine of neo-Ottomanism, who has served both as Minister of Foreign Affairs and Prime Minister, and who founded the Future Party in opposition to Erdoğan’s AKP, also in 2019. It is no secret that many of modern Turkey’s economic problems have been the result not only of domestic politics and internal problems, but also, at least to a certain extent, of an ill-considered foreign policy and the resulting tensions with the West, which holds the keys to major foreign investments and loans.
Russian expert (researcher of the Middle East and Post-Soviet East Department of Institute of Scientific Information on Social Sciences at the Russian Academy of Sciences) Alina Sbitnyova notes that “Western sanctions against the Republic of Turkey, in particular the imposition of an embargo during the presidency of Donald Trump, in equal measure both accelerated the fall of the Turkish lira and became one of the catalysts for the economic crisis. If things are not in order inside the country, and they are trying to “strangle” it from the outside, then it will be doubly difficult for Turkey to get out of this trap.”
- The technological backwardness of the Turkish economy. Low investment and limited access to advanced technologies from the West countries have to some extent reduced Turkey’s ability to create an innovative economy and develop related products. It should be noted that the innovative successes of the Turkish economy in the past were largely due to the introduction of advanced technologies from the EU and the USA in a wide range of sectors, including modern tourism services, the textile industry, automobile industry, chemical industry and the defense complex. The rapid advances in Turkish textile production were the result of the introduction of specialist equipment and technologies from the USA, Germany, Austria, France and Italy. The modern Turkish brand of UAVs, Bayraktar, was largely developed using Western technologies (Canada, Spain and Germany).
Turkey’s most profitable industries continue to be tourism, agriculture, textile manufacture, and, in recent years, automobile manufacture and military hardware (including UAVs, armored personnel carriers, and small arms). Turkey is not particularly rich in raw materials, except for its chrome ore reserves. Finally, Turkey has a strategic geographical and economic location at the junction of three continents, Asia, Africa and Europe, and access to important seas and waterways (the Mediterranean Sea, Aegean Sea, Sea of Marmara, the Dardanelles, Bosporus and Black Sea). Since the mid-2000s, with the implementation of its energy communications program to export Azerbaijani oil and gas through Turkey to Europe, thus bypassing Russia, Turkey has become an important transit country for the supply of energy resources to global markets (primarily the EU).
The Southern Transport Corridor, combined with the trans-Anatolian and trans-Adriatic gas pipelines, and Russia’s Turkish Stream pipeline, have made Turkey a key player in the global gas trade. In addition to the above pipelines, in the future the planned Russian gas hub mega-project will further increase Turkey’s importance as a transit route for natural gas. Despite its high dependence on Russian gas, Turkey is aiming to diversify its energy policy and serve as a transit route for the supply to Europe not only of Azerbaijani and Russian gas, but also of gas from Turkmenistan, Iraq and Algeria.
One further promising incentive for the development of the Turkish economy and the strengthening of its sovereignty from Western diktat will be the commissioning of the Akkuyu nuclear power plant, the first of its kind in Turkey, which is being constructed by Russia’s Rosatom. Moreover, it is thanks to its policy of re-exporting Chinese and Russian goods that Turkey is currently raising its export potential.
Thus, Turkey’s exports in 2023 reached a record high of $255.8 billion. If in 2002 Turkey’s share of global exports was 0.55%, in 2022 it was 1.02%, and in early October 2023 it was 1.06%.
The great majority of these goods are of Chinese and Russian origin.
The Turkish economy is heavily influenced by geopolitical factors. For example, the current crisis in the waters of the Red Sea and the Gulf of Aden, due to the increasing attacks by Yemeni Houthis on Israel-bound merchant ships, is forcing Turkey to seek foreign partners in the north (first and foremost, Russia). According to Ferhat Gürüz, head of the Mediterranean Fresh Fruit and Vegetable Exporters Association, the Russian Federation at the beginning of 2024 was the number one importer of Turkish agricultural produce. In particular, in February, Russia purchased $73.7 million worth of Turkish fruits and vegetables (by comparison, Iraq purchased $34.3 million and Romania $30.8 million).
According to forecasts by the Central Bank of Turkey at the end of 2024, inflation in the country may reach 44.19%, and the national currency will fall to 40.53 lira to the US dollar. Obviously, the Central Bank interest rate will also rise, with forecasts of 45 to 47% followed by a dip to below 40%.
All this indicates that the Turkish economy is highly vulnerable and dependent on external support. By waiting for major Western investment, Turkey may find itself living through a repeat of what it has experienced over more than half a century of integration with Europe. Accordingly, Turkey should not reduce its level of trade and economic partnership with Russia, or comply with the US Treasury Department’s instructions and join in the anti-Russian sanctions. On the contrary, it should focus on boosting its growth and step up its financial cooperation with our country. This is the path that will bring Turkey out of its protracted crisis.
Alexander SVARANTS – Doctor of Political Sciences, Professor, exclusively for the online magazine “New Eastern Outlook”