Turkey’s economy is yet again in turmoil. The Turkish lira lost more than 10 per cent of its value against the US dollar in March, after President Recep Tayyip Erdoğan fired the central bank governor, Naci Ağbal, who had only been in post since the previous November. The lira’s plunge further increased inflation, which had already risen to 16 per cent after last year’s sluggish 1.8 per cent growth rate. Yet this was merely the latest episode in the ongoing breakdown of Turkey’s capital accumulation regime. The currency crisis of March 2021 followed the rapid depreciation of the lira in 2020 after the onset of the Covid-19 pandemic, which was itself a sequel to the currency crisis of August 2018 (precipitated by the country’s changeover from a parliamentary to a presidential system and the diplomatic crisis between Turkey and the US). While different events have triggered these recent upheavals, each one has followed a similar pattern: the government takes steps to lower interest rates and stimulate economic growth, thereby creating higher inflation and currency devaluations, which Erdoğan tries to resolve through a turn to austerity. This cycle has created a degree of political instability whose effects can only be contained through a crackdown on dissent. Yet to fully understand the reason for Erdoğan’s economic zigzags, we need to anatomize Turkey’s model of dependent financialization, along with the conditions that produced it.
Turkey’s ruling Justice and Development Party (AKP), led by Erdoğan, flourished between 2002 and 2013 due to relatively high economic growth stimulated by abundant capital inflows. The two main characteristics of Erdoğan’s neoliberal populist power strategy during these years were financial inclusion through providing cheap loans to lower income groups, and co-option of the poor through a new welfare regime. Back then, international media outlets presented Turkey as a ‘model country’ in which the Islamist government – which defined itself as ‘conservative democrat’ – was modernizing its economy and pursuing democratization as part of its application for European Union membership. The AKP, in turn, used the EU membership process as leverage against Turkey’s Kemalist establishment, concentrated in the Turkish military and the higher courts. This period was characterized by market reforms under the auspices of the International Monetary Fund: privatizations, labour market deregulation and the establishment of a depoliticized governance structure, including central bank independence. The combination of these policies was a key component of the country’s so-called dependent financialization regime, in which domestic demand was stimulated through credit expansion cycles fuelled by foreign investment.
During the first half of the 2000s, the AKP managed to eliminate the most militant part of Turkey’s organized working class via top-down privatizations. By this route, Erdoğan was able to escape from the impasse that the Turkish political establishment had faced during the ‘structural adjustment dilemma’ of the 1990s. While implementing the IMF-brand structural adjustment programmes provided fresh capital inflows which enabled the centre-right parties to stay in power, it also elicited a powerful backlash from working class organizations, which were able to stop some of the significant privatisations drives. Upon his election in 2002, Erdoğan therefore made the elimination of organized labour a top priority, with dramatic results: trade union density in Turkey decreased from 29 per cent in 2001 to 6.3 per cent in 2015, allowing the AKP’s market reforms to proceed unchecked. Simultaneously, household indebtedness – which rose tenfold between 2002 and 2013 – gave rise to a new disciplinary mechanism, making resistance more costly both in the workplace and on the streets, while reconstituting many lower income groups as supporters of Erdoğan’s low interest policies. Such were the pillars of AKP hegemony in the new millennium. Yet the drawbacks of dependent financialization came to be acutely felt during the early 2010s: Turkey’s reliance on capital inflows increased, its industrial structure eroded, and the foreign exchange-denominated debt of nonfinancial corporations increased to historic levels.
In this context, 2013 marked a turning point. International capital inflows slowed down following the US Fed’s announcement that it would taper its quantitative easing programmes – causing volatile growth rates for Turkey and others in the Global South. This period was characterized by financial turbulence, higher unemployment rates and rising inflation. Domestically, the AKP responded by using increasingly authoritarian measures to maintain its supremacy. Its rule was challenged from different angles, by grassroot opposition movements such as the Gezi Park uprising, and by intensified struggles within the power bloc, with the bourgeois factions represented by the AKP confronted by the ‘Güllenists’ (members of the political Islamist group led by former cleric Fethullah Gülen) embedded in the state bureaucracy. This combination of state crisis and capital accumulation crisis – which culminated in the failed coup attempt of 2016 – roiled the Turkish regime for most of the following decade. It has also underpinned the instability of recent months.
The events of March 2021 show how Erdoğan’s government has been paralysed by this conjuncture. Its economic agenda is now dominated by several conflicting accumulation strategies. On the one hand, Turkey’s large bourgeoisie, which has significant access to global financial networks, demands an orthodox monetary policy, the implementation of austerity measures and a pro-Western, pro-EU stance on foreign affairs. Their interests are complemented by the dependent financialization model, which requires higher interest rates to attract investment and drive domestic growth. But on the other hand, much of Erdoğan’s electoral base – small and medium-sized enterprises (SMEs), the construction sector, so-called Islamic capital groups that depend on government contracts and the domestic credit markets – will be hurt by higher interest rates. These groups are therefore demanding the continuation of cheap loans and a strong lira. Hence, central banking policy has become a crucial site of political contestation. Erdoğan continues to mediate between these rival interests, excoriating high interest rates as ‘the mother of all evil’ and postponing austerity measures for as long as possible to prevent another slide in the polls, while quietly submitting to the demands of the bankers whenever push comes to shove.
The Covid-19 pandemic has thrown these tensions into relief. In June 2020, Turkish policymakers once again tried to lower interest rates to stimulate the economy – but this predictably caused capital outflows and rapid lira devaluation. By autumn of that year, the country was facing a fully-fledged balance of payments crisis which prompted Erdoğan to reverse course and abandon the SMEs, implementing an austerity programme of wage restraint and public spending cuts, supported by interest rate hikes. Initially this strategy succeeded, with 15 billion US dollars of fresh capital inflows to Turkey since November 2020. Yet the turn towards fiscal rectitude alienated the AKP constituency at a time when its support was already waning, causing consternation among the president’s inner circle.
Then on 19 March 2021, Ağbal opted to raise interest rates to 19 percent – a move that threatened to further increase unemployment levels, which had grown to almost a third of the working population. In addition, the rate hikes forced SMEs that do not have access to international loan markets to take loans denominated in lira at unsustainably high rates. The combination of these two factors rendered the political cost of the central bank’s new interest policy untenable. Erdoğan dramatically sacked the governor, as if the rate increases were the latter’s personal initiative. Yet Ağbal’s replacement – supposedly one of the representatives of the ‘low interest rate coalition’ – has now promised to keep interest rates high for as long as it takes to control inflation. Irrespective of their political orientation, it seems, each governor will put the markets first; and Erdoğan won’t stand in their way.
Turkey’s story is not unique. It is rather an instance of the long stagnation – and consequent rise in political authoritarianism – which has afflicted the global economy since 2008. Nonetheless, there are important national particularities. Turkey faces elections in 2023, so the opposition is currently trying to formulate a popular democratization programme which will loosen Erdoğan’s grip on power by reinstituting a parliamentary system. Despite this, the main opposition parties have presented no solution to the perils of dependent financialization. In essence, their pledge is to revive Turkey’s 2001 IMF programme while securing civil liberties, democratic processes and the rule of law. They thus pit neoliberal centrism against AKP authoritarianism without recognizing that the former is precisely what gave rise to the latter. Beyond these two failed projects lies the struggle against both repression and marketization, but, as yet, this platform has not been articulated by an electoral force capable of challenging AKP hegemony.
Read on: Cihan Tuğal, ‘Turkey at the Crossroads’, NLR 127.