Turkey’s functioning market economy passes democracy test

Turkey’s functioning market economy passes democracy test

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Turkey’s functioning market economy passes democracy test The Turkish economy has proven its resilience by displaying a normal reaction to an extraordinary development like the July 15 attempted coup, according to Professor Güven Sak, the head of TEPAV, a think tank based in Ankara. 

Turkey cannot afford to be authoritarian as its high current account deficit is financed by the instruments of Western markets, meaning Turkey needs the rule of law to maintain its current state of welfare, he said.

When you look at Turkey currently, what is the picture you see?

Turkey has gone through a terrible incident. The Turkish economy had its own problems, but now we had a negative external shock, meaning it is not part of the dynamics of the economy itself. We are still in an extraordinary period. There was a clear and present danger for Turkish democracy and the rule of law.

Although we had problems, this has shown us that more terrible things could have happened. The important issue is to get through this period as quickly as possible and to normalize things as much as possible. This extraordinary situation should not become the new normal.

That requires first of all taking measures to eliminate all elements of this clear and present danger to our way of life.

How did the economy react to the failed coup?

It reacted in a normal way. First of all, there was this swing toward foreign exchange.  The lira depreciated; there were negative developments in the stock exchange as would have happened in any functioning market economy. When the lira depreciated to a certain level, there is always a kind of a tendency toward selling dollars. So up until now I have seen ordinary things happening in the Turkish money markets.

Turkish officials said ordinary citizens sold their dollars to support the government.

They acted with an animal spirit – that is, to maximize their profits and that’s good because this only shows that things are getting normal. It is a functioning market economy and people learned it and acted accordingly. Saying that people did this out of altruistic behavior might sound good, but doing things because of animal spirits is also good.

Is it normal to react normally to an extraordinary situation?

We are much more prepared for these big events happening in Turkey. There is robust growth in the Turkish economy, and it has been resilient despite the fact we had four elections in the last two years, a war on the southern front, a serious domestic security situation in the southeast, ISIL [Islamic State of Iraq and the Levant] and PKK [Kurdistan Workers’ Party] bombings. That’s one reason why Turkey analysts that are living outside the country failed.

You are alluding to S&P’s reaction.

That and all those young portfolio managers. We are much more accustomed to having a functioning market economy. The fundamentals of the Turkish economy are strong. We are one of two countries in this region where the ballot box has been doing its job amid a fairly functioning rule of law structure.

But it is important for us to explain what happened in Turkey on July 15. It’s like we were on the edge of democracy; we looked down and we did not like what we saw so we reacted. That’s a story that needs to be told instead of accusations by talking about plots against Turkey. We have internalized the market economy, and this needs to be explained. Of course, we have some problems with the economy and some homework to do. In the last two or three years, we have created problems in terms of the rule of law, and our judicial system needs to be strengthened. 

Maybe this is a blessing in disguise to deal with the structural problems. It is good that we have a consensus in the parliament to deal with our problems. For some time, we have not done anything in terms of structural reforms. This external shock to the economy shouldn’t lead to a decline in state capacity. We should strengthen state capacity; in other words, the ability to deliver results. Although the economy is robust, and compared to the world, it is not that bad, the growth rate, productivity and levels of foreign direct investments are too low, and Turks also are not investing in Turkey; this needs to be changed. Neither foreigners nor Turks are investing in the future of Turkey, and it is very much related to the rule of law. 

And I don’t think we have time to wait for the end of a reform process in order to harvest the fruits.

We need a more front-loaded process whereby we don’t have to wait until the end to see the result. The EU process provides that mechanism; if we do these reforms within the EU framework, it will provide credibility. So engagement with the EU has become even more important after July 15.

There are concerns that President Recep Tayyip Erdoğan will use this occasion to consolidate his authoritarian rule. Are these concerns baseless?

They are baseless. The plans are to target the 2019 elections when will see three elections. The prime minister said there will not be early elections and I don’t think there will be a constitutional referendum as the consensus that emerged in the parliament after the coup is going to be consolidated. The current purge that is now needed is related to the coup attempt. There was a clear and present danger to democracy and Turkey needs to clean the bureaucratic structure.

Yes, but there has also been an outcry about the detention of certain names believed to have had nothing to do with the coup.

That’s what I mean with the capacity to deliver. Those who are preparing the plans for the purge to turn to normality need to take into account possible mishaps that might happen along the way. That’s why you have to have strong institutions.

You are talking about the EU process but the president is talking about the death penalty.

That was said at the spur of the moment, although discussions on the issue are still continuing.
Many of our friends and allies focus on the declaration on the death penalty rather than what happened on July 15, and we need to explain to them what happened. They have to understand what that meant; it was a terrible ordeal.

Some might think that the rapprochement with Russia that has gained speed after July 15 and the failed coup indicates another sign of Turkey sliding into authoritarianism. 

It is not possible for Turkey to be an authoritarian state with limited rule of law. Turkey is not Russia because we do not have natural resources. Turkey is an industrial country. Eighty to 85 percent of our exports are industrial products. Twenty-five to 30 percent of industrial exports in this region from Russia to the Middle East come from Turkey. This is the only way we can survive and maintain this level of GDP per capita.

And Turkey is not like China either. China is an industrial economy and they have a different rule of law structure, but it is not a democracy. China has a very high current account surplus whereas Turkey has a very high current account deficit that needs to be financed by the savings of others and the largest market is the U.S. dollar market. That requires a minimal level of the rule of law.

So the realities of the economy dictate that Turkey must be a democracy?

Yes, the current account deficit that we have is our major link to the West and that is a good thing.
Any leader who would like to change this arrangement has to agree that the GDP per capita level will return to 3,000 U.S. dollars – a lower level of welfare. Can any leader afford that in a country like ours where the ballot box has worked since the 1950s?

How do you think the relations with the West will develop after July 15?

The stability of Turkey is very important for the Western world. Anything that destabilizes Turkey is bad for the West. This is much more important than the disability in other countries in the region, including Syria. 
The 20th century was about the integration of China into the global system and the 21st century is going to be about the integration of the Muslim world into the global system. That’s why this de-radicalization is the most important thing that needs to be done in this century and Turkey has a fundamental role to play.

We are not the leaders of the Shiite world, and we are not the leaders of the Sunni world. What Turkey can offer is the secularism that has developed in this country.

Who is Güven Sak?

Turkey’s functioning market economy passes democracy test

Güven Sak is the managing director of the Economic Policy Research Foundation of Turkey (TEPAV).

Sak is also a member of the steering committee of Business 20 Turkey. 

He has served in various academic positions and obtained full professorship tenure in 2003. 

Sak has lectured extensively on public economics and public policy design at the undergraduate and graduate levels. He has served as vice rector of TOBB Economics and Technology University starting with the university’s foundation in 2006, acting as rector between September 2011 and June 2013. 

A columnist since the mid-1990s, Sak currently writes for dailies Dünya and the Hurriyet Daily News. Sak has also had a career in government service; between 1984 and 1995, he was a research officer and later (1990) chief economist at the then newly established Capital Markets Board of Turkey. Following Turkey’s 2000 banking crisis, Sak became a founding member of the Monetary Policy Committee.