The dream palace of the Arabs, a termed coined by Fouad Ajami in his brilliant book of the same title, is finally beginning to crumble. Unlike previous cracks in the façade this one can not be blamed on some external agent.
Previously, Egyptian leaders could always blame outsiders for whatever ills befell their country. It was Israeli aggression, Saudi conniving, British duplicity, American blundering, terrorist scheming, outside agitators in general trying to upset the calm and security of Egypt. The recipe for dealing with disasters was always the same; blame someone else and lower the price of bread to keep the masses quiet. It is no wonder that Ajami reserves his severest criticism for the Egyptian regime.
Now the challenge comes entirely from within, from the Egyptian people who no longer can be bought off with cheap bread. There’s no convenient outsider to blame this time. Even the jihadis seem to have been caught off-guard by the vehemence and spontaneity of the protests. The regime and all its supporters have seriously underestimated the pent-up anger and frustration of ordinary people who will no longer tolerate their pretend democracy and a government that does not begin to answer their frustrations.
The only surprise with the Egyptian uprising is that it didn’t happen sooner. The situation has been building for decades. While the macro economic numbers aren’t bad, they don’t begin to meet the demands of a population of 75 million and a labour force of about 26 million. The official unemployment rate is close to 10%, but no one dares to count the number of under-employed people. University graduates consider themselves fortunate to get a job as a porter in a building. Many graduates simply fill the ranks of the unemployed literate discontented mass that is now filling the streets of Cairo.
The authorities can no longer control access to news as easily as they did previously. The internet has given people easy access to information from all over the world, and they start to compare their situation unfavourably with others. They start to ask that most dangerous of all questions, ‘Why?’ Why does Turkey, a Moslem country with the same population as Egypt, have a Gross National Product triple that of Egypt? Why does Turkey, a country with a fraction of the oil and gas reserves of Egypt, have a per capita income double the Egyptian per capita income? And, more fundamentally, why is the Turkish democracy with all its flaws so much more developed than Egypt’s?
Simple questions, perhaps. But questions that up to now have had few, if any, convincing answers.
The old appeal for stability has no meaning now. Too many people associate that term with the stability that comes only with brutal suppression. The Mubarak machine was very good at either marginalizing any independent voices or throwing them in prison.
Now that the façade has been torn off the regime the key question is what comes next. Conventional wisdom has always said that nothing happens in Egypt without the approval of the security services. Now that the head of those services, Omar Suleiman, has been appointed vice president we shall see if that wisdom holds up.
A major part of the problem or solution, depending on your point of view, is the army. It is the largest in the Arab world and has traditionally supported the regime that returned the favor with large amounts of money. The army could ease Mubarak out of power and try to control the transition to a more representative government. Or it could support Mubarak to the bitter end by trying to crush the protests. This step could very likely rip the country further apart and open the door to the fundamental Islamists. Mubarak could do worse than to read the history of the last few years of the reign of Tsar Nicholas II of Russia. He might understand the bitter consequences of remaining fatally stubborn in the face of massive popular unrest.
The re-appearance of Nobel Prize laureate Mohammed El Baradei on the Egyptian political scene adds a new piece to the puzzle. Will this learned former Director of the International Atomic Energy Agency (IAEA) who earned the severe displeasure of the American neo-cons be able to channel the Egyptian protests into real democracy? Will he be able to satisfy all the contending forces in that large and diverse country? Will his lack of political experience be a plus or a minus? More fundamentally, will he become Egypt’s Kerensky, merely keeping the chair warm until a more dynamic, forceful figure imposes himself on the scene? The initial steps offer hope as he is now supported by the Moslem Brotherhood, long a fixture in opposition Egyptian politics.
The stakes are very high. It is one thing for a small country like Tunisia to overthrow a long-time dictator. But Egypt is an entirely different story. The largest country in the Arab world, it has long considered itself a leader. It has produced brilliant intellects, poets, novelists, and several business leaders successful on the world stage. Many of the leading political movements in Arab history have their origins in Egypt’s struggle for independence from British rule. An Egyptian is the head of the Arab League. In short, the established, ruling forces in Egypt will not easily roll over and go away. Mubarak may go, but the issue is whether this would result in real change or mere window dressing.
The United States is in an awkward position. It has long supported Mubarak and Anwar Sadat before him, but at the same time has tried to introduce elements of real democracy by sponsoring NGOs that worked with various groups training them in how to make a democracy work. Egyptian authorities often took a dim view such activities and either severely restricted them or shut them down entirely. The last thing the United States wanted was a fundamentalist take-over in Egypt, and as long as Mubarak was seen as the best bulwark against that development he got massive amounts of American support and aid.
But now there is a different alternative. The fundamentalists may not be the only alternative to the Mubarak regime. The demonstrations have not been co-opted by the fundamentalists, and have been genuinely broad based. It is much too early to tell how all this will play out, but the United States has to calculate very carefully how much, and when, to reduce its support of the Mubarak regime and simultaneously find some group emerging from the demonstrations that it can openly support.
Sunday, 30 January 2011
Tuesday, 25 January 2011
What Are Turkey's Alternatives To The European Union?
One sure way to ruin a good dinner party in Paris or Berlin is to bring up the contentious subject of Turkey’s bid to join the European Union. While the hostess glares at you, the usual polite dinner-time babble degenerates into competing salvos of rhetorical artillery for and against the Turkish membership. “The EU needs the shot-in-the-arm a fast growing young Turkey would bring,” claim the few proponents of Turkish membership. “Rubbish,” fires back an opponent from the across the fois gras, “The only things Turkey would bring are chaos and huge outflows from our budget!” And so it goes.
