Though this intervention is “designed to be temporary,” according to an anonymous Turkish official who spoke to Bloomberg, its long-term ramifications might not be. Turkey, as we’ve discussed, has accumulated substantial external debt to fund its economic growth. That puts the country on shaky ground; if the lira declines, it becomes more difficult to repay debt denominated in foreign currencies. Turkey, therefore, needs more foreign capital inflows to fill its foreign reserves, which serve as a buffer against external debt. Yet after interventions like this, investors will likely feel that their Turkish positions are particularly insecure and poorly insulated from near-term political pressure, which in turn is likely to restrict the flow of foreign investment into the country. Erdogan is making a dangerous tradeoff: short-term political gain for a long-term economic cost.
A similar tradeoff exists with food price controls. While providing cheap food might give the AKP a boost in ratings before the election, doing so for too long risks driving grocers out of business. If this travels up the supply chain, then food producers may also be in danger. The government will end up footing the bill one way or another – either by paying for imports or subsidizing farmers and grocers. These sorts of palliative measures are not sustainable in the long run, as Venezuela so clearly shows.
How, then, should we interpret Erdogan’s decision to intervene in a way that further weakens the bedrock of Turkey’s economy? It’s possible that Erdogan is simply ignorant of basic economic theory and is pursuing politics that will benefit himself and his party. Yet, given that Erdogan is arguably the most powerful Turkish leader since Mustafa Kemal Ataturk and that this level of power could only be achieved by a shrewd operator, this explanation doesn’t make sense. Erdogan must know that these moves will damage the Turkish economy. His willingness to undertake these sorts of interventions to improve his party’s position in the arguably less important local elections is a sign that the AKP’s grip on power in Turkey is wavering. It’s also an indication that Turkey’s economic vulnerabilities will constrain its leaders’ ability to exercise political power in the years to come.
Cheap food and near-term measures to keep the lira from plunging may well work in the AKP’s favor this Sunday. If the AKP prevails, expect a greater push by Erdogan in the next four years to significantly weaken the opposition, either by persecuting opposition leaders (and Erdogan is already going after the pro-Kurdish opposition party) or by undermining institutional checks and extending term limits on the presidency.
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