Turkey's Turmoil Will Only Get Worse In 2014

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ISTANBUL-Wandering around the Yesilkoy section of Istanbul, watching the boats on the Bosphorus, dining on fresh fish at the Eleos restaurant, it is hard to understand Turkey's political turmoil. Yet it is here, and will likely increase in 2014.

The European Union has not accepted Turkey as a member, and, with the EU in disarray, it might be that the country has dodged a bullet. Produce prices in the stores are far less expensive than in America, Britain, France, or Germany. Turkey would gain from EU trade, but lose from pricing restrictions and regulatory harmonization.

In December, an escalating corruption crisis spooked global investors and caused a swift drop in the lira. The sixth-largest bank in Turkey, Halkbank, is state-owned and its head, Süleyman Aslan, was arrested on corruption charges. Twenty-five others have been arrested in the scandal, 91 detained, while three legislators from the ruling party resigned and accused the government of pressuring the judiciary branch during its investigations.

Turkish Prime Minister Recep Tayyip Erdogan, in power since 2003, heads the Justice and Development Party. It won 60 percent of the seats in the Grand National Assembly with less than 50 percent of the popular vote in June 2011.

Many of those affected by the probe are considered to be allies of Erdogan. The corruption probe began on December 17th. On December 25th, Erdogan shuffled his cabinet, replacing ten ministers with new officials that he considers more loyal. Erdogan has accused cleric Fethullah Gülen of orchestrating the probe against him, even though Gülen is exiled in America. As the probe continues to dig deeper into the government, it is likely that calls for Erdogan's resignation will escalate.

Over Erdogan's three terms in power, his government has infringed on many civil liberties and blurred the lines separating church and state. Advertising alcohol has been severely limited, alcohol sales are banned from 10pm to 6am, and packaging must contain health warnings. Journalists critical of Erdogan's government have been accused of participating in terrorist plots, with as many as 97 members of the news media jailed. The Turkish Journalists' Union asserts, rightly or wrongly, that more journalists are detained in Turkey than in China. The government has also been known to levy fines against firms that criticize its political moves, such as a $2.5 billion fine on Dogan Media Group.

Turkey is still defined as an emerging economy by the IMF. Almost two-thirds of GDP comes from services, while nearly half of employment is in services. In 2012, Turkey's GDP of $789 billion ranked 17th globally. Over the past ten years, nominal GDP has grown by 160 percent.

The weakening Turkish lira is especially dependent upon global investors because of Turkey's large trade deficit and externally-held debt. The trade deficit in 2012 was $46.8 billion (new figures for 2013 due shortly), one of the top ten largest trade deficits in the world, and 6 percent of GDP, the worst of the OECD nations. At the end of 2012, Turkey's external debt was at $336.7 billion, 42 percent of GDP.

A boom in construction helped boost the economy under Erdogan, but construction often occurs among political cronies, without public consultation. This policy led to the mass protests in May 2013, when a development plan for Taksim Gezi Park in Istanbul was announced and derided by the public for destroying green space in an urban area. Other controversial government construction projects now underway include a new international airport, three nuclear power plants, and a third bridge over the Bosphorus.

The Turkish government has long banned women who wear headscarves from working in the public sector, but Erdogan tried to reverse that policy. In 2008, the government passed a constitutional amendment lifting the ban on headscarves in universities, but a high court overturned the amendment, leaving the ban in place. Recently, the ban was expanded to non-state institutions as well. For example, women may not wear headscarves in courtrooms, universities, and public swimming pools.

Last September, Istanbul lost a bid to host the 2020 Olympics when the International Olympic Committee picked Tokyo instead. Istanbul could have been a particularly strong bid, as it would have brought the Olympics to the Middle East to the first time, following landmark events in Rio de Janeiro and Beijing which also showcased rising economies.

Instead, Istanbul's bid was sunk by civil unrest and regional security issues, as well as corruption allegations. Perhaps on the minds of International Olympic Committee members was the corruption scandal engulfing Turkish soccer, resulting in one and two-year expulsions of Istanbul teams Besiktas and Fenerbahce from international competitions.

Small business owners and shoppers in Yesilkoy are probably unaware of the extent that corruption affects their lives. But it reduces investment and lowers the growth prospects of the economy. Perhaps in 2014 Erdogan will be held to account.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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