30 December 2013

If I had a Person of the Year Award

My choice would not be the Pope.

He seems like a nice guy (though he should go easy about his PR goons who leak his every move to the media). But his organization has a bit too much to apologize for. And I didn't even linked to massive sexual abuse scandal in the previous century.

My person of the year would be Edward Snowden.

First, I am not sure that at his age I would leave a $200,000 job in Hawaii and get myself in the crosshairs of the largest intelligence organization in the world.

He did it.

People don't seem to understand how much courage and determination that takes.

Moreover, his goals were really outstanding. As he recently explained, he was not trying to change the world, he was just trying to let people decide whether they want the world changed.

I am pretty sure that at his age, I would have missed this nuance.

The only person I admired more was a former neighbor of mine.

His name was Wilhelm Pfeffer (or as I knew him Bill Pfeffer) and he was the right age to have been part of the WWII. Yet, no one knew his history. One day I asked him how it was and he told me rather matter-of-factly (just-because-you-asked-young-man) that as a young German at the tender age of 19, he decided that Hitler was an abomination. And he made the decision to move to France not to be part of his army of murderers, he said.

That is not all.

Once France was occupied, he moved with the French Resistance to Algeria but told them them he was a pacifist and would not fight and kill. He was a geologist and he offered to train French soldiers instead.

Think about that.

At 19 (a) he knew Hitler was an abomination (something that most West Europeans and North Americans did not get for a long time) (b) he accepted the consequences of leaving his country (c) he refused to become a killer for the other side just to be accepted.

That is the definition of courage to me.

I don't know anyone who could do these things at that age and especially at that time.

Perhaps more importantly, he never shared these details with friends and neighbors. He did the right thing and he did not even let others know he was on the side of the angels.

That is a mensch in my book.

He was my hero.

So, if I had a Person of the Year Award, it would be called Wilhelm Pfeffer Person of the Year Award.

And I would give it to Edward Snowden this year.

But I don't have such an award because I doubt that I will ever find another worthy recipient.

Turkey: Is This The Beginning Of The End For Erdogan?

If you are reading this blog, chances are you already know about the huge graft scandal in Turkey.

In case you missed the highly entertaining soap opera, two weeks ago, Turkish police conducted several raids and took 52 prominent people into custody and seized over 4 million dollars in bribe money neatly stored in shoe boxes. They subsequently arrested and charged 24 of these people. Among them were the sons of two members of PM Erdogan's cabinet and the CEO of a state controlled bank. The CEO was accused of money laundering on behalf of the Islamic Republic of Iran.

I found the story rather amusing and initially, I thought about writing about the underlying ironies.

And there are many, starting with the acronym of the ruling party. You see, its supporters do not use the abbreviation of the party (the AKP) but go with the acronym AK Party, as "ak" means white and has a strong connotation of "clean" in Turkish.

To be sure, this cleanliness was never really accurate. Many AK Party politicians became extremely wealthy in their 11 years in power (including Erdogan himself who is rumored to have become a multi-billionaire on his meager PM salary). But with media consolidation after 2007, no corruption allegation ever made it to the mainstream, leaving the party free to claim a clean image. This is now over and the acronym must be an embarrassment.

The second fun fact is about the identity of the prosecutor behind the graft investigation. His name is Zekeriya Oz and he was one of the leading prosecutors for the deeply flawed Ergenekon trial. At the time, the ruling party hailed him as the brightest star in the judicial firmament and when he was reassigned in 2011 by the board of judges and prosecutors, senior AKP politicians bitterly criticized that decision as a blatant effort to change the course of independent judicial inquiry.

Now that it transpired that Oz was behind this year long investigation, the same senior AKP leaders, who had vouched for his objective and brilliant judicial mind for the Ergenekon case, are publicly claiming that Oz is an agent of the Hizmet movement and the whole thing is a politically motivated witch-hunt.

In other words, exactly the charge they dismissed as rubbish throughout the Ergenekon trial.

