Last Word: Daron Acemoğlu
How do you think foreign investor sentiment toward Turkish domestic politics has changed since the June 7 polls? Do you believe foreign investors to Turkey can foresee a permanent solution to current political uncertainty after Nov. 1 elections? I think foreign investors are reacting to changes in the Turkish economy with some delay. As I already noted, though they stopped investing long-term, they were still willing to bring in money to the Turkish economy on a short-term basis. We are seeing that even this is starting to change. Some of this is because there are general fears about emerging markets and anticipation of the end of abundant liquidity as quantitative easing and ultra low interest rate policies in the United States are coming to an end. But some of it is about Turkish economy’s fundamentals not looking so good anymore. Would you say foreign investors consider the depreciation of Turkish lira versus the dollar and euro to be an opportunity for mergers and acquisitions in Turkey? What is your reading as regards this year’s FDI and M& A performance? I don’t think in the current institutional environment and with the current uncertainties affecting everybody, foreigners are likely to bring long-term capital into the Turkish economy. In its recent report, Transparency International named Turkey among six of the G-20 powers that persistently fail to fight corporate corruption. How do you think such findings, combined with falling confidence in the Turkish judiciary, affect investor sentiment? It is one of the factors that has been discouraging foreign investors and will continue to do so. But it’s not just foreign investors. Corruption is a major problem for domestic businesses also. It implies a misallocation of resources, but even more importantly, it makes politicians interfere at every stage of economic activity, thus discouraging entrepreneurship, innovation, and the right type of risk taking. In the short run, the Turkish economy’s health depends on micro-political factors. But in the medium run, it is also equally important to reduce politicians’ control over the economy, which is choking investment, innovation and competition. Turkey’s strong public debt standing remained a positive for the government for a long time. We are seeing deterioration on that front while private debt in USD is also surging. Turkey’s five-year credit default swaps, jumped to 280 points on Aug. 20, the highest reading since January of this year. Do these indices call for an upcoming domestic crisis? The account I provided above suggests that the Turkish economy has structural problems, and these are bound to lead to an economic crisis sooner or later. The question is whether this will be a soft crisis, where growth slows down and the economy picks up soon thereafter, or a hard landing with much more dire consequences. Unfortunately, the series of policy mistakes I have mentioned make a soft crisis less likely. For example, the about-face on reforms leaves the economy much less productive and with much less potential for future growth. This will have a price to pay. Similarly, a more prudent monetary policy would have avoided some of these risks, but years of irresponsibly lax monetary policy has led to rapid credit growth and foreign exchange risks through mismatch on the balance sheets of firms. All of these policies have also made us much more dependent on foreign capital through our current account deficit, and left the economy vulnerable to a sudden withdrawal of foreign funding.