EurasiaNet Business & Economics - Economic Progress in Turkey Endangered by Political Jousting

BUSINESS & ECONOMICS

ECONOMIC PROGRESS IN TURKEY ENDANGERED BY POLITICAL JOUSTING
Nicolas Birch 6/06/06
A EurasiaNet Commentary

As transformations go, the changes to Turkey’s economy following the 2001 crash were radical. A banking system that had been little more than a piggy-bank for politicians was transformed into one of the fastest-growing in the world.

In place of governments willing to throw fiscal responsibility out the window in exchange for a handful of votes, elections late in 2002 brought to power a party apparently determined to extricate Turkey from years of debilitating boom-and-bust economic cycles. Was the change of mentalities only a mirage? With political jousting between secularists and a religious-minded government showing increasing signs of spilling over into the economy, analysts increasingly fear the answer may be yes.

The political maneuvering is connected with a battle over legislation aimed at rationalizing Turkey’s bloated social security system. A major guarantor of Turkey’s economic recovery since the 2001 crash, the International Monetary Fund (IMF), has described social security reform as a sine qua non of its continued support. There were even hints that the government’s failure to comply might result in the IMF withholding a $1.9-billion loan due for release July.

Somewhat cowed, the government quit dawdling and pushed a reform package through parliament. On paper, most experts believed the legislation to be sound. But that didn’t stop President Ahmet Necdet Sezer from vetoing the legislation. Parliament reworked part of a bill concerning the reorganization of the social security system’s bureaucracy, and Sezer ended up signing the revised legislation. But another bill that gradually raises the retirement age to 65 remains in limbo.

In a country where life expectancy is 66, Sezer argued, setting retirement age for men at 65 was unjust, a violation of the constitution’s description of Turkey as a "social state." The veto prompted howls of protest in Turkish financial circles. According to Serhan Cevik, a senior analyst with the investment bank Morgan Stanley, the president’s justification for his veto were "factually misinformed and fundamentally misguided."

For a start, Turkey’s own State Statistical Institute puts life expectancy at birth at 71. Where pension systems are concerned, though, it is life expectancy at retirement that matters. In Turkey, that stands at 79 now and is likely to increase to 85 by 2050, when Turkey’s new generation of workers retire. Although a 1991 law allowing men and women to retire at 43 and 38 respectively has been repealed, average retirement age is still well below 50 at present. The result is a country, young by western standards, where there are only 1.7 workers for each retiree.

With the social security system projected to have a deficit of 5.2 percent of GDP by the end of 2006, reform was expected to be a major component in efforts to balance Turkey’s budget. Turkey’s significant deficits have stirred concern among Western investors, along with the IMF.

In his May 16 investors report, Cevik attributed indicated that Sezer’s veto of the retirement-age bill was the latest example of an ideological clash between advocates of a liberal economy and a "statist tradition inherited from the Ottomans." Inside Turkey, speculation is rife that the May 10 veto was an act of political resistance by a staunch secularist, who has long been at loggerheads with the religious-minded government, led by the moderate Islamist Justice and Development Party (AKP).

The veto is "one of many examples of the way Sezer is now acting not �impartially,’ but as a sort of �Cankaya opposition,’" commentator Taha Akyol wrote in the centrist daily Milliyet on May 12. Cankaya is the name of the presidential lodgings in Ankara.

On May 31, parliament approved the social security bill unchanged. With the president unable to exercise a veto a second time, secularists look set to turn to Turkey’s Constitutional Court to block it. The process could take months, and the result is far from sure. In 1999, the Court ruled against an earlier piece of social security legislation. Sezer was one of the judges to make the ruling.

But it’s not just Turkey’s secularists who seem willing to trade economic stability for political advantage. Indeed, the first to raise international eyebrows were the self-styled "Muslim democrats" of the AKP, with their mishandling of the end of Central Bank Governor Sureyya Serdengecti’s term March 13.

Appointed to the newly-independent bank during the 2001 crisis, Serdengecti oversaw five years of GDP growth of between 6 percent and 9 percent, and a drop in inflation from 70 percent to a 40-year low of 7.9 percent. Chairman of the influential businessman’s association TUSAID, Omer Sabanci spoke for many when he described it as "incomprehensible that such a successful governor should not be begged to stay at his post." But Serdengecti had never been close to the government, and ministers preferred to promote his former deputy to interim governor while they searched for a full-time replacement.

Who the government’s nominee actually was only became clear on March 25, when the Turkish media reported that President Ahmet Necdet Sezer had vetoed the appointment of Adnan Buyukdeniz. This time, Sezer’s decision was no surprise. British-trained Buyukdeniz is the head of one of only five Turkish banks that function according to Islamic principles, neither paying nor charging interest.

For some, AKP’s selection of such an apparently unsuitable candidate was evidence that, with parliamentary elections due in late 2007, it was tiring of an IMF-sponsored austerity program. Buyukdeniz has been an outspoken critic of the IMF. Meanwhile, one Istanbul banker described the Buyukdeniz nomination as "the worst political error the government has made since it came to power."

Others saw the nomination affair as the first serious exchange of fire between secularists and the AKP in preparation for the presidential selection, also scheduled to take place next year. In Turkey, the head of state is elected by parliament, and the AKP’s big majority should make it easy for the ambitious Prime Minister Recep Tayyip Erdogan to step up. The prospect horrifies secularists. Though largely ceremonial, the presidency symbolizes Turkey’s secular state. Plus Erdogan’s wife wears a headscarf.

The AKP shows few signs of having learned from its recent mistakes. At a party meeting in late May, Erdogan assured his listeners that the government was "in no hurry to intervene" to shore up a Turkish lira that has lost 18.3 percent against the dollar since March 3. His comment brought a curt riposte from the man who finally took over as Central Bank governor on April 18, Durmus Yilmaz. "Defining currency policy is the responsibility of the bank," Yilmaz said in a note.

"We struggle for years for an independent Central Bank only to find at the first sign of trouble that the people in charge of Turkey never believed in the idea in the first place," columnist Ertug Yasar commented in business daily Referans on May 25.

Few analysts expect a repeat of the 2001 crash. Turkey’s economy may still be fragile, they say, but important steps have been taken over the last five years to strengthen it structurally. But the signs are already there that moves to re-politicize the economy are doing Turkey no favors. Developing markets the world over have been negatively affected by the recent down-turn in global liquidity. None more than Turkey, though, where the exodus of international money has pushed the stock market down 21 percent over the past three months.

Editor�s Note: Nicolas Birch specializes in Turkey, Iran and the Middle East.

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