In this episode of the Liberal Europe Podcast, Leszek Jażdżewski (Fundacja Liberté!) welcomes Dr İrem Güçeri, Associate Professor of Economics and Public Policy at the Blavatnik School of Government, Governing Body Fellow of St Antony’s College, an International Research Fellow of the Oxford University Centre for Business Taxation, and an affiliate of the CESifo Network in Public Economics. They talk about Turkey on the eve of the elections in the context of the earthquake and reconstruction, hyperinflation and its impact on the economy and society, and political and institutional instability.
Leszek Jażdżewski (LJ): The state of the Turkish economy will likely be one of the deciding aspects of the upcoming elections. What are the foundations of Turkey’s economic success in the recent years?
İrem Güçeri (IG): We had two big crises – in 1999 and 2000. The aftermath was a period of reconstruction – rebuilding the banking system and the economy, and a rapid pace of structural reforms. At the time, the focus was on the recovery from the crisis. But it was 20 years ago. In an economic sense, it was complete devastation. This, however, provided the opportunity to rebuild – especially the banking system, but also some slow steps in structural reforms that helped the private sector to thrive.
Early in that time, Turkey graduated from the IMF program and found its own path. However, this entire period was focusing on reconstruction and building investor confidence. It was followed by an inflow of foreign direct investment (FDI) as well as domestic developments, with domestic investors gaining more confidence in the future.
Of course, things have changed after the coup attempt. There was already much prior uncertainty. Today, as we go into the elections, there are three defining characteristics of the current Turkish economy.
One is the earthquake, which already has and will continue to change the country profoundly – its economy, politics, you name it. In every sense, the country has faced a devastating disaster, which will have a lasting impact on the future. Another aspect is persistent and chronic inflation that Turkey is battling. The third one is uncertainty. If you are a foreign investor in Turkey – even if you have been in the country for a long time – the level of uncertainty that you are facing right now is unprecedented.
What is going to happen at the ballot boxes in two days? Despite the polling and various reports, it seems to be ‘a roll of a dice’. Based on what kind of news outlets you consume, you are going to have a completely different perspective on what the election outcome might be. If you are investing in Turkey, you will be faced with two opposing scenarios that you must prepare for. If you fail to do so and prepare only for option A or B, it is a big hazard. What you need to do is to anticipate that the current government might continue or that the opposition will take over. Either of these options will take you into completely different trajectories – both with a very high degree of uncertainty, even after you know the result.
LJ: The earthquake has profoundly changed the Turkish economy. How is the reconstruction going? How has the earthquake changed Turkey?
IG: Let us look at the numbers. A recent report by the Turkish Economic Foundation states that reconstruction will probably spread over five years. The cost is going to reach approximately USD 150 billion. Thinking about geography, the size of the region affected was about the size of Austria, with almost 20 million citizens affected by the earthquake. Everyone I know has lost a loved one or know someone who has. This already puts things in perspective – for a country of 85-million population, it clearly shows how large this area was and how much destruction it caused.
According to the report, the number of houses that were either destroyed or severely damaged (to a degree that you cannot go back there and collect your things) was around 650,000. On top of that, there is about 1 million or more houses that were damaged to a medium or low degree – these will need some repairs in the medium or long term. This data actually means that the scale of the reconstruction and the need for public funds to support the reconstruction is way above the capacity of any government. However, of course, given the fragility and volatility of Turkish public finances right now (we did not go into the earthquake with a very strong economy), this process will be a big challenge for the Turkish government and the policymakers – whichever party comes into power.
Meanwhile, the projected growth – relative to a no-earthquake scenario – is about 1.2 percentage points lower than what it would have been. There are multiple reasons for it, but it will be a really serious hit on growth.
LJ: What was the response of the state? How would you assess the reaction of the institutions? How is the reconstruction going so far?
IG: It was a massive earthquake, which would challenge any government’s resources and capacity to respond to it. The way it did respond came under criticism. Let us, however, go back to 1999 and the Marmara earthquake. It was really devastating but at a smaller scale and magnitude that the recent one. Back then, after the earthquake, Turkey had many institutions put in place to respond to disasters – especially earthquakes. This means that this time there were some procedures already in place.
But was there an early warning system? There was not. Was there a ‘rapid response’ rescue teams who arrived in a matter of a few hours? That was not the case. This was part of the criticism that the government received.
In terms of looking at reconstruction, right now many people are living in tents. At the moment, Turkey is transitioning to a reconstruction stage – we are not there just yet. People are moving to other cities – Ankara and Istanbul, trying to find a new place to live, temporary work and housing.
LJ: What are the origins and the background of the raging hyperinflation in Turkey? How is it possible to sustain hyperinflation for such a long time?
IG: The Turkish economy is very import dependent. It has high trade deficit. It is a big economy with a lot of industrial outputs, but many inputs are still imported as well. There are also a lot of agricultural imports. If we look at the Russian invasion of Ukraine, Turkey was actually one of the biggest countries that was to be affected by grain shortages. Alread the international dynamics were moving Turkey toward a situation where there was going to be inflation – as in many countries around the world right now in light of energy and import dependency.