The pro/con arguments are becoming stale and less convincing with passing time. While there are some serious reasons to question Turkey’s membership, one recent paper ventures into the bizarre. The authors suggest that Turkey does not fully share a European identity (whatever that is) because it did not participate in World War II and therefore does not possess the required commitment to peace, individual rights, and democracy. Right. Can one then assume that the memberships of Sweden, Ireland, Portugal and Spain are somewhat suspect because they remained neutral during the war? The paper also argues that Turkey has only recently and tentatively emerged from the authoritarian Kemalist military/judicial domination and has not developed a strong enough ‘real’ democracy. One could make the same argument about Spain and Portugal emerging from decades of brutal dictatorships or Greece recently emerged from military rule when it was admitted in 1981. What about recent entrants Bulgaria and Romania? In short, the claim may be true, but is meaningless given the history of recent entrants into the European Union.
Professor Bahri Yilmaz, in another paper in the same journal, mentions what is perhaps the major stumbling block to Turkey’s membership. It is simply too large. It is one thing to absorb the Baltic states, Malta, Cyprus, Hungary, the Czech Republic, Slovakia, Bulgaria and Romania whose combined population does not equal Turkey’s. But Turkey’s population of 75 million would immediately gain it a seat at the high table of European policy making. Only Germany would, for the time being, have more votes than Turkey. Many current members of the EU would find it very hard to accept that a country who has not been an integral part of the union since it was formed should assume such power. If the EU is embarrassed by the hard-line regressive positions of small Hungary what would it do with Turkey that in many ways is equally hard-line and self-righteous -- and eight times larger?
Professor Yilmaz also discusses the foreign policy implications of the EU decision. If Turkey were somehow to join the union it would enjoy the full privileges and responsibilities of membership. Consequently, the EU also would then be injected more directly into Middle Eastern issues by virtue of its borders now extending to Iran, Iraq and Syria. This is not a prospect that thrills many European Union members. Would Turkey accede to the EU’s opposition to Iran’s nuclear program and its definition of Hamas as a terrorist organization? Or would it use its weight to force a gentler EU position toward Iran and various radical Arab organizations and states? I imagine these would be interesting, somewhat heated discussions.
What are the options if its membership bid is rejected, or the Turks get fed up with waiting in the outer harbor while lesser countries go sailing in? The Turkish government puts on a brave face and says that membership doesn’t really matter and that Turkey would continue on its way upward and onward. The government is currently benefitting at the polls by playing on the people’s resentment at the EU’s treatment of Turkey. It is stoking the already fervent Turkish nationalism and sense of grievance against the rest of the world. “A Turk has no friend but a Turk” is a long-standing, popular sentiment.
But can Turkey really go it alone? Brave words, but such a move is questionable. Turkey is large, but unlike Brazil, India or China, not large enough to forge a completely independent foreign policy. What about trying to join the Arab League? This option is not very likely given the strong resistance of countries like Egypt that resent attempts by non-Arab Turkey to meddle in Arab affairs. Could Turkey turn to historical adversary Russia for comfort? Despite a long and bloody history this idea may not be as far-fetched as first appears. A journalist friend told me that Vladimir Putin suggested nothing less at a meeting with Turkish journalists in Moscow. The mutual economic interests of the two countries are growing stronger every day, and Russia is the main supplier of natural gas to Turkey. But Moscow is not well known for giving its friends and allies a great deal of flexibility in managing their own affairs. There are many in Turkey who believe the embrace of the bear could be a bit suffocating.
Barring some major geo-political event that forces the EU’s hand one way or another, one possible outcome is that Turkey and the EU agree to disagree. Turkey will continue to benefit from close economic, duty-free ties to the EU but will not be part of the political decision making process. In some ways this may not be a bad option. Turkey could surely extract some serious economic concessions from the EU by agreeing to postpone indefinitely its application, and simultaneously edge even closer to the United States -- at least behind the scenes. Turkey would be free to continue its prickly independence without becoming totally isolated. It would be very difficult for Turkey’s axis to slip too far away from the West. No matter how close it grows to Iran or the Arab countries they are simply no match for the economic importance of Europe or the political weight of the United States. Its politicians may exclaim loudly about the proud, independent role that a resurgent Turkey will play on the world stage. But outside observers should carefully distinguish how much of this is for domestic consumption and how much these proclamations represent a realistic alternative to a modified status quo.
The pro/con arguments are becoming stale and less convincing with passing time. While there are some serious reasons to question Turkey’s membership, one recent paper ventures into the bizarre. The authors suggest that Turkey does not fully share a European identity (whatever that is) because it did not participate in World War II and therefore does not possess the required commitment to peace, individual rights, and democracy. Right. Can one then assume that the memberships of Sweden, Ireland, Portugal and Spain are somewhat suspect because they remained neutral during the war? The paper also argues that Turkey has only recently and tentatively emerged from the authoritarian Kemalist military/judicial domination and has not developed a strong enough ‘real’ democracy. One could make the same argument about Spain and Portugal emerging from decades of brutal dictatorships or Greece recently emerged from military rule when it was admitted in 1981. What about recent entrants Bulgaria and Romania? In short, the claim may be true, but is meaningless given the history of recent entrants into the European Union.
Professor Bahri Yilmaz, in another paper in the same journal, mentions what is perhaps the major stumbling block to Turkey’s membership. It is simply too large. It is one thing to absorb the Baltic states, Malta, Cyprus, Hungary, the Czech Republic, Slovakia, Bulgaria and Romania whose combined population does not equal Turkey’s. But Turkey’s population of 75 million would immediately gain it a seat at the high table of European policy making. Only Germany would, for the time being, have more votes than Turkey. Many current members of the EU would find it very hard to accept that a country who has not been an integral part of the union since it was formed should assume such power. If the EU is embarrassed by the hard-line regressive positions of small Hungary what would it do with Turkey that in many ways is equally hard-line and self-righteous -- and eight times larger?