The third irony is about the Sledgehammer and Ergenekon cases: when the previous Chief of General Staff (who was promoted by Erdogan and who worked closely with him throughout his tenure) was arrested and later given a life sentence for trying to overthrow the government, the PM lamented that his hands were tied as he could not intervene in any investigation or judicial process.

This time around, the day after the scandal became public Erdogan dismissed or moved more than 100 police chiefs and officers and appointed two new lead prosecutors to the case, with the explicit instruction that decisions will be taken by a majority vote (two out of three). Moreover, one of the prosecutors in the original investigation claimed that a large part of the case was removed and various arrest warrants he signed were not executed. If this is not interfering with an investigation or judicial process, I don't know what is.

Fourth irony: Sledgehammer trial was about a plan that was never executed. Yet the government and the prosecutors argued that a plan was the same as an actual execution.

A month ago, a 2004 document signed by Erdogan, the then Chief of General Staff and the then Minister of Foreign Affairs (and current President) Gul was leaked to the media. It enacted a plan to destroy the Gulen movement.

When it became public, Erdogan argued that it was just a plan that was never implemented and as such it should not be taken seriously.


But, as the scandal unfolded, I realized that there was something more interesting than the ironies.

Is This Mutually Assured Destruction or a Foreign Plot?

There are two competing explanatory narratives about the scandal.

One side maintains that this is a vicious power struggle between the Erdogan wing of the Turkish Islamist movement and the Fethullah Gulen camp. And they claim that the struggle is about to turn into a Mutually Assured Destruction (MAD) type of war.

As you probably know, Fethullah Gulen is a moderate Islamist preacher who lives in self-imposed exile in Pennsylvania on a special talent visa sponsored by former CIA agents. While his movement (known as Hizmet or Service) is ostensibly a philanthropic organization running charter schools all over the world, many people believe he has serious political ambitions beyond his charitable work. And they assert that, as part of these plans, he directed his followers to infiltrate the judiciary and the security apparatus in Turkey.

Those who see Gulen's tentacles within the state argue that the National Intelligence Organization (MIT) is the only state structure that eludes him. And as proof, they refer to the February 2012 events, when a special prosecutor executed an arrest warrant against the Director of MIT, Hakan Fidan, freaking Erdogan out, in the process..

Accordingly, Erdogan's recent decision to close special prep schools (largely run by the Gulen organization) is seen as a strike against Gulen. Those schools are a major source of income for the Hizmet movement and perhaps more importantly, they operate as recruitment centers for the Imam.

In that scenario, last week's corruption scandal seems to be Gulen's counter strike. Recently, a Turkish journalist specializing on the Hizmet movement reported that a senior Hizmet figure was arrested at a US airport (link in Turkish) with many corruption dossiers implicating senior AKP leaders. The journalist claimed that the FBI submitted that treasure trove to the MIT, which, in this scenario, is the only security unit loyal to Erdogan.

The other narrative is put forward by Erdogan and his defenders and they depict these events as an American plot to get rid of him. According to these media outlets, Gulen is an American agent and one of the key players in that plan.

The more I read about the facts surrounding the case, the more I realized that maybe this is not an either-or proposition and these two narratives might actually be complementary.

There is a civil war between the Erdogan wing of AKP and the Gulen movement. Gulen movement is indeed well placed in the judiciary and security forces to be able to pull a secret year-long investigation with absolutely no leaks.

And it surprises no one (at least not me) that the US now sees Erdogan as a liability and its regional plans would be better served if he could be replaced with a less temperamental and more malleable leader.

Since Gezi events, I more or less assumed that there was an outline of a plan to remove him. But it was hardly the ingenious and nefarious coup plot Erdogan supporters claim. It was a simple re-branding effort which relied heavily on Erdogan's predictably over-the-top reactions.

But there is a twist.

Let me explain.

The Plan (If There Was One)

While many people are convinced that Gulen is an insidious opportunist driven by his ambition to become the leader of Turkey, I see him as someone who had made a Faustian pact to become the religious leader of mainstream Islam.