Then, Turkey has a Central Bank, which is not fully independent. It is focused on keeping the interest rates low in a high inflation environment, which is a rather heterodox economic policy. According to it, if we keep the interest rates low, perhaps we are going to generate new investments. Of course, in developing countries, monetary policy transition mechanism does not work in the way that conventional economic theory suggests. Policy leaders always look for different policy options and ideas but saying that keeping interest rates low combats inflation does not exactly work.
LJ: Are there any economic theories that would support such an approach?
IG: If you kept interest rates low to allow investors to borrow at low rates, and then come and invest in our country. However, even if you keep the interest rates low, the market rates do not necessarily follow the policy rates. This gap in the monetary policy transmission mechanism might mean that things do not work exactly the same as they do in a developed country. We do not have high interest rates dampening the rest of the economy and curbing investment.
Everybody wants more investment – both people who support high interest rates or low. Where do we get investment? In a stable situation where business can see at least a few months ahead. If we have an unorthodox economic policy that says ‘we are going to keep interest rates low’, at the same time, we are unable to manage exchange rate fluctuations and business expectations. As a consequence, we will not be able to generate investment. This means that unorthodox thinking fails in achieving its goal of more investment.
If we take the orthodox way and say, ‘we are going to raise interest rates to fight inflation and then let us try to get investment’, this is, again, a rough ride. You will need to answer the question of by how many percentage points the interest rates need to be raised to combat inflation in a hyperinflation environment? This is going to be a challenge if policymakers decide to follow that path.
If the current government wins, I think they will follow the low-interest-rate policy – there is already some commitment to it. If the opposition takes over and decides to follow a more orthodox policy, and then the Central Bank decides to get on board – even though the Central Bank will still face challenges in curbing inflation – depending on how these commitments are communicated, it might clear the way for investment, as well as dampen the uncertainty and the noise. But that is a big ‘if’.
There is a lot more that needs to be sorted out in Turkish economy to clear the path for a lower uncertainty and higher investment environment. It is not just about the Central Bank deciding on low or high interest rates, it goes beyond that. Right now, there are many other variables in the economy that have an impact on how investment trajectories are going to be shaped.
LJ: What does everyday life in a hyperinflation country look like?
IG: According to the data by the Turkish Statistical Institute, we have an inflation of about 50%. If we look at food, we go up to approximately 70%. The Istanbul Chamber of Commerce publishes the working persons’ Cost of Living Index, according to which it is also quite high – at about 70%. All this has a significant impact on people’s day-to-day lives.
We are in the pre-election period, so there were some boosts coming from raising the minimum wage or a generous pension reform. These allowed some parts of the population to afford higher prices a bit more. This, however, creates a lot of difficulty on a day-to-day basis for Turkish households.
If you go to a supermarket, every single day you see the staff changing the price tags on products. It is very hard, and people are really struggling to get by.
LJ: In terms of the economic aspect, why is Turkey important for Europe and the rest of the world?
IG: Turkey is a huge country, and size matters in terms of economic relationships. It is strongly integrated with European trade – it is a part of the EU Customs Union. Europe is its biggest export market. The country also has a strong and longstanding cultural and social relationship with Europe. Turkey borders Greece and Bulgaria, and as such it is directly affecting the trading relationships and balance in Europe.
Of course, currently, Europe has its own challenges that it has to deal with, in an economic sense – the energy and cost of living crises. Going into summer, these seem a little bit lighter and dampened, but they are there and cannot be ignored. All this has an amplifying effect on the rest of Europe and is going to have an adverse effect on European trade relations.
LJ: What macroeconomic reforms should the new Turkish government introduce to stabilize the country’s economy?
IG: Allow me to tweak this a bit, as I would focus on structural reforms instead of macro policies., because there is already a rulebook on the latter, so as a scholar I would follow it. However, the most important thing is the clarity of messaging and saying, ‘Here is our plan, here is our reform agenda, and here our earthquake reconstruction agenda’. These three elements will build investor confidence, increase investor appetite, and – hopefully – curb the wide volatility that is taking place in the Turkish economy.
In a nutshell: on the macro policy side – follow the rulebook; on the structural side – there will be a lot to do; on the messaging side – focus on clarity.
LJ: What will the future of Turkey look like in 10 years from now?
IG: As I have mentioned before, the outcome of the election will decide on one of the two very distinct paths. Both will feature a lot of uncertainty on the economic side. In light of this fact, I would probably need a magic ball to predict what might happen in ten years.
Nonetheless, Turkey is a country with a very high potential, very skilled labor force. It is very open to change and extremely plugged into international markets. So, the country has at its core massive potential.
Even though I see a lot of uncertainty in the next few years ahead, we have to focus on rebuilding post-earthquake and re-leveraging the fantastic skilled labor force, the country’s relationships with close proximity in terms of geography, and rebuilding – no matter what path we will follow. I believe, trust, and hope that in ten years’ time we can get back to the path of rapid growth and reconstruction, so that we can really have the economy and environment where social mobility is high, and where no matter where you come from in the country you can get a good education and a job, so that you can contribute to that growth as well.
Find out more about the guest: www.sant.ox.ac.uk/people/irem-guceri
This podcast is produced by the European Liberal Forum in collaboration with Movimento Liberal Social and Fundacja Liberté!, with the financial support of the European Parliament. Neither the European Parliament nor the European Liberal Forum are responsible for the content or for any use that be made of it.
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