Professor Yilmaz also discusses the foreign policy implications of the EU decision. If Turkey were somehow to join the union it would enjoy the full privileges and responsibilities of membership. Consequently, the EU also would then be injected more directly into Middle Eastern issues by virtue of its borders now extending to Iran, Iraq and Syria. This is not a prospect that thrills many European Union members. Would Turkey accede to the EU’s opposition to Iran’s nuclear program and its definition of Hamas as a terrorist organization? Or would it use its weight to force a gentler EU position toward Iran and various radical Arab organizations and states? I imagine these would be interesting, somewhat heated discussions.
What are the options if its membership bid is rejected, or the Turks get fed up with waiting in the outer harbor while lesser countries go sailing in? The Turkish government puts on a brave face and says that membership doesn’t really matter and that Turkey would continue on its way upward and onward. The government is currently benefitting at the polls by playing on the people’s resentment at the EU’s treatment of Turkey. It is stoking the already fervent Turkish nationalism and sense of grievance against the rest of the world. “A Turk has no friend but a Turk” is a long-standing, popular sentiment.
But can Turkey really go it alone? Brave words, but such a move is questionable. Turkey is large, but unlike Brazil, India or China, not large enough to forge a completely independent foreign policy. What about trying to join the Arab League? This option is not very likely given the strong resistance of countries like Egypt that resent attempts by non-Arab Turkey to meddle in Arab affairs. Could Turkey turn to historical adversary Russia for comfort? Despite a long and bloody history this idea may not be as far-fetched as first appears. A journalist friend told me that Vladimir Putin suggested nothing less at a meeting with Turkish journalists in Moscow. The mutual economic interests of the two countries are growing stronger every day, and Russia is the main supplier of natural gas to Turkey. But Moscow is not well known for giving its friends and allies a great deal of flexibility in managing their own affairs. There are many in Turkey who believe the embrace of the bear could be a bit suffocating.
Barring some major geo-political event that forces the EU’s hand one way or another, one possible outcome is that Turkey and the EU agree to disagree. Turkey will continue to benefit from close economic, duty-free ties to the EU but will not be part of the political decision making process. In some ways this may not be a bad option. Turkey could surely extract some serious economic concessions from the EU by agreeing to postpone indefinitely its application, and simultaneously edge even closer to the United States -- at least behind the scenes. Turkey would be free to continue its prickly independence without becoming totally isolated. It would be very difficult for Turkey’s axis to slip too far away from the West. No matter how close it grows to Iran or the Arab countries they are simply no match for the economic importance of Europe or the political weight of the United States. Its politicians may exclaim loudly about the proud, independent role that a resurgent Turkey will play on the world stage. But outside observers should carefully distinguish how much of this is for domestic consumption and how much these proclamations represent a realistic alternative to a modified status quo.
Sunday, 23 January 2011
Turkey's Real Contribution To The Middle East
Two recent long stories in The New York Times and The Wall Street Journal note Turkey’s increasing diplomatic profile in the Middle East. The country’s peripatetic foreign minister Ahmet Davutoglu has injected himself deeply into the region’s well known problems trying to make Turkey the facilitator, the catalyst for agreement among parties with seemingly intractable differences.
Both these stories point out that Turkey’s efforts so far have yielded very little in the way of concrete results. The efforts to mediate between Iran and the West have fallen flat with considerable collateral damage to Turkey’s image as a solid Western ally. Efforts to arbitrate the Palestinian/Israeli/Syrian quagmire blew up with Turkey’s bombastic response to Israel’s bloody Gaza incursion and the ill-fated alleged Gaza aid ship fiasco. And recently Davutoglu had to admit defeat in the Qatari/Turkish efforts to find a solution to the pending Lebanese crisis.
But what these stories missed is that Turkey’s biggest contribution to development in the region may well be in its very structure rather than in any direct action it might take. Turkey, as a functioning secular democracy with a Moslem society, is in an excellent position to serve as an example to other countries in the region that the choice of governance is not limited to dictators or Al Qaeda. There is another option, and Turkey shows just how successful it can be. The economy is growing, there are functioning political parties with sharply different visions of the country’s future, there are real elections, and there is a vibrant social life that is projected throughout much of the Arab world in extremely popular and controversial soap operas. Even in Greece one of the most of the most popular TV shows is a trashy Turkish soap opera.
But Davutoglu wants to be much more pro-active. Building on Turkey’s current economic success and his own vision put forth in his 600-page tome ‘Strategic Depth’ he strides boldly into issues that previous Turkish diplomats have steered gently around: Iran/West, Palestine/Israel, Hezbollah/Sunni/Christians in Lebanon. Whether you agree or disagree with Davutoglu you have to appreciate his intellectual dexterity and curiosity that is missing in so many other Turkish officials. A fluent English speaker and voracious bibliophile he is a frequent visitor to book fairs in Great Britain.
He believes that Turkey, as the former imperial power in the Balkans and Middle East, is ideally positioned to project its ‘soft power’ to solve the region’s problems. In this vision, Turkish products like refrigerators, processed food, and televisions will replace the elite Janissary troops that brought the Balkans and Middle East under Ottoman Turkish control centuries ago. According to this theory, few outside powers -- read the United States – have Turkey’s knowledge and historical/religious ties that allow them to project ‘soft power’ throughout this troubled region. He has even gone so far as to suggest that it might be worthwhile to create a commonwealth of former Ottoman Empire entities, naturally with Istanbul as the centre.
