Turkey Illustrates The Real Risk Of Emerging Markets

The current political turmoil in Turkey illustrates with startling clarity the real risk in the so-called Emerging Markets.  Commonly used economic indicators such as GDP growth, debt, deficits, corporate profits, etc. tell only part – the superficial part -- of the story.

            Much more important for anyone seduced by the theoretical growth potential of these markets are issues like the underlying political stability, existence of ‘crony’ capitalism, competence of government institutions, level of systemic corruption, and -- most important of all – respect for the rule of law.

            A brilliant young Turkish financial analyst, who needs to remain anonymous given the poisonous climate in Turkey, emphasized this contradiction in a recent email about Turkey and cautioned against a headlong rush into emerging markets in general.

“The key issue is to understand that a growing population, rich natural resources, or a large manufacturing (assembly) base do not in themselves make a good long term story. In fact, three common denominators of emerging markets are lack of the ‘rule of law’, an economic system of ‘crony capitalism’, and a poor education system. These, in turn, create a system of constant corruption and regular boom/bust cycles. In emerging markets corruption is the grease that turns the wheels of the economic system – where politicians, bureaucrats and businessmen benefit at the expense of productivity and innovation. This system is usually supported by a political system that plays on social/political divisions along different ethnic, religious or political lines.”

            Turkey, thanks mainly to the work of former economic minister Ali Babacan, doesn’t score too badly on the raw numbers. Unfortunately, the country scores at or near the bottom of any league table on the second set of issues – the ones that can really make or break any investment. President Tayyip Erdoğan has gone out of his way to show that he recognizes no constitution and no law except the law of sheer power.

            The dramatic events yesterday that saw the dismissal of the prime minister only confirm this trend. It is well known that Erdoğan does not tolerate any dissent from his narrow, parochial world view – particularly his ambition to transform the office of president into an untouchable, unaccountable power center. Prime Minister Ahmet Davutoglu was seen as the softer, more reasonable side of Turkey’s unequal power balance. Despite his frequent avowals of undying loyalty, he apparently infuriated the president with his lack of enthusiasm for several issues key to Erdoğan’s megalomania: 1) the change to an unchecked presidential system, 2) his reluctance to throw people in jail before a trial, and 3) his willingness to use professionals like Babacan as economic advisers rather than rely on the sycophants who surround Erdoğan.

            In some ways Davutoğlu was the architect of his own downfall. His deeply flawed foreign policy only succeeded in completely isolating Turkey. Arab countries don’t really trust Turkey, Russia openly loathes and mocks Erdoğan, and the Europeans would really like to keep Turkey in some sort of ante-room to be seen and not heard. The Americans look on in despair at the rapid polarisation in Turkey and the deterioration of the country’s political discourse. But then they grit their teeth and think of Turkey’s geopolitical importance. Perhaps Davutoğlu’s main foreign policy problem as far as Erdoğan is concerned was to be perceived as mildly pro-Western. Erdoğan despises the West. He reacts furiously when Western politicians, journalists, NGOs, etc. scold him for his miserable record on human rights, press freedom, or judicial independence. His only response is loud bravado that ‘Turkey was great once and will be great again’.

            The name of the non-entity who takes over as prime minister is completely irrelevant because his only job will be to enact whatever Erdoğan wants. Cabinet meetings will have the same vibrant discussion, bright ideas, and independent thought as Stalin’s politburo meetings.

The only sliver of good news is that Erdoğan’s Turkey has absolutely no ability to project power beyond its own borders. Erdoğan would love to act like Putin throwing his weight around. But he can’t. He is hemmed in on all sides – if not militarily then politically. The Turkish army is large, but so far has shown no interest at all in moving one meter beyond its borders. From time to time the Air Force chases Kurdish guerrillas into northern Iraq and makes the boulders bounce with a few bombs, but that’s about it.

In the long run Erdoğan will fail because he is making the same major mistake as his arch-enemy the old Kemalist regime that ruled the Republic with an iron hand for more than 70 years. By alienating a large part of the population the Kemalist regime created fertile recruiting ground for Erdoğan. Erdoğan, too, is alienating a large part of the population. He is trying to force all Turks into his narrow mold of what he thinks a Turk should be. The trouble is, Turks don’t do ‘should’. The country is too diverse, too heterogeneous to fit into anyone’s mold. Erdoğan’s mold, like that of the Kemalist regime’s, will one day break. The only question is ‘How long is the long run?’