The answer to solving Turkey’s economic turmoil is the introduction of “more inclusive economic institutions guaranteed by democratic institutions” and not “capital controls or other forms of financial engineering”, well-known Turkish-born American economist Daron Acemoglu wrote in an opinion piece published by Bloomberg on August 30.

“Rather than hope that capital controls or other forms of financial engineering will miraculously restore to health an economy ailing from institutional ills, it is better to be clear-headed about what the Turkish economy needs: more inclusive economic institutions guaranteed by democratic institutions,” commented Acemoglu, a professor of economics at the Massachusetts Institute of Technology (MIT) and co-author of "Why Nations Fail: The Origins of Power, Prosperity, and Poverty."

He added: “Important steps would include rolling back the sweeping powers of the executive presidency [introduced in July]; freeing up the media; freeing political prisoners, such as the businessman and peace activist Osman Kavala; granting independence to public agencies such as the central bank, and to the courts; reactivating the controls over government procurement; and taking simple confidence-building measures for foreign and domestic investors.”

However, Acemoglu cautioned that the “simplicity of the solution shouldn’t allow false hope,” noting: “The conditions that enabled political reform in the early 2000s do not exist now. Turkey changed its constitution in a more authoritarian direction, and the opposition is in no position to force President [Recep Tayyip] Erdogan to take a reformist turn. The courts and the media have completely ceased to provide checks against government power. The population has become much more anti-Western in the intervening years, in part because of the collapse of the EU accession process, and also because of the steady barrage of propaganda in the Turkish media. The coup attempt of July 2016, which led to the deaths of over 300 people, has scarred the public psyche and further polarized the country. Even if the path out of Turkey’s economic troubles seems clear, getting there is no easy thing.”

Stopgap measures
The Turkish government’s was undertaking stopgap measures to halt the economic hemorrhaging but they would not fix what ails the economy, the economist said, and other crises lie around the corner.

“Foreign capital flows financing the country’s massive current account deficit have dried up following the row between President Donald Trump and President Recep Tayyip Erdogan over the fate of Andrew Brunson, the American pastor jailed by Turkish authorities. The heavily indebted corporate sector, especially real-estate and construction companies, are hanging by a thread,” he added.

Acemoglu further concluded: “The roots of the crisis lie not in fickle foreign investors or the tweetstorms of a capricious American president, but in structural problems: low productivity in the corporate sector, unsustainable credit growth, and corporate overextension. [But] these problems are themselves grounded in the decline of economic and political institutions over the past decade.”

Acemoglu also said that in his eyes, although Turkey did weather the global recession after the 2008 financial crisis reasonably well, the growth that followed was low in quality. “Productivity has declined for most of the past decade. Growth during this era relied on a construction boom and rampant credit expansion. It is these unsustainable engines of growth that have also created the persistent current-account deficits and inflationary pressures that have become harder to contain.”