The trouble with this vision is that it overlooks some important historical realities, one being that the alleged unity of the Ottoman Empire is overstated. The Ottoman attitude toward the Arabs is best described in an Ottoman proverb quoted by Philip Mansel in his book Levant. The linguistic pun is missed in translation, but the proverb says that Turks would forgo all the sweets of Damascus if they could avoid seeing the face of an Arab. This attitude is slowly changing as the preferred partner European Union makes it clear it doesn’t want Turkey, but even now I encounter considerable residual distrust on both sides. The Arabs complain that they have always lost money when investing in Turkey, and the Turks complain that they can’t trust the Arabs either. About two years ago the investment banking team of our company was trying to mediate the acquisition of a Turkish company by a group of Arab investors. Given the invective about liars, cheats, thieves, procrastinators, etc. it was a very good thing they were in separate rooms with us shuttling between. It was no surprise that the deal did not happen. Another issue is that, as large Turkey's economy may be, the financial power of the region has shifted to the Gulf. Turkey's economic contribution is nice, but not really necessary.
A third problem is that some Arab countries, particularly Egypt, have made it quite clear that they do not appreciate Turkish interference in Arab affairs. They resent the growing prominence of this non-Arab country into their affairs, and pointedly remind the Turks that the days of the Ottoman Empire are over.
But perhaps the biggest problem that Davutoglu faces in convincing people that Turkey wants ‘zero problems’ with its neighbours near and far is that his boss, Prime Minister Tayyip Erdogan, constantly launches verbal hand grenades that can shatter months of quiet diplomatic work. According to Erdogan all talk of Iran’s plans to build nuclear weapons is mere ‘gossip.’ Oops. Down goes all the credibility you’re trying to build as a serious arbitrator. All talk of genocide in Darfur is nonsense, according to Erdogan, because ‘Moslems don’t commit genocide.’ Erdogan has also loudly proclaimed that the Palestinian group Hamas is not a terrorist organization and that Israel should fire its equally combative foreign minister Avigdor Lieberman. One wonders how he would react for calls to replace certain Turkish ministers. The tendency of the prime minister to cross the street to get into a fight can only over shadow the tireless efforts of Turkey’s foreign minister.
Perhaps Turkey’s, and the region’s, interests would be better served if it could help others achieve that most difficult of tasks – building a functioning democracy from the rubble of dictatorship. As the brilliant French Arabist Olivier Roy points out in an essay in The International Herald Tribune the protestors in Tunisia are not Islamists. They are calling for democracy and elections. It is difficult to blend Islam and democracy, but this is something that Turkey has achieved. If it really wants to make a difference in the Middle East it will help others move toward this goal.
Both these stories point out that Turkey’s efforts so far have yielded very little in the way of concrete results. The efforts to mediate between Iran and the West have fallen flat with considerable collateral damage to Turkey’s image as a solid Western ally. Efforts to arbitrate the Palestinian/Israeli/Syrian quagmire blew up with Turkey’s bombastic response to Israel’s bloody Gaza incursion and the ill-fated alleged Gaza aid ship fiasco. And recently Davutoglu had to admit defeat in the Qatari/Turkish efforts to find a solution to the pending Lebanese crisis.
But what these stories missed is that Turkey’s biggest contribution to development in the region may well be in its very structure rather than in any direct action it might take. Turkey, as a functioning secular democracy with a Moslem society, is in an excellent position to serve as an example to other countries in the region that the choice of governance is not limited to dictators or Al Qaeda. There is another option, and Turkey shows just how successful it can be. The economy is growing, there are functioning political parties with sharply different visions of the country’s future, there are real elections, and there is a vibrant social life that is projected throughout much of the Arab world in extremely popular and controversial soap operas. Even in Greece one of the most of the most popular TV shows is a trashy Turkish soap opera.
But Davutoglu wants to be much more pro-active. Building on Turkey’s current economic success and his own vision put forth in his 600-page tome ‘Strategic Depth’ he strides boldly into issues that previous Turkish diplomats have steered gently around: Iran/West, Palestine/Israel, Hezbollah/Sunni/Christians in Lebanon. Whether you agree or disagree with Davutoglu you have to appreciate his intellectual dexterity and curiosity that is missing in so many other Turkish officials. A fluent English speaker and voracious bibliophile he is a frequent visitor to book fairs in Great Britain.
He believes that Turkey, as the former imperial power in the Balkans and Middle East, is ideally positioned to project its ‘soft power’ to solve the region’s problems. In this vision, Turkish products like refrigerators, processed food, and televisions will replace the elite Janissary troops that brought the Balkans and Middle East under Ottoman Turkish control centuries ago. According to this theory, few outside powers -- read the United States – have Turkey’s knowledge and historical/religious ties that allow them to project ‘soft power’ throughout this troubled region. He has even gone so far as to suggest that it might be worthwhile to create a commonwealth of former Ottoman Empire entities, naturally with Istanbul as the centre.
The trouble with this vision is that it overlooks some important historical realities, one being that the alleged unity of the Ottoman Empire is overstated. The Ottoman attitude toward the Arabs is best described in an Ottoman proverb quoted by Philip Mansel in his book Levant. The linguistic pun is missed in translation, but the proverb says that Turks would forgo all the sweets of Damascus if they could avoid seeing the face of an Arab. This attitude is slowly changing as the preferred partner European Union makes it clear it doesn’t want Turkey, but even now I encounter considerable residual distrust on both sides. The Arabs complain that they have always lost money when investing in Turkey, and the Turks complain that they can’t trust the Arabs either. About two years ago the investment banking team of our company was trying to mediate the acquisition of a Turkish company by a group of Arab investors. Given the invective about liars, cheats, thieves, procrastinators, etc. it was a very good thing they were in separate rooms with us shuttling between. It was no surprise that the deal did not happen. Another issue is that, as large Turkey's economy may be, the financial power of the region has shifted to the Gulf. Turkey's economic contribution is nice, but not really necessary.
