Last Word: Daron Ace­moğlu

Turkish Review - - CONTENTS -

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.

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