Could Trump trample Turkey’s growth?

Much of Europe is mourning a US presidential election that has catapulted real estate mogul Donald Trump into position as possibly the world’s most powerful person.

In contrast, Ankara is rejoicing: President Recep Tayyip Erdogan and his government have made it clear that they welcome the result — not only because they think Mr Trump is likely to upset US power structures, but also because his rival, Hillary Clinton, had declared her intention of arming Syrian Kurds, seen as a hostile force by the government.

Mrs Clinton was also alleged to have received campaign contributions from the network of the exiled cleric Fethullah Gulen, accused by Mr Erdogan of orchestrating the failed coup attempt in July.

Ankara’s glee is misplaced, however, mainly because the implications of a Trump presidency are likely to be dire for the Turkish economy. Turkey has achieved average annual growth rates of about 3 to 3.5 per cent since the onset of the global financial crisis in 2007, but its growth has been low quality in at least three senses.

First, in contrast to a period between 2002 and 2006, when productivity growth was at 6 per cent per annum, there has been almost none since. This implies that there have been no improvements in how technology is being used or in how labour and physical capital are being allocated.

Second, the growth has been fuelled not by investment but by consumption, fed by an unsustainable rise in private credit, which has increased from around 30 per cent of GDP before 2007 to almost 80 per cent now. Such rapid credit growth in emerging economies is often the harbinger of a looming economic crisis.

Finally, economic institutions have been weakened since 2007. A range of institutional reforms — such as increasing transparency in government, limiting corruption, empowering independent agencies, and introducing a rule-based decision-making framework — have been all but reversed. Instead, public perceptions of corruption have risen and political meddling in economic affairs has become commonplace.

Despite its low quality, however, Turkish growth has been resilient. One reason for this stands above all else: the abundant global liquidity that has been created in part by ultra-low world interest rates courtesy of the US Federal Reserve and, to a lesser extent, the European Central Bank.

But these conditions seem likely to change under President Trump. Two pillars of his economic policy are expected to be massive tax cuts and infrastructure spending, which the markets have already begun pricing in.

This re-run of Reaganomics will increase US fiscal deficits and debt and may push up US inflation — developments unlikely to leave the Fed with any other option than raising the federal funds rate relatively quickly. As interest rates increase, the global or dollar liquidity glut will dry up.

Emerging economies in general, and Turkey in particular, have little time to adjust to such a shift in the global environment. Time is running out for the Turkish economy for other reasons too. Economic growth had begun to slow even before the coup attempt, increasing uncertainty for foreign investors.

The latest indicators suggest the economy has contracted in the third quarter of 2016, probably leaving Turkey with meagre growth of about 1 per cent year on year — the lowest level in almost a decade. Meanwhile, the unemployment rate has risen by 1.5 percentage points to 11.4 per cent over the past four months.

Turkey shares another trait with some of its fellow emerging economies: it has a limited capacity for enacting countercyclical policy to combat a sharp slowdown. The weakness of the lira (which has lost some 15 per cent in a matter of weeks); the Turkish central bank’s aggressive rate cutting since March (with the exception of the modest increases of last week); a large external financing requirement amounting to almost 30 per cent of GDP, due to the stubbornly high current account deficit and short-term debt obligations; and limited central bank reserves leave little room for action on monetary policy.

Ankara’s glee is misplaced. The implications of a Trump presidency are likely to be dire

On the fiscal side, Turkey has some breathing space, thanks to relatively low government debt-to-GDP ratios (around 35 per cent) and moderate headline deficits (around 1.5 to 2 per cent), but the underlying situation is a lot weaker than it first appears, with primary expenditure growth visibly outpacing tax revenue growth.

It is not too late to change course. Growth in the aftermath of Turkey’s economic crisis in 2001 showed how even modest attempts towards a more inclusive economy can spearhead rapid and relatively high-quality growth. Nothing precludes a re-run of that experience — except Turkish politics.

An economic revamp requires hard political choices — restarting the process of economic reforms, reversing the control of the government over the judiciary and economic agencies, and starting a rapprochement with Europe and the US. This is a tall order, but one that is urgently needed if Turkey is to withstand the wild and unpredictable winds of a new Trumpian world.

Daron Acemoglu is the Elizabeth and James Killian professor of economics at the Massachusetts Institute of Technology; Murat Ucer is Turkey adviser at GlobalSource Partners