As I mentioned before, his ideology is the only coherent and modernist counterpart to Wahhabi or Salafist teachings. In that sense, he fits perfectly into what I see to be the American plan for the Middle East. Which also explains how and why he continues to live peacefully in Pennsylvania and his visa applications are sponsored by former intelligence officers and ambassadors.

As for his nemesis, Erdogan, my regular readers know that I singled him out as the lead actor in the US produced drama in the region. The problem is that, Erdogan, who was almost a method actor in the original Kabuki theater, has turned, over time, into a Chaplinesque caricature of an autocrat.

You must have heard of Baron Acton's dictum that "power tends to corrupt and absolute power corrupts absolutely." After his last election victory, it has been reported that Erdogan stopped listening to other people and he began running the government with a small group of trusted aids. Apparently, he treats even his own ministers with disdain and mistrust. Throughout, there have been numerous reports that he is unable to control his temper (which some people attributed to his diabetes) and he routinely lashes out at journalists, civil society leaders or colleagues.

More importantly, in the process, he dropped the ball economically. His focus remained on large construction projects, which were designed to be glamorous for him and profitable for his supporters (the construction magnate Agaoglu was among those arrested). But he did very little to fix the chronic current account deficit or to stop foreign capital outflow.In fact, his polarizing rhetoric seemed to have accelerated the exodus of foreign capital making the current account deficit even worse.

On top of all that, he committed a series of blunders in the Middle East and alienated an impressive list of regional and global players, including Israel, Egypt, Iran and Saudi Arabia. And of course the US.

Given all this, I assume that there must be a consensus that he needs to go. You hardly need a conspiracy theory to see this. But how do you get rid of him?

His supporters find him charismatic and believe that he is a man of God, working tirelessly for the country and his constituency. They see him as their dragon slayer who will stand up to internal and external enemies.

How do you turn such a man into a pariah?

If I were asked to do it, I would take a page out of Joao Santana's book. I would first make him appear as an out-of-touch and out-of-control leader. This would galvanize and unify his opposition and solidify a darker image. Then I would expose his corruption dossiers. And this would make him appear the opposite of a man of God: a greedy politician filling his pockets.

It is not a very original idea but judging from the turn of events, it looks like someone else might have had the same inspiration.

Gezi events appears to be the turning point and (if such a re-branding plan existed) the first step.

And therein lies an interesting tale.

When Gezi protests erupted, Erdogan remained silent initially. He was scheduled to go to Morocco and he was expected to make a statement upon his return. At the time, President Abdullah Gul and Deputy PM Bulent Arinc were making conciliatory noises (both men are said to be "inspired by" Gulen). The expectation was that Erdogan was going to do the same upon his return.

However, I learned from reliable sources that just before his trip, Erdogan was submitted a report by his trusted aid Hakan Fidan, the Director of MIT. And the report concluded that the protests were actually a plot by foreign powers wanting to destabilize the government. It also claimed that radical left wing organizations were the main groups behind the unrest.

We now know that both claims were complete and utter rubbish.

Apparently, this made Erdogan livid and he immediately adopted a very belligerent rhetoric and a decisive action plan. He ordered the police to forcibly remove the protesters, he famously lashed out at them as "capulcu". And he introduced his extremely dubious "interest rate lobby" discourse.

The police executed his orders, wounding hundreds of people and killing at least four. It was a hugely disproportionate use of violence against peaceful demonstrators. Overnight, the opposition became unified and Erdogan appeared as an out-of-touch and out-of-control autocrat. Even some Islamist groups joined the protests.

Now, let's think about this for a minute.

First, there is the role played by MIT in this. If there is a "deep state," as people in Turkey would like to believe, a US controlled Gladio structure, wouldn't MIT be part of that shadowy apparatus? Historically, it certainly was. In fact, it was smack in the middle of it. So when I hear the MIT director submitting a completely bogus report to the PM and changing the course of history, I wonder whether the highly inaccurate conclusions of that report could be seen as an honest mistake.

