September 23, 2009
Political Developments
Taking stock
The last six weeks have been a busy period with the “Kurdish opening” on the domestic political front and the “Armenian opening” on the international front. As the economy stutters into the fourth quarter, the Government finally came out with a document that has some broad medium-term objectives and targets after at least a six-month delay. While the second quarter GDP decline at 6 percent – according to TUİK data and subject to a revision- was better than expectations, the unemployment and fiscal deficit numbers have been far from than comforting.
How to botch up? The AKP administration launched a new initiative, first christened as the “Kurdish opening”, later dubbed as the “democratic opening”, aimed at ostensibly to bring about social peace and reduce terrorist attacks by the Kurdish terror organization, PKK. The process seems to have been prompted by an effort to preempt incarcerated PKK leader Abdullah Öcalan’s efforts to put out a “road map” for a political settlement. While Erdoğan and other government spokespersons denied the link between Öcalan’s road map and the way with which the government hurled itself into a rapid resolution, it is hard to explain this sudden awakening after seven years of having a decisive parliamentary majority and running the government. True to the typical AKP style of governing, the initiative came about without any strategic framework, making a sensible public debate extremely difficult. The two large opposition parties opted out of a dialogue with the ruling party, reducing the chances of a consensus based solution. One of the concerns is the sincerity of Erdoğan & Co. in pushing for democratic reforms since some of the actions of the government are seen as Putinesque efforts to muzzle the opposition, in particular the media. The risk of deepening ethnic fault lines has gone up significantly in the last few months while a “solution” remains undefined and elusive. A proposed secret session of the parliament after the Bayram to discuss the next steps has added to the controversy about AKP’s intentions.
The second initiative of normalizing relations with Armenia also followed the same pattern in terms of the ability to get consensus, and bore the marks of the Davutoğlu’s “Osmanisches Reich über alles” fantasy along with attempting to mediate between Iraq and Syria, Iran and the EU, Syria and Israel, Hamas and PLO and so on While Turkey can and should make the best out of its regional position, a better balance between self-aggrandizement and principled foreign policy and avoid temptations of opportunistic gains. Where the Nabucco pipeline stands now is another outcome of willy-nilly governance. Even the discussion of the formally recognizing Abkhazia would pit Turkey against norms of international behavior and condoning secessionism. Even Belarus refrained to do so until now. Whatever Erdoğan might share with him, Putin will not share power with Turkey in the Caucasus. Playing into his hand will perhaps benefit a few in the country but relegate Turkey to be Russia’s little brother in the neighborhood, Against the backdrop of Davutoğlu’s storyline of creating peace with the neighbors, it is hard to explain why Turkey would consider spending in excess of $8 billion to buy a missile defense system when the budget has more holes than Swiss cheese.
Both of these initiatives make eminent sense in themselves and they have been overdue, but both have been badly managed in terms of clarity of objectives and transparency of the processes. Not unlike how the economic policy is managed, Erdoğan government plays everything they do by ear. It may work in a cattle bazaar but it is not a shining example of good governance. The unending saga of the discussions with the IMF is good example. It is in part due to Erdoğan’s lack of understanding of economic policy and international finance and in part due to his mismanagement of the crisis that chipped away his credibility while he tried to buy time. Looking from a distance, it looks like there are a number of rules in Erdoğan’s rule: refrain from being consistent; if you wait long enough, the problem will go away; always blame others; when cornered, build your straw man and attack ferociously.
By the way, as for democratic opening, how about starting with simple things like lifting the ban on you tube?
Blame game. While inspecting the damage of the floods that took 34 lives two weeks ago from a chopper, Erdoğan declared that illegal construction was the key reason and blamed everyone from Constantin I to Şehremini Pepe Salih Paşa for letting the urban sprawl on riverbeds and watercourses, notwithstanding the fact that AKP and its predecessor parties have held the Istanbul Metropolitan Municipal government for the last fifteen year during the first four Erdoğan himself was the mayor.
