Plot allegations: some simple facts

On New Year's Eve I was determined to watch Prime Minister Recep Tayyip Erdoğan's New Year's discourse on TV. He vehemently tried to convince us once again about the existence of an international plot against Turkey through its economy.
According to Mr. Erdoğan, some dark plotters, together with domestic collaborators, have decided to prevent Turkey from becoming a global power through provoking problems in its economy, aiming to condemn the Turkish economy to a pattern of low growth. Two major events, the Gezi Park protests and the Dec. 17 “coup,” the day when a large judicial investigation involving the sons of ministers and businessmen close to the ruling party began, are obvious evidence of the international plot, according to the prime minister. Mr. Erdoğan claims that some global powers do not want a strong Turkey and that the corruption allegations are just pretexts. He argued that his government has always been intolerant of corruption. If this was not the case, thousands of kilometers of roads, and many schools and hospitals as well as big projects like Marmaray could not have been built. Needless to say, I was absolutely taken aback by these arguments and claims. However, since the prime minister insists on and tirelessly repeats the story, I think it deserves some comment. So long as the alleged plotters are not revealed, it is difficult to discuss the issue directly. Nevertheless, many implicit arguments can be developed. First of all, let me remark that I do not understand how a link exists between increasing public expenditures and reducing corruption. The reverse can also be argued. What I know is that the huge real increase of infrastructural public investments was possible by reducing real interest rates from sky-high levels to low levels thanks to fiscal discipline. I have always defended that this was the main economic achievement of Erdoğan's government. As to the allegations related to the Gezi Park protests, one should note that they are not new. Mr. Erdoğan had already pointed to an obscure “interest rate lobby” during the protests and the Capital Markets Board (SPK) was charged with unearthing it. The investigation was finalized weeks ago, and the infamous lobby could not be found. But on the other hand, with regards to interest rates, the Central Bank of Turkey increased its market rates and tightened monetary policy. What disappointed me more during the New Year's discourse was that the prime minister said absolutely nothing about Fed Chairman Ben Bernanke's announcement about monetary tightening, which coincided with the Gezi Park protests. Today, everyone, including the Turkish economic bureaucracy, knows very well that what caused losses in the stock exchange and pushed up the exchange rate, as was the case in other emerging markets, was not the protests but the change in the Fed's policy. What Mr. Erdoğan also neglected to say is that 2013 will be better than 2012 with respect to economic growth performance, despite the Gezi Park incidents. Indeed, after two years of very high growth in 2010 and 2011, the growth rate fell abruptly to 2.2 percent in 2012. The Treasury and the central bank were responsible for this decrease. They wanted to rebalance the economy, which was pursuing a crazy course as the current account deficit (CAD) was rapidly widening because of strong domestic demand-led growth. They were right, but growth slowed more than they were expecting. So, if we follow the logic of Mr. Erdoğan, one can easily accuse Deputy Prime Minister Ali Babacan and Central Bank Governor Erdem Başçı of being the chief plotters! Anyway, the growth rate in 2013 will not be less than 4 percent. Will the Dec. 17 “coup” cause more damage than Gezi Park? Probably yes, but not because of the corruption scandal itself but because of the reaction of the government to the graft allegations. I tried to explain in my previous columns that I do not expect a recession amid a financial crisis but rather decreasing investments that will lower the actual growth rate to around 2-3 percent and accelerate the increase of unemployment that is already perceptible. This unpleasant economic perspective will be the result of increased concerns regarding political stability and the rule of law and not over the corruption scandal. The strong criticism coming from the EU is helping to seriously jeopardize the EU anchor that is essential to foreign direct investment (FDI). However, it is up to Erdoğan as well as the Justice and Development Party (AK Party) management to move away the unpleasant perspective. It will suffice to come back to democratic reforms securing the plurality and the separation of powers in Turkey.