Expert Speak Raisina Debates
Published on Feb 17, 2016
Turkey’s shadow boxing

In the geopolitically volatile region of the Middle East, the dominant economic model is that of hydrocarbon exporting while the non-oil dependant/free market models are in a relative minority. Saudi, Oman and Kuwait are examples of the former, while countries like Bahrain and Turkey are relatively lesser dependant on oil and gas as an economic lifeline.

With oil prices at historic lows, one would tend to believe that Turkey and Bahrain are better poised in their economic forecasts and performance. However, the economic domino impact is beyond oil. The conflict touches them all.

One dimension of this conflict is largely between regional leadership of the Middle East. Saudi and Iran, long at loggerheads with each other, have been shadow boxing through proxies so far.

One country that has been an extremely loyal proxy to Saudi has been Turkey. And that’s where its problems start.

Nearly a decade after the Cold War ended in 1991, a study was commissioned (in late 2002) on the economic impact of the Cold War on global economy. It yielded a strange footnote -- the long term economic impact on Pakistan.

Apart from flawed internal policies, economic short-sightedness and political instability, the study yielded that Pakistan, since 1995, has been an economic case gone wrong. (Pakistan, which had seen high growths in the 80’s, had a per capita income 25% higher than India, and had just 11% of its population below poverty line as against 52% in India then).

One surprising reason also attributed to, but vastly understated, in the decline of Pakistan’s economy is its involvement in the Cold War – as a proxy.

The complete distraction of General Zia in driving the Soviets out of Afghanistan, surges in the military expenditure, disregard for public sector development outlays, stifling taxes and an economy pampered increasingly by aid, Pakistan was on troubled roads.

History is not unforgiving only to the losers in war, it is equally unforgiving to spectators who got involved. Pakistan being an unintended economic victim of the Cold War, only serves as a case in point.

The issue with proxies in a larger theatre of conflict is that the proxy starts blind boxing in a heavier weight category. It bloodies the proxy, and the limp is permanent.

In the ongoing Middle East crises, the key players and the proxies are well defined, except Turkey. Depending on which side you’re on, Turkey is either a primary player alongside Saudi or just a proxy of Saudi and the anti-Iran-Russia-Syria axis.

Regardless of what typecast it exactly fits into, this seat of the erstwhile Ottoman Empire seems to be now settling into an extremely troubled zone. Partly external, largely self inflicted.

Turkey is one of the MINT countries (Malaysia, Indonesia, Nigeria and Turkey) that were hailed as the world’s next economic giants after the BRICs (Brazil, Russia, India and China).

One of the world’s largest 20 economies since 2002, Turkey’s economy quadrupled in size, and saw record increases in consumption and export. A case study in emerging market economies that were managed well, it was classified as a newly industrialised and upper middle class country (Per Capita GDP of 10,400 USD, Nominal 2014).

It had a golden decade of political stability and economic growth. Until now.

Ruled by the iron fisted Recep Erdogan, the last 2 years have seen a series of missteps, setting the clock in reverse.

Erdogan currently has his armed forces multi-warring various foes, and operating at cross purposes. They might as well have started more conflicts than they can finish.

At the east, they’re fighting the Kurdistan Workers' Party (PKK), who are intent on establishing a larger Kurdistan. At the Syria front, the bloody war is with Bashar Al Assad’s loyalists. Since July this year, Turkey has also been battling the ISIS in retaliation for suicide bombings in Suruc and Istanbul. There are six active conflicts that Turkey is currently engaged in.

If these troubles weren’t enough, Turkey shot down a Russian jet this November, allegedly for violating its airspace.

The economy is another troubled area.

Erdogan has increasingly politicised the economy, undermining the relevance of the central bank and meddling with interest rates. With inflation at record high levels of 8.5% and GDP growth projections at a record low of 3%, Erdogan has appointed loyalists and family members in key ministerial positions. His son-in-law, for example has been appointed the all important energy minister.

Instability, crony capitalism and a weak rule of law are repellents to global capital. This flight of capital has made Turkey more vulnerable, given its already big current account deficit estimate at 4.5% of GDP this year. (Turkish Lira depreciated by 40% against the Dollar on an annual basis)

In this deadly cocktail of multiple sectarian wars and a weakening economy, the issues of increasing unemployment and refugee influx are making matters worse.

An estimated 8,00,000 Syrian refugees have entered Turkey, disturbing the delicate demographic profile even in cosmopolitan cities like Istanbul. Worse, Turkey has no shortage of unskilled workers. Unlike Germany, for which the refugees might be an economic asset, for the Turkish economy they are a liability, weighing on a workforce where nearly one in ten adults and one in five young adults are jobless.

Given suicide attacks in the heart of Istanbul, tourism is at an all time low, frustrating a huge service workforce dependent entirely on tourist dollars.

The Russians are trying to exact revenge for the downed jet by muscular economic posturing already. (Turkey imports 55 percent of its natural gas and 30 percent of its oil from Russia). Slowing global demand for Turkey’s exports (especially to Europe and China) are also making matters worse for this beleaguered economy.

Saudi Arabia might bail out Turkey on energy and EU and the US might step with cheap credit access for a longer time. However, Turkey’s problems seem too complex for external resolution.

Turkey, once an example of good economic management in the Middle East, is looking increasingly beleaguered economically and has bitten more than it can chew militarily. It could have chosen to fly under the radar in this sectarian conflict and managed its borders with tact and silence. Not that all its woes would have disappeared but it would be way better placed than today.

With bloodied sectarian borders, internal economic decline, a frustrated and unemployed workforce, and an authoritarian President,  Turkey is unfortunately the perfect recipe for a troubled time ahead.

The author is the Business Head of Marico Limited and a columnist for The Hindu and Business Line newspapers.

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Avijit Goel

Avijit Goel

Avijit Goel is a Senior Director with Flipkart. An alumnus of the Oxford University

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