In your editorial “Turkey’s currency crisis is of Erdogan’s making” (FT View, November 29) you describe the recent economic turmoil as “a very unusual currency crisis” and argue that “the collapse in the lira’s value has not been caused by problems in the country’s economic fundamentals”.
I disagree. In my opinion, the dire state of the Turkish economy is indeed caused by deteriorating economic fundamentals. There are two main reasons. First, the country has moved away from democracy. A recent paper by Daron Acemoglu and others suggests that moving away from democracy costs a country around 20 per cent of its gross domestic product in the long run. Since president Recep Tayyip Erdogan introduced Turkey’s new presidential system in 2017, the Turkish economy has been moving slowly to the new poorer “steady state”.
The new regime has caused all sorts of problems for the economy. Just to name one, foreign investment (both short-term and long-term) has dried up and Turkish investors are finding it difficult to borrow from abroad.
Foreign monies have been the main source of economic growth in Turkey: fewer foreign funds mean lower economic growth.
Second, according to the statistics compiled by the World Bank, in 2018 Turkey’s foreign debt-to-gross national product ratio was around 60 per cent — this ratio was the same in the 2001 crisis. The Turkish economy has been struggling to rollover this much foreign debt. At the time of the regime change, the long growth cycle sustained by foreign borrowing was about to come to an end, as it was about the time to pay some of the debt back. The worsening political climate due to the new regime certainly is not helping.
Erdogan understands that the country is getting poorer and in his own way is trying to reverse the Turkish economy’s inevitable decline. But his interventions are making the adjustment even bumpier.
What Turkey is experiencing is not a currency crisis but a transition to a poorer steady state due to poorer economic fundamentals. Reversing the decline will only be possible by restoring democracy in the country and finding a new economic growth model that does not rely on borrowing and consuming.
I believe there are no crises without worsening fundamentals and Turkey’s recent crisis is no exception to this.
Engin Kara
Professor of Economics
Cardiff University, Cardiff, UK
Letter: Turkey must restore democracy to halt its economy’s decline
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