Ruthless vengeance. It looks like the much advertised Umrah of Ertuğrul Özkök and Ahmet Hakan, the editor-in-chief and a columnist for Doğan Group’s daily Hürriyet respectively, did not help Aydın Doğan who got slapped by a $2.5 billion fine for back taxes. Even letting Bekir Çoşkun, a former Hürriyet columnist and a fierce critic of Erdoğan go seems to have been in vain. According to its Web site, Doğan Holding's total assets as of June 30 amounted to the equivalent of approximately $2.8 billion. Despite the fact that majority of Doğan Group publications supported AKP during the 2002 and 2007 elections, bad blood developed between them mostly because of conflicting business interests, e.g. , construction permits for upscale condo project and permits for a refinery construction project. Erdoğan did not take the ensuing intense critical reporting of his government’s performance last year in Doğan Group media outlets kindly and has called on his supporters to boycott Doğan media publications. Once the ATV/Sabah Group was firmly in the hands of Çalık Group managed by his son-in-law, Erdoğan often found it expedient to use the opposition media as a straw man. Doğan Holding issued a statement saying that fine was “based on the unjust interpretation of applicable rules and regulations,” and it has appealed the decision. Erdoğan has distanced himself from the case, saying the fines are part of a legal process within the Finance Ministry over which he has no control. Whether the stiff fine is legally justified or a retribution to decimate the Doğan’s empire remains to be seen, it makes it clear why Erdoğan was adamantly opposed to an IMF conditionality to make the tax administration an autonomous body. If the decision is overturned, it will also reconfirm the total lack of judgment of the Minister of Finance Şimşek for being bullied by his boss. Stay tuned…
Economic Developments
The Global Financial Stability Report that the IMF has just released says that there are signs that government interventions in the 13 advanced economies have helped reduce systemic risk, calm markets and restore liquidity concerns. While the long-term effects of these large scale interventions are yet to be seen, leading indicators show that the recession may be bottoming out in the US. The European recovery prospects are a bit of mixed bag. Both EU and Russia, Turkey’s major trading partners are facing continued decline in their output and import demand. EU27 and Russia are expected to end the year with their GDPs declining 4.2 percent and 7.5 percent respectively. G-20 will be discussing exit strategies and the sustainability of the recovery. Many of these countries have been gearing their fiscal stimuli programs to greener investment, enhancing their competitiveness and innovation. This may also be a good opportunity to put the reform of the international financial architecture and regulatory framework back on the agenda.
Rocket science? After several months of delays, the Government released its medium-term program (MTP) that looks like more of targets and a wish list than a policy document. While it lacks policy content, it is a lot more realistic document in terms assessing the current situation than expected given the rhetoric of the Prime Minister on the crisis during the last nine months. Since it does not have any serious new or innovative policy content, it is hard to understand why it had been delayed for several months. The key problems with the medium-term framework are as follows.
· The macroeconomic priorities are boilerplate; too general and do not include the enhancing Turkey’s competitiveness as a key priority.
· GDP decline in 2009 is underestimated at 6 percent. EPA expects that the Q2 data will be revised down – as was in the case for Q1 and 2008 data- as it has serious inconsistencies for the manufacturing sector. EPA expects that Q2 will be revised down to -8.3 and annual decline will be 7.8 percent.
· The expenditure priorities in the budget for which massive deficits that the MTP foresees are not clear. Funding requirements that are projected to read 6.6 percent of GDP in 2009 and remain high in the subsequent years. Interest expenditures are low balled while non-interest expenditures are not consistent with the public sector expenditures in the national accounts framework.
· Projected deficit of TL 63 billion is more than a fifth of the bank credit to the economy in 2009. If the assumption is that deficits will be financed by short-term capital flows, then it is not consistent with the balance-of-payments projections and the implied exchange rates. Those in turn do not augur well with the export targets. The fiscal and external deficits are out of synch and perhaps give Erdoğan a false confıdence that they can manage wıthout the IMF.
· Central Bank’s policies and continued rate cuts that RGE Monitor likens to “pushing a string” accommodates the runaway deficit in the short-run but risk fueling inflation. EPA believes that inflation targets are too low and do not reflect the view that commodity prices may rise sharply as the recovery takes hold and raw materials demand from China and other developing countries starts putting pressure on commodity prices.
· According to Minister Babacan, only tax increases should be expected for energy products and telecommunications services. This would perpetuate the tax distortions that have been eroding Turkey’s competitiveness. A serious and comprehensive tax reform that reverses the lopsided balance between direct and indirect taxes has been long overdue, but MTP points out to marginal tinkering. The reason why AKP can not undertake tax reform is that the expanded tax base when the system is reformed unfortunately is the political base of AKP.
· The opportunity presented by the crisis to undertake other structural reforms such as the judicial reform is being squandered by excessive political polarization. No reform can succeed without ownership of all stakeholders. Like most reforms in Turkey, enacting a law does not mean it is done. The proof of the pudding is in the eating.
A table comparing the MTP with EPA’s projections is below. EPA assumes that there will not be a program agreed with the IMF during the 2009-2010 period.
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