If you wish to mislead the PM and encourage him to overreact to change his public image, is there a better way than give him such a report and let him hang himself? If you argue that Fidan is a trusted aid and he would never do that, I would suggest that stranger things have happened when it came to intelligence organizations.

Secondly, if the opposition narrative is correct and the police are controlled by the Gulen movement, shouldn't we question why they used such excessive force in implementing Erdogan's order to empty Taksim Square? If Gulen himself and Gulen-inspired politicians recommended a softer approach, why would a police force supposedly taking its orders from the movement opt for a massive use of force?

You see what I am hinting at.

Once the first step is complete and Erdogan's image is tarnished (and the opposition unified), the second step would be to open up the treasure trove of corruption dossiers. If there was such a plan, that is. And this is exactly what happened.

In fact, it is widely rumored in Turkey that more dossiers are being readied and some of them will implicate Erdogan and his family members. One of the ministers who had to resigned openly called for the PM's resignation and said that all of the large construction projects were approved personally by the PM. To me this is a thinly veiled threat against Erdogan. It means that they know the skeletons and they have the key to the closet where they are kept.

There is a third element that support the idea of a plan to politically terminate Erdogan. As I wrote recently, there has been an unmistakably clear and very successful re-branding effort to turn Gul into a caring and moderate politician. In fact, at every juncture, as soon as Erdogan staked a position Gul carefully moved away from that stance and made it clear that he did not approve of it.

If Gul does not accept to resign as president to make way for Erdogan to replace him, Erdogan has only one option left. He will have to publicly renege his commitment to term limits and fight for a third term in office. A year ago, this would have been fine and perhaps even encouraged by most observers for the sake of stability. But now, such a move would make him look like a greedy and power-thirsty politician even in the eyes of his supporters.

Which means his negative re-branding is almost complete.

What's Next?

I only have a couple of educated guesses for the short run. In medium and long term, I can only speculate on likely outcomes but not on the unfolding of events.

In the short run, I am pretty sure that the new Minister of the Interior, Efkan Ala, who is one of the closest collaborators of Erdogan (he was Prime Ministry's Under Secretary and he is not an MP) will go after Gulen supporters.
Ala, with his vast experience in bureaucracy, is expected to play a central and practical role in purging the followers of the Gülen movement, who are particularly influential in the police and judiciary.
If his past behavior is any indication, Erdogan will also order tax audits for pro-Gulen businesses and he will try to prevent them from bidding in large state contracts. He might try to seize Zaman (the largest Turkish newspaper) and its English language counterpart, Today's Zaman and sell it to one of his supporters (it was one of his favorite tactics prior to media consolidation).

Almost as likely, the Gulen camp will retaliate with more corruption allegations and they will get closer to the PM with every leak. They might hit close collaborators first, then family members and finally the PM himself.

I also suspect that this slowly unfolding process will cost the AKP electorally, starting from the municipal elections early next year. My prediction is that their vote will hover around 35 percent but might go lower if particularly damaging information surfaces before these elections.

It is hard to speculate beyond that point because there are too many variables that might change between now and then.

But I can make two predictions.

One is that Erdogan will find it difficult to hang on to power in the next year or so and he might quit before the 2015 general elections citing health reasons.

Two, Abdullah Gul will become the new star of the party.

Many pundits see him taking over the PM post. I am inclined to think that he might prefer his current position which is above politics and work with another pro-Gulenist PM.

One name that comes to mind is Ali Babacan, a formidable technocrat who enjoys the work and does not chase the limelight.

He would be perfect as he would let Gul become the public face of the administration while he acts like a super trouble-shooter.

For once, I am actually curious to see how things will unfold..

15 December 2013

Is France the Sick Man of Europe?

When I moved to Paris almost ten years ago, I expected to be enchanted with what I assumed to be the best synthesis of capitalism and an egalitarian society with impeccable living standards.