A third problem is that some Arab countries, particularly Egypt, have made it quite clear that they do not appreciate Turkish interference in Arab affairs. They resent the growing prominence of this non-Arab country into their affairs, and pointedly remind the Turks that the days of the Ottoman Empire are over.
But perhaps the biggest problem that Davutoglu faces in convincing people that Turkey wants ‘zero problems’ with its neighbours near and far is that his boss, Prime Minister Tayyip Erdogan, constantly launches verbal hand grenades that can shatter months of quiet diplomatic work. According to Erdogan all talk of Iran’s plans to build nuclear weapons is mere ‘gossip.’ Oops. Down goes all the credibility you’re trying to build as a serious arbitrator. All talk of genocide in Darfur is nonsense, according to Erdogan, because ‘Moslems don’t commit genocide.’ Erdogan has also loudly proclaimed that the Palestinian group Hamas is not a terrorist organization and that Israel should fire its equally combative foreign minister Avigdor Lieberman. One wonders how he would react for calls to replace certain Turkish ministers. The tendency of the prime minister to cross the street to get into a fight can only over shadow the tireless efforts of Turkey’s foreign minister.
Perhaps Turkey’s, and the region’s, interests would be better served if it could help others achieve that most difficult of tasks – building a functioning democracy from the rubble of dictatorship. As the brilliant French Arabist Olivier Roy points out in an essay in The International Herald Tribune the protestors in Tunisia are not Islamists. They are calling for democracy and elections. It is difficult to blend Islam and democracy, but this is something that Turkey has achieved. If it really wants to make a difference in the Middle East it will help others move toward this goal.
Tuesday, 18 January 2011
Can Lebanese Chaos Be Averted?
The downfall of long-time Tunisian strongman Zine el-Abidine Ben Ali has prompted a great deal of ink about the fate of other Arab autocrats. Is Tunisia, like Solidarity in Poland, the spark that will set off a chain reaction and freedom and democracy in the Middle East? Will other regimes use some imagination to deal with the turmoil spreading from under the rock of oppression or will they simply push down harder on the rock to make sure absolutely nothing seeps out?
Initial reactions are not promising. Other than checking the status of their get-away planes and Swiss bank accounts the autocrats’ reactions have been typical – buy off potential threats by lowering prices of key commodities rather than deal with the real underlying issues. Kuwait and Saudi Arabia have quickly lowered prices of key items to pre-empt any disturbances over rising prices. Saudi Arabia may also have felt it had to do something to cut off protests after it solidified its reputation for never turning away a despot in need by granting asylum to the unpopular Ben Ali. Syria has increased its heating oil allowance by 72% to the equivalent of $33/month for a total cost more than $300 million. Even moderate Jordan has similarly announced a package of $225 million in cuts for several fuels and staples including sugar and rice rather than risk the wrath of the people. It remains to be seen if these moves are enough to contain the virus of political freedom. It will be more difficult than in the past. With Facebook, tweets, and other electronic communications channels the autocrats can no longer control the news flow as much as they did. Their people may just require more than a reduced price for bread.
While the Tunisian events have been unfolding, there is a time bomb in Lebanon steadily ticking away. The prosecutor for the Special Tribunal for Lebanon has issued an indictment in the 2005 assassination of former Lebanese Prime Minister Rafik Hariri. He was killed with a huge car bomb that claimed another 22 innocent people. The indictment is being reviewed by a tribunal judge before the terms are released. But the widely held belief is that it will condemn the Iranian-supported group Hezbollah along with Syrian agents. Hariri was strongly opposed to Syria meddling in Lebanese affairs, and many believe that Syria played a key role in the assassination. The fact that 10 Lebanese politicians opposed to Syrian control have been killed since 2005 is a clue that these suspicions may not be groundless.
A further clue to Hezbollah involvement is that the group pulled its members out of the Lebanese government last week in protest about the indictment and its possible conclusions. Hezbollah wants the government to distance itself from the Special Tribunal and stop cooperating with it. The odds of this happening are not great because, among other things, the acting Lebanese government is headed by the son of the assassinated prime minister. Operating on the premise that offense is better than defence, Hezbollah is trying to discredit the tribunal and has predictably called it a tool of the United States and Israel. Hezbollah added that it will not allow any of its members to be arrested as a result of the indictment. With its heavily armed and disciplined militia that is not an idle claim.
Meanwhile representatives from just about every other country inside and outside the region are meeting to try to find a way to stop Lebanon from sliding into bloody chaos after the indictment is released to the public. Lebanon is a delicate construct of deeply incompatible religious, economic and political interests that seems to survive on nuances and deals that slither around this incompatibility without ever challenging it. There is a fear that something as direct and blunt as a United Nations-sponsored indictment rendered by the Tribunal’s Canadian prosecutor will tear these relationships apart with disastrous consequences.
Syria, Qatar, Saudi Arabia, Turkey, Iran, and France are desperately trying to find a solution that will square the circle. Egypt is not directly involved, but there are reports its agents are busily working away in the Sunni regions of Lebanon. The result of all these meetings so far is a collection of inane statements that make Texas beauty pageant winners sound like Rhodes Scholars. The prime minister of Turkey, a relative late comer to intra-Arab affairs and included over the objections of Egypt, lets us know that he wants peace in the region. Very good. Any ideas how to achieve this? The spokesman for the Egyptian Foreign Ministry says a solution must balance stability and justice. Good luck with that, whatever that statement means.
