Turkey Needs Radical New Direction to Save the Economy

Turkey should emulate the reformist approach it adopted after the 2001 crisis to prevent an economic and financial breakdown - but this looks highly unlikely.

Expert comment Updated 6 June 2024 Published 23 November 2020 2 minute READ

Fadi Hakura

Former Consulting Fellow, Europe Programme

Although Ankara has witnessed what appears to be an abrupt change of its top economic team with two fresh appointments to key positions – Naci Ağbal as governor of the central bank and Lütfi Elvan as finance and treasury minister – a cardinal rule of thumb in Turkish politics is that the more drama one sees, the less policy change there will actually be.

Financial markets reacted positively to the moves in the expectation they will signal a change of Turkey’s overall economic approach, but the reality is Turkish president Recep Tayyip Erdoğan is simply putting loyalists into key bureaucratic positions to help ensure the primary role of these functions becomes ‘selling’ his policies more effectively, rather than altering them.

The hope from the markets – which saw the beleaguered Turkish lira appreciate against the US dollar at the news – is that Turkey adopts substantial interest rate increases as well as measures to repress liquidity expansion in order to temper its controversial so-called ‘Triple C’ approach of using cheap credit to stimulate growth with an unsustainable consumption and construction boom.

But instead, Erdoğan’s declaration after the appointments were made indicates the new restrictions in which they will now operate, saying ‘we are in a historic struggle against those who want to force Turkey into modern capitulations through the shackles of interest rates, foreign exchange rates and inflation’.

Learn from past successes

To resolve its current underlying economic problems, Turkey should actually be looking to its recent past and aiming to emulate the approach pursued by former prime minister Bülent Ecevit during the 2001 financial crisis when he recruited Kemal Derviş, a senior World Bank official with extensive experience and international contacts in economic, financial, and monetary affairs.

As economy minister with a broad mandate to spearhead a durable economic recovery plan, Dervis established independent market regulatory agencies covering banking, telecommunications, energy, and other key sectors, and strengthened the competition authority.

He also either liquidated or merged insolvent banks, granted central bank autonomy to guarantee price stability, and ensured recruitment was based on competence, expertise, and meritocracy. Crucially, his productivity-enhancing restructuring blueprint was designed in Turkey rather than being imposed by the International Monetary Fund (IMF) or another external agency.

Ecevit also turbocharged reforms motivated in part by a desire to join the EU with constitutional, political and legal modernization which widened personal freedom, significantly curtailed capital punishment, liberalized the cultural environment for Kurds, and fortified the rule of law. And one of his coalition partners in that work, the right-wing pro-Turkish National Action Party (MHP), is now allied with the current ruling Justice and Development Party (AKP).

His foreign minister Ismail Cem also enhanced Turkey’s relations with both Europe and the US, initiated the so-called ‘earthquake diplomacy’ with his Greek counterpart George Papandreou after twin tragedies struck both nations in 1999, and largely avoided entanglement in Middle Eastern conflicts.

The net result of all these actions was that Turkey emerged from the crisis with greater resilience, a more robust regulatory framework, upgraded political and economic institutions, rapidly decreasing inflation, a credible central bank, a stronger financial system, closer relations with the EU and US, and heightened domestic and foreign investor confidence.

But now that similar woes are engulfing Turkey anew, is Erdogan and the AKP/MHP alliance able – and willing – to repeat the Ecevit recipe? Present signs indicate they are highly unlikely to as they are too committed to entrenching the Triple C model.

Although this model will likely further consolidate their power, it will also empty the civil service of qualified professionals, restrict civil liberties and freedoms, and create more ideological politics, affecting Turkey’s foreign policy.

Such a stubborn refusal to shift direction is increasing the inevitability of a deep economic and financial breakdown and so, unless Turkey undertakes a serious policy departure instead of continuing to resort to the quick fix approach, there is real likelihood it will simply accelerate towards disaster.