Up to that point, I had been reading how the French system was superior: Their healthcare system was exemplary, frequently elected the best in the world. Their school system produced solid managers, innovative engineers and world class thinkers and literary figures. They had an amazing social safety net, their minimum wage was more than decent and they believed in leisure society, as everyone enjoyed at least four full weeks of vacation time.

Add to all that excellent food, very good and affordable wine, a mild climate with barely a speck of snow all year around and you could picture me giving myself virtual high-fives all the way to Paris.

Imagine my surprise when I discovered that the superior French system was a mirage, a holographic picture taken a couple of decades earlier.

The Real France

By the time I arrived, France was running continuously a budget deficit for at least 30 years, unemployment had reached double digits, the influx of expats pushed food and accommodation prices so high that ordinary French people were simply unable to maintain a reasonable middle class life style (at least not in Paris and certain other popular regions). Their minimum wage (known as SMIG, which stands at €1430.25 as of July 2012) wouldn't be enough to pay the rent for a one bedroom apartment.

The healthcare system was falling apart. The education system was crumbling and the students were disillusioned with their job prospects.

Having lived through the Thatcher-Reagan revolution, it was obvious to me that the system had a number of structural problems. And unless they were fixed (and fixed rapidly), sooner or later capitalism would fix it for them, as it did in the UK and the US under those two hapless luminaries.

But I also knew that if the correction was left to capitalism, the French system would become something else entirely. It would look like today's America or Britain, that is, a polarized society with massive income disparity and a sharp winners and losers perspective permeating everything, including the distribution of vital services. (If you doubt that vision, think of the American system today with Obama and the British system with Cameron and tell me the difference).

I could also tell that France had never gone through the North American IT-based productivity revolution. Most computer systems were archaic, inventories were still taken by hand, banks operated on a batch processing system and most custom software packages were written with simplistic languages like Visual Basic.

But when I voiced my concerns about productivity, my French friends always defended their system by citing the OECD statistics that place France very high on the productivity scale. I know that their numbers can look high.  But I think these high figures are mostly based on the industrial sector. It is a capital-intensive and highly automated sector and I am sure French industrial workers work their tails off. But the service sector is a different ball game.

If you look at the period where the IT-led productivity took off in the US and the UK, France is at the bottom of the scale.

And since then, the productivity gap has remained a major issue.

Mittelstand or Does Size Matter?

You might have heard that a category of German companies known as Mittelstand are credited for the economic health of the country. These companies of up to 500 employees (or €50 million annual turnover are the stuff of legends.

And the French business press routinely bemoan the fact that France does not have a similar structure. That is because the French economy is structured to discourage Medium Enterprises, the ME in the SME. It is a peculiar system.

On the one side there are tiny companies, one or two person family firms. They don't hire much and they have a high failure rate (twice as many bankruptcies as Germany).

On the other side, there are large enterprises, most commonly in fashion and food & beverage sectors. And there are state-championed giants in high tech fields like aerospace and nuclear energy.

In the middle, you find French style SMEs but they are much smaller than the German Mittelstand: They are characterized by their constant effort to never have more than 49 employees. (Beyond 50 they have to spend on training and provide additional benefits.)

In OECD countries, SMEs are usually the main source of employment and you can see from the above picture why unemployment has remained stuck around 10 percent for the last four decades. However, in my humble opinion size is not the decisive criterion.

There are other factors at play.

Management, Innovation and Tools of Productivity

The primary characteristics of Mittelstand companies is to promote innovation and target export markets. Better products do not compete on the basis of price and they command higher margins. And opening up to foreign markets gives companies more independence and flexibility: if you have more outlets, you can weather cyclical crises with relative ease.

To achieve this, Mittelstand companies maintain a lean management structure, emphasize continuous on-the-job training, encourage in-house innovation, invest in Research and Development (R&D) and they promote Information and Communication Technologies (ICTs).