If, as expected, Hezbollah is implicated in Hariri’s assassination it risks losing a great deal of the credibility within Lebanon that it gained as a result of its strong resistance to the disastrous Israeli invasion in 2006. Many Lebanese may not like Hezbollah, but they like the Israelis even less. Over the last few years the organization has tried to portray itself as dedicated to the welfare of Lebanon and not just a tool of its fellow Shiites in Iran. Once the indictment is made public this facade will be torn to shreds and the Sunni Moslems and Christians in Lebanon would now have a powerful weapon to use against Hezbollah.
One gets the impression that release of the indictment was delayed less for a judicial review than to give the parties involved a chance to find a solution that would avoid chaos. No one so far seems to have bothered to ask the Lebanese people just what they would like to happen once the indictment is released. Or perhaps it is felt that their wishes are far less important than the interests of the various patron states.
Initial reactions are not promising. Other than checking the status of their get-away planes and Swiss bank accounts the autocrats’ reactions have been typical – buy off potential threats by lowering prices of key commodities rather than deal with the real underlying issues. Kuwait and Saudi Arabia have quickly lowered prices of key items to pre-empt any disturbances over rising prices. Saudi Arabia may also have felt it had to do something to cut off protests after it solidified its reputation for never turning away a despot in need by granting asylum to the unpopular Ben Ali. Syria has increased its heating oil allowance by 72% to the equivalent of $33/month for a total cost more than $300 million. Even moderate Jordan has similarly announced a package of $225 million in cuts for several fuels and staples including sugar and rice rather than risk the wrath of the people. It remains to be seen if these moves are enough to contain the virus of political freedom. It will be more difficult than in the past. With Facebook, tweets, and other electronic communications channels the autocrats can no longer control the news flow as much as they did. Their people may just require more than a reduced price for bread.
While the Tunisian events have been unfolding, there is a time bomb in Lebanon steadily ticking away. The prosecutor for the Special Tribunal for Lebanon has issued an indictment in the 2005 assassination of former Lebanese Prime Minister Rafik Hariri. He was killed with a huge car bomb that claimed another 22 innocent people. The indictment is being reviewed by a tribunal judge before the terms are released. But the widely held belief is that it will condemn the Iranian-supported group Hezbollah along with Syrian agents. Hariri was strongly opposed to Syria meddling in Lebanese affairs, and many believe that Syria played a key role in the assassination. The fact that 10 Lebanese politicians opposed to Syrian control have been killed since 2005 is a clue that these suspicions may not be groundless.
A further clue to Hezbollah involvement is that the group pulled its members out of the Lebanese government last week in protest about the indictment and its possible conclusions. Hezbollah wants the government to distance itself from the Special Tribunal and stop cooperating with it. The odds of this happening are not great because, among other things, the acting Lebanese government is headed by the son of the assassinated prime minister. Operating on the premise that offense is better than defence, Hezbollah is trying to discredit the tribunal and has predictably called it a tool of the United States and Israel. Hezbollah added that it will not allow any of its members to be arrested as a result of the indictment. With its heavily armed and disciplined militia that is not an idle claim.
Meanwhile representatives from just about every other country inside and outside the region are meeting to try to find a way to stop Lebanon from sliding into bloody chaos after the indictment is released to the public. Lebanon is a delicate construct of deeply incompatible religious, economic and political interests that seems to survive on nuances and deals that slither around this incompatibility without ever challenging it. There is a fear that something as direct and blunt as a United Nations-sponsored indictment rendered by the Tribunal’s Canadian prosecutor will tear these relationships apart with disastrous consequences.
Syria, Qatar, Saudi Arabia, Turkey, Iran, and France are desperately trying to find a solution that will square the circle. Egypt is not directly involved, but there are reports its agents are busily working away in the Sunni regions of Lebanon. The result of all these meetings so far is a collection of inane statements that make Texas beauty pageant winners sound like Rhodes Scholars. The prime minister of Turkey, a relative late comer to intra-Arab affairs and included over the objections of Egypt, lets us know that he wants peace in the region. Very good. Any ideas how to achieve this? The spokesman for the Egyptian Foreign Ministry says a solution must balance stability and justice. Good luck with that, whatever that statement means.
If, as expected, Hezbollah is implicated in Hariri’s assassination it risks losing a great deal of the credibility within Lebanon that it gained as a result of its strong resistance to the disastrous Israeli invasion in 2006. Many Lebanese may not like Hezbollah, but they like the Israelis even less. Over the last few years the organization has tried to portray itself as dedicated to the welfare of Lebanon and not just a tool of its fellow Shiites in Iran. Once the indictment is made public this facade will be torn to shreds and the Sunni Moslems and Christians in Lebanon would now have a powerful weapon to use against Hezbollah.
One gets the impression that release of the indictment was delayed less for a judicial review than to give the parties involved a chance to find a solution that would avoid chaos. No one so far seems to have bothered to ask the Lebanese people just what they would like to happen once the indictment is released. Or perhaps it is felt that their wishes are far less important than the interests of the various patron states.
Friday, 14 January 2011
So Far So Good, But Can It Continue?
The Turkish economy has put up some glittering numbers in the past few years. GDP growth has averaged 4.5% from 2002 – 2009 and is expected to exceed 6% in 2010. Per capita income has risen to about $10,000. The US Dollar index of the Istanbul Stock Exchange rose a healthy 20% in 2010. Foreign trade is booming. The banks avoided the toxic asset crisis that hit so much of the United States and Europe and now enjoy healthy capital adequacy ratios. On Jan. 14 spreads on Turkish 5-year Credit Default Swaps were only 143 basis points compared with 1,005 bp for Venezuela, 965 bp for Greece or 541 bp for Argentina. All in all an enviable performance.
