The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics

Master, Financial crises class

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The evolution of crises in Turkey

1. Introduction

Turkey has a history of accumulating foreign debt then investing in sectors that don’t bring
much profit, and although its GDP seems to be increasing, so is its debt. Their economy was
based a lot on services(tourism, medical services, transport), industry (metal, car production,
clothes), while agriculture production dropped significantly(Statista, 2022). Even though
they had factories, they were dependent on imports, not managing to export enough to break
even. They had a current account deficit. They got loans from other countries, focused on the
wrong sectors that didn’t bring them enough profit (the construction sector) and couldn’t pay
back the debt. Over the years they accumulated more and more debt(Electronic Data
Distribution System, 2017), both from public spending, but also from private people,
businesses and households that borrowed money in order to survive the growing prices and
the depreciation of the Turkish lira. All of this began way back in the 2000s when the
government started implementing neo-liberal policies that encouraged foreign loans. With
this apport of money, the economy seemed to grow, but in the wrong direction. After each big
borrowing of money, the GDP grew, but after some time they experienced recessions because
it wasn’t sustainable. In 2001 they experienced a crash. In 2008 while most countries also
struggled, Turkey seemingly got fast out of the situation. Now in 2018 the situation is
aggravated, they have a lot of debt, the Turkish lira depreciated, there is a lot of inflation, and
the president is adamant to keep the loan interest rate low. He says that interest is evil, which
ties with the Islamic belief that lending or borrowing money with interest is a sin, and that
certain groups will benefit from the increase of the interest rate. He even goes as far as
removing the chief of the central bank when they disobey his wishes. But by keeping the
interest rate low, he keeps the inflation growing by letting people that can’t pay back the
loans pump money into the economy. The country is experiencing a lot of austerity, big
prices, young people wishing to emigrate, and a high unemployment rate.(BCN Turkey, n.d.)
The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
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Turkey’s situation is similar to one of the most famous cases of hyperinflation, Zimbabwe.
Both countries suffered because their economy changed drastically and didn’t have the
sufficient means to sustain itself. Both in Turkey and Zimbabwe’s case agriculture production
decreased until they didn't have enough and then had to import goods. Poor policy
management made inflation boom.

Turkey’s situation has been studied and analysed since the 1980s, and even then they describe
the bad way Turkey is going by accumulating so much debt.

As in other countries along the oil route, Turkey's economy boomed during the 1970s. To
keep that boom going, Turkey borrowed heavily from abroad, especially from European and
American banks - eager to lend and confident that Turkish borrowers would never default.
But those loans would come at a heavy price. In mid-1977, international investors began to
pull out of emerging markets like Turkey - because of rising inflation and interest rates in the
US and Europe (where most borrowers were based), but also because of growing doubts
about how developed these economies were (and whether they could pay back the money
they had borrowed). The loan payments dried up; foreign debt soared;and two years later,in
1979-1980, Turkey found itself in an unprecedented debt crisis(D. Sachs, M. Collins, 1989).
The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
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The 1990s were characterised by a high level of macroeconomic instability and volatility,
resulting in poor business climate conditions. The government ran large budget deficits, up to
7% of GDP in 1997. Interest rates on government debt exceeded the inflation rate, on
average, by more than 30 percentage points. Meanwhile, Turkey’s current account deficits
were relatively small (around 1% of GDP during 1995-1997), it was mainly financed by
short-term capital inflows(The Turkish 2000–01 Banking Crisis, 2013). Inflation rates often
exceeded 80% and caused heavy reliance on monetary financing until 1997 (EC, 2009).

The Asian and Russian financial crises in 1997 and 1998 negatively affected investor
confidence in Turkey. As a result, capital inflows dropped sharply, and economic growth
slowed down from 7.5% in 1997 to 2.5% in 1998. The slowing economy further undermined
investor confidence and pushed the economy into a deep recession. In 1999, the economy
shrank by 3.6% while public debt rose to 40% of GDP (IHS, 2000).

The crisis, which first revealed itself as a warning signal in November of 2000, and erupted in
full scale in February, 2001, is explained in the official circles and in the popular media as a
result of “…the failure of the Turkish bureaucracy to implement the necessary structural
adjustment reforms on time, thereby disturbing the market agents and letting foreign capital
to leave the country.”. “The crisis is the end result of Turkey’s failure to follow its program”,
and the problem is due to “Turkey’s bad record in terms of doing its homework in time,
which deserves to be severely penalized”. This view which portrays Turkey as a misbehaved
student in the global markets has also been reflected in the official documents of the
post-February 2001 crisis era, and as such, has become the main ideological theme of the
measures of new conditionality(Yeldan, n.d.).
The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
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The Great Recession had adverse effects on the Turkish economy beginning October 2008.
Industrial activity fell by 40%, open unemployment rate rose by 5 percentage points to 15.4%
and GDP contracted by 4.7 over 2009(ERCAN, TAYMAZ, YELDAN, 2010).