Let's start with lean management structures:
Jean-Daniel Weisz (...) compares the way German firms and their French counterparts operate. French middling companies, he says, have twice as many layers of management between the boss and the shop floor: usually 18, compared with a German maximum of nine.
Think about that: Average of 18 layers of mid-management versus a maximum of 9 levels.

Moreover, these managers are the product of elitist Grandes Ecoles, which means that they are convinced that they already received all the training they will ever need. According the an early Harvard Business Review study, they view management not as a set of techniques but as a state of mind. It sounds like a line from a Godard movie but that's what passes for business perspective in France.

The same study also found that French businesses are overly hierarchical and sharply compartmentalized.

Perhaps more importantly, change and innovation are almost actively discouraged by the system. Let me give you a concrete example.

You are an engineer or a researcher in a French company and you have just invented something new. Maybe a new method to produce more with less or a brand new product. And your invention directly benefited the company's bottom line, with increased revenues, lower expenditures and higher stock value. Can you guess what your reward will be?

You will get a bonus of €500 to €2500. Before taxes. That's it.

Do you know how much a German engineer will get if she or he comes up with a better method or product? Since 1957, companies are legally required to give such innovators a proportion of the revenues generated by their innovation. The more the company earns, the more the inventor/innovator collects.

Even in China, since 2010, the person who comes up with a better product is given 2 percent of the additional revenues and if the invention is licensed to another company, they collect 10 percent of the royalties.

To be sure, French researchers have an outstanding record and they came up with many great inventions that changed the world. But it is quite damning of the system that very few of these new ideas and products were commercialized by French companies.

French companies have another management-induced obstacle.

According to the Economist, a World Economic Forum of Davos report found that while "the French have a "stronger work ethic than American, British or Dutch employees." They're just not motivated by their managers." In fact you could call it apathy and in some cases intense dislike.
France ranks last out of ten countries for workers’ opinion of company management, according to a report from 2007. Whereas two-thirds of American, British and German employees say they have friendly relations with their line manager, fewer than a third of French workers say the same. ...
A study of seven leading economies by TNS Sofres in 2007 showed that France is unique in that middle management as well as the lower-level workforce is largely disengaged from their companies.
The disconnect is not just within corporations, it is also reflected in management attitudes towards global markets.

While German Mittelstand company managers remain very active in global markets and bring up their supply chain with them, French managers are almost entirely absent from the global scene. This is partly due to the Grandes Ecoles mentality: they know best and don't need stinking foreigners to tell them otherwise. Partly, it is the unintended consequence of the insular nature of the French elite. They rarely speak any foreign language, they almost never had any experience living abroad and they are too happy to stay within a familiar market delineated by language and history, such as France and North Africa. A French report in 2008 concluded that, unlike Germany, France had no longer any international expertise.

The insular and parochial management culture affected the productivity efforts. When the US, the UK and Scandinavian companies were heavily investing into ICTs, French companies were staying away from them.

A recent report reached this conclusion:
En définitive, les mauvaises performances françaises en termes de croissance du PIB et de la productivité peuvent être interprétées comme la conséquence d’un investissement insuffisant en éducation supérieure et en TIC, d’un marché du travail trop rigide, d’un marché des biens insuffisamment concurrentiel et d’un renouvellement insuffisant du tissu entrepreneurial. [my emphasis].
In that sense, my critical assessment of Air France, a global company run by French business elite with no regard towards productivity can be generalized to the rest of the French economy.

Just like my French friends who loved to point to high industrial productivity figures to tell me I am wrong, you could also counter with recent ICT investment figures. In Europe, Germany, the UK and France are now the top spenders on high tech tools. Point taken.

However, like high productivity figures, these numbers hide a different reality. The ICT revolution of the 90s was geared towards increasing labor productivity. These new spending programs are designed for a different purpose. The bulk of it is for new technologies like virtualization solutions and moving things up to the Cloud. They hardly make employees more productive. They are shiny new toys that will reduce corporate carbon footprint and get subsidies from the state.