But, behind all that a glitter there are major structural weaknesses that could slow down or even de-rail this strong performance. Turkey has been one of the main beneficiaries of a benign environment for emerging markets, and the rush of volatile money into the country over the past few years has literally papered over the weaknesses. Fund managers desperate for decent returns have fled the near-zero interest rate environment of the American and European markets for higher interest rates available in emerging markets like Turkey.
The major crack in the structure is Turkey’s gaping current account deficit, basically the country imports far more than it exports. Exports have shown impressive growth from $36 billion in 2002 to an estimated $112 billion in March 2010. Unfortunately, import growth has been even more impressive from $51 billion to $180 billion in the same time. The size of the gap by itself is worrying, but manageable. The real problem is that this deficit has become a permanent and growing feature of the Turkish economy while the methods of financing it are deteriorating. Essentially, Turkey depends upon short term, very volatile inflows to finance this long term and growing deficit.
The problem is not just that Turkish citizens have suddenly developed a taste for fancy European cars, Cuban cigars, or Hermès scarves. They have, but consumer items are still a small percentage of total imports. The deeper and more serious nature of the Turkish current deficit is exhaustively covered in a paper prepared by the staff of the Central Bank in March 2010. Unfortunately this paper is available only in Turkish, and it did not get the exposure it deserves.
The main conclusion of the paper is that since the 1980s the structure of the Turkish economy has changed rapidly from one based on agriculture, textiles, leather goods, and a few raw materials to one where foreign trade and manufacturing play a much larger role. Today the growth engines of the Turkish economy are major industries like automotive, home appliances, televisions, steel, and processed foods. And each of these relies heavily on imported raw materials and equipment.
Another major problem for Turkey is that it imports just about all the oil and natural gas it uses. That bill alone amounted to about $30 billion in 2009. It only gets worse as the economy grows and uses more oil and gas. Turkey has also benefitted from relatively depressed gas prices and moderate oil prices of the past few years. This situation could change for the worse at any minute as energy demand increases sharply with improving economies in Europe and the United States and prices begin to escalate.
Even excluding oil and gas imports, the authors of the Central Bank study did a survey of major Turkish companies that revealed imported raw materials and equipment averaged 67% of total manufacturing expenses in 2007. Sample import percentages were 87% in petroleum/chemicals, 83% in electronics, 65% in electric equipment, 58% in transport, and only 25% in furniture. Turkey does have large forests to provide plenty of wood for furniture.
According to the study, it is precisely those sectors with heavy import content that have fuelled the sharp increase in Turkish exports. Since 1996, for example, the share of textiles and clothing in Turkish exports has fallen from about 15% to less than 8% in 2008. The share of agricultural product exports fell from just under 10% to about 3% in the same time. Meanwhile the share of automotive exports has risen from 4% to 14%. Exports of other major industries that were small or non-existent in the 1980s, i.e. home appliances and televisions, have also surged in the last 10 years. These industries also have high import content.
One of the factors aggravating this situation, according to the report, is that the supply chain in Turkey is underdeveloped. Manufacturers are forced to look outside for inputs. A couple of examples highlight this dilemma. A friend of mine brought a group of colleagues from Silicon Valley to Istanbul to establish a company producing high quality internet and VOIP products. All the engineering work is done in Istanbul, but he has to have the manufacturing done in Taiwan. Turkey simply does not have companies capable of supplying the required high quality work. Another friend has a company producing very good cotton shirt fabric for export mainly to Europe. Despite the fact that the company is located less than five miles from one of Turkey’s largest cotton fields he imports every gram of cotton from the United States and Egypt. He said domestic cotton is more expensive and much lower quality. Even the best weaving machines have to be imported.
The government is trying to address these problems by working to improve the technological component of domestic companies as well as encouraging home grown technology companies. This is admirable, but the results will not show for a very long time long time. And time is a luxury Turkey does not have.
Turkey has to continue on a high growth path to address its serious unemployment issue. The official unemployment rate in 2009 was 14%, and was even higher in the urban areas. The relatively young and growing population is only going to put more pressure on these employment statistics. The conundrum is that the faster it grows the larger the deficit becomes.
Further complicating the issue are the national elections scheduled in about six months. It is unreasonable to expect any government to exercise restraint in the pre-election period. Deputy Prime Minister and Economy Minister Ali Babacan and his colleagues in the Treasury have done a very good job up to now controlling the economy and managing the country’s debt. Their skills will be sorely tested in the next few months.
Again, the problem is not so much the size of the current account deficit itself as the deteriorating means of financing it. Ideally one would match the long-term built-in nature of the current account deficit with long term funding that comes with foreign direct investing. This number, unfortunately, is dropping sharply in Turkey. For years it was an insignificant amount, and then took off in 2005 when it reached $10 billion. The peak was 2007 when FDI amounted to $22 billion. By 2009 it had fallen to $8.4 billion, and will be even less in 2010. The result of this decline is that Turkey has to rely even more heavily on debt and portfolio flows to cover the gap. The conditions for the past few years have been ideal for doing for doing just this. Even though Turkey has not yet been given an Investment Grade rating by the rating agencies, its superior debt management has resulted in moderate interest rates for its debt. In addition, the herd of portfolio managers seeking higher returns has been flocking to emerging markets.
So far so good, but this beneficial environment can change overnight with moves by central banks in the United States and Europe to end quantitative easing programs and tighten their monetary programs. Sooner or later this will happen. But only the very brave, or foolish, are willing to predict exactly when. However, as we have seen so many times in the past, when this happens there will be a stampede into the ‘new’ opportunities leaving countries like Turkey somewhat in the lurch. Turkish officials have done a good job managing the economy through the global crisis, but the real challenge could lie in the future when global investment trends that are completely out of their control change suddenly leaving a very large hole in their accounts.