The recent years have been studied by Turkish experts and they all come to the conclusion
that this new situation is the result of decades of improper financial management, lack of
structural reforms and low return from investments. The Covid-19 pandemic also aggravated
these problems, and everything resulted in the depreciation of the lira(Orhangazi,Yeldan,
2021).

2. Economic situation and reactions of authorities

A lot of sectors have been impacted by the recent inflation. Food got more expensive, fuel
and energy became more costly(BBC News, 2022), businesses had to lower the number of
employees in order to cope with debt, and international relations worsened after a failed
military coup and the intensifying conflicts with neighbouring countries. A series of conflicts
determined The President of United States of America Donald Trump(Breuninger, 2019) to
make steel and aluminium imports from Turkey more expensive in 2019. The construction
industry also didn't make enough profit because they built in the wrong niche, with more than
2 million houses staying empty. So the exports have been affected, the building sector wasn't
doing so well to begin with, and money is still being pumped into the economy through low
interest loans with no way of knowing how they will pay it back.

Turkish President Recep Tayyip Erdogan is expected to take new measures to support the
country’s currency, but he strays from the advice most of the other economists tell him. The
lira has declined by around 25 percent against the U.S. dollar since the beginning of 2017,
and he blames it all on the West, using populist rhetoric and denying the benefit of modifying
loan circumstances. Erdogan(Steinberg, 2022) stated that keeping interest rates low will
reduce inflation and encourage the economy to grow, despite the history that Turkey has with
big inflows of foreign money that results in a crash not long after. He even goes as far as
changing the Central Bank Chief if they do not respect his demand of maintaining low
interest rates. In three years, the Central Bank Chief was changed four times.
The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
_________________________________________________________________________________________
The government plans to cut public spending by 13 billion Turkish lira ($1.83 billion) in
order to reduce the sum it will have to pay back to international creditors, Finance Minister
Berat Albayrak declared in 2018(hurriyetdailynews.com, 2018). Also, just recently, in July
2021, Erdogan(The Economist, 2021) ordered for construction projects to be halted for a
time, but it didn't stop the president from completing his enormous mansion.

The president has made a number of press releases in which he was stating that he doesn’t
want to raise interest rates, that interest is “the mother of all evil” because it will hurt the
economy and cause inflation. This goes against classic economics and ignores all evidence
that his theory is not working. He even relies on Islamic beliefs to reject transforming the
economy in the way that foreign institutes and experts advise.
This is diametrically opposite to the way the government handled the 2008 crisis. Even
though they still offered stimulus packages and implemented remedial policies encouraging
people to spend, the message transmitted was much more optimistic, in a way that
strengthened solidarity and community. They offered to lower taxes for almost 6 months
(march 2009 - september 2009) and NGOs were making campaigns to make people
understand the relationships between businesses, production and consumption. The
president’s party lost a lot of popularity, and people started borrowing more and more money
in order to afford the living cost, encouraged by the low interest rates(Kaytaz & Gul, 2014).

Conclusion

The opinions are divided on the ones that lost confidence in Erdogan's unorthodox way of
manipulating the interest rates and the ones that follow his word because they are strict
believers in the Islamic culture. It seems people are tired of this economical rollercoaster and
live with nostalgia with the stories of Attaturk. The quality of life has decreased repeatedly
and most of the youth can not make a living in the country because of the corrupt system. All
those unhappy events can be put on the shoulders of an unknown “behind the scenes hand”
that pulls the strings for some people to get rich and keep the population miserable. But by
passing through so many economic crises you would expect people will learn from their
mistakes and get better. It looks with each sign there was no reason from the government to
stop the roller coaster going down the hill. I believe it is really hard to repay the debts with a
tired, angry and unmotivated population that is barely making it to the next day.
The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
_________________________________________________________________________________________
References

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The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
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The evolution of crises in Turkey - Mihai Ana-Maria 2022, University of Bucharest, Behavioural Economics
Master, Financial crises class
_________________________________________________________________________________________
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