There is one other point you find in the new ICT figures: In France, unlike other European countries, a large portion of that spending goes towards software development. Normally, this would be encouraging, but in this case it is largely because they need to catch up with the rest f the world and update all the primitive Visual Basic enterprise software packages that seem to be running the operations of most French companies.

You think I exaggerate. Two anecdotes to illustrate the point.

Around 2005, French IKEA was using an inventory system that was updated once a day (I asked). Therefore, during the day, each time a customer asked if an item was available at the warehouse, a clerk had to call another clerk for a visual inspection. The computer showed two but the clerk had no idea if someone bought them. Maybe it is still the case, I can't tell you. I have not bought anything from IKEA in a long time. But no US store had such a system past 1995. Including, I am sure, IKEA itself outside France.

Second anecdote. Two years ago, I went to a branch of Groupama, a large insurance company operating in 14 countries. It was to get a quote and I asked them to print me a couple of tables. The custom software package was so user-unfriendly that they couldn't do that. So, the only thing the person I was dealing with could do that was to copy various tables in to an empty Word document and print that. It took her 10 minutes. All the while she complained about how terrible the software was. The workaround was suggested by her manager. I agreed with her. The package should have done that with two clicks.

Then I asked why she simply did not click Ctrl-P on each table. She was shocked to see that you could print almost anything under Windows with that key combination. She went around the office to tell everyone that. I became a hero.

Two years later, they are still using the same software and since that person moved to another branch, the new people still copy and paste tables for customers.

You can see the unifying thread in all this.

An insular and elitist management class creating structures to penalize innovation, devalorize their own R&D, discourage employees, turn their backs to global markets and ignore lean corporate structures and new management techniques implemented elsewhere.

A Huge Missed Opportunity

What is sad in all this it was a historic opportunity to set an example.

You see, in the UK and the US, the huge productivity gains made companies very profitable. But senior management and CEOs moved quickly and appropriated everything. Executive pay shot through the roof and real wages continued to decline.

France had a historic opportunity.

If they had implemented ICTs at the same time as everybody else, valorized their own R&D, motivated their employees, copied the lean management structures and new techniques being implemented elsewhere and expanded their global horizon, they could have pushed France to the forefront of global capitalism.

Given the social democratic nature of the system and the relative power of the unions, such a system would be inclined to distribute these profits derived from productivity gains more equitably. Which would have made France a prosperous, affluent and peaceful capitalist system.

People would have used them as a stellar example of what could have been when they criticized the winner-take-all culture that emerged in the UK and the US.

They could have become the envy of the world.

Instead, with parochial and elitist managers blaming "lazy" workers for their every mistake, an ineffectual government mismanaging the economy and discouraged and alienated employees, France is on its way to becoming a second tier economy.

As a Francophile, I find this to be a shame.



This is a headline on the BBC Web site from this evening, or a full day after I posted the above assessment.

PMI surveys raises fear that France may be back in recession.

It mentions the possibility of a "triple dip" recession.

What can I tell you?

12 December 2013

Bangladesh Might Be the Canary in the Mines

Bangladesh has just executed Abdel Kader Mullah.

To most people, this will not mean much.

To me, this is really worrisome.

It is not the man himself.

He was one of the leading figures of the Jamaat-e Islami, a conservative Islamist party in Bangladesh.

More importantly, he was one of the Islamists who (allegedly and apparently) advocated that independence from Pakistan was not a good idea in 1971.

And he was among those Islamist leaders who actively "discouraged" pro-Independence people.

I explained some of those dynamics here.

Now that they terminated him with extreme prejudice, I suspect things will go a bit crazy.

Bangladesh may not be on your radar screen. But it is about to become the main chessboard in the power struggle between the cynical ISI of Pakistan and not-so-in control of Indian government.

I hope this ends well for the sake of Bangladeshi people.

But I am worried.

07 December 2013

Additional Notes on the New American