But, behind all that a glitter there are major structural weaknesses that could slow down or even de-rail this strong performance. Turkey has been one of the main beneficiaries of a benign environment for emerging markets, and the rush of volatile money into the country over the past few years has literally papered over the weaknesses. Fund managers desperate for decent returns have fled the near-zero interest rate environment of the American and European markets for higher interest rates available in emerging markets like Turkey.
The major crack in the structure is Turkey’s gaping current account deficit, basically the country imports far more than it exports. Exports have shown impressive growth from $36 billion in 2002 to an estimated $112 billion in March 2010. Unfortunately, import growth has been even more impressive from $51 billion to $180 billion in the same time. The size of the gap by itself is worrying, but manageable. The real problem is that this deficit has become a permanent and growing feature of the Turkish economy while the methods of financing it are deteriorating. Essentially, Turkey depends upon short term, very volatile inflows to finance this long term and growing deficit.
The problem is not just that Turkish citizens have suddenly developed a taste for fancy European cars, Cuban cigars, or Hermès scarves. They have, but consumer items are still a small percentage of total imports. The deeper and more serious nature of the Turkish current deficit is exhaustively covered in a paper prepared by the staff of the Central Bank in March 2010. Unfortunately this paper is available only in Turkish, and it did not get the exposure it deserves.
The main conclusion of the paper is that since the 1980s the structure of the Turkish economy has changed rapidly from one based on agriculture, textiles, leather goods, and a few raw materials to one where foreign trade and manufacturing play a much larger role. Today the growth engines of the Turkish economy are major industries like automotive, home appliances, televisions, steel, and processed foods. And each of these relies heavily on imported raw materials and equipment.
Another major problem for Turkey is that it imports just about all the oil and natural gas it uses. That bill alone amounted to about $30 billion in 2009. It only gets worse as the economy grows and uses more oil and gas. Turkey has also benefitted from relatively depressed gas prices and moderate oil prices of the past few years. This situation could change for the worse at any minute as energy demand increases sharply with improving economies in Europe and the United States and prices begin to escalate.
Even excluding oil and gas imports, the authors of the Central Bank study did a survey of major Turkish companies that revealed imported raw materials and equipment averaged 67% of total manufacturing expenses in 2007. Sample import percentages were 87% in petroleum/chemicals, 83% in electronics, 65% in electric equipment, 58% in transport, and only 25% in furniture. Turkey does have large forests to provide plenty of wood for furniture.
According to the study, it is precisely those sectors with heavy import content that have fuelled the sharp increase in Turkish exports. Since 1996, for example, the share of textiles and clothing in Turkish exports has fallen from about 15% to less than 8% in 2008. The share of agricultural product exports fell from just under 10% to about 3% in the same time. Meanwhile the share of automotive exports has risen from 4% to 14%. Exports of other major industries that were small or non-existent in the 1980s, i.e. home appliances and televisions, have also surged in the last 10 years. These industries also have high import content.
One of the factors aggravating this situation, according to the report, is that the supply chain in Turkey is underdeveloped. Manufacturers are forced to look outside for inputs. A couple of examples highlight this dilemma. A friend of mine brought a group of colleagues from Silicon Valley to Istanbul to establish a company producing high quality internet and VOIP products. All the engineering work is done in Istanbul, but he has to have the manufacturing done in Taiwan. Turkey simply does not have companies capable of supplying the required high quality work. Another friend has a company producing very good cotton shirt fabric for export mainly to Europe. Despite the fact that the company is located less than five miles from one of Turkey’s largest cotton fields he imports every gram of cotton from the United States and Egypt. He said domestic cotton is more expensive and much lower quality. Even the best weaving machines have to be imported.
The government is trying to address these problems by working to improve the technological component of domestic companies as well as encouraging home grown technology companies. This is admirable, but the results will not show for a very long time long time. And time is a luxury Turkey does not have.
Turkey has to continue on a high growth path to address its serious unemployment issue. The official unemployment rate in 2009 was 14%, and was even higher in the urban areas. The relatively young and growing population is only going to put more pressure on these employment statistics. The conundrum is that the faster it grows the larger the deficit becomes.
Further complicating the issue are the national elections scheduled in about six months. It is unreasonable to expect any government to exercise restraint in the pre-election period. Deputy Prime Minister and Economy Minister Ali Babacan and his colleagues in the Treasury have done a very good job up to now controlling the economy and managing the country’s debt. Their skills will be sorely tested in the next few months.
Again, the problem is not so much the size of the current account deficit itself as the deteriorating means of financing it. Ideally one would match the long-term built-in nature of the current account deficit with long term funding that comes with foreign direct investing. This number, unfortunately, is dropping sharply in Turkey. For years it was an insignificant amount, and then took off in 2005 when it reached $10 billion. The peak was 2007 when FDI amounted to $22 billion. By 2009 it had fallen to $8.4 billion, and will be even less in 2010. The result of this decline is that Turkey has to rely even more heavily on debt and portfolio flows to cover the gap. The conditions for the past few years have been ideal for doing for doing just this. Even though Turkey has not yet been given an Investment Grade rating by the rating agencies, its superior debt management has resulted in moderate interest rates for its debt. In addition, the herd of portfolio managers seeking higher returns has been flocking to emerging markets.
So far so good, but this beneficial environment can change overnight with moves by central banks in the United States and Europe to end quantitative easing programs and tighten their monetary programs. Sooner or later this will happen. But only the very brave, or foolish, are willing to predict exactly when. However, as we have seen so many times in the past, when this happens there will be a stampede into the ‘new’ opportunities leaving countries like Turkey somewhat in the lurch. Turkish officials have done a good job managing the economy through the global crisis, but the real challenge could lie in the future when global investment trends that are completely out of their control change suddenly leaving a very large hole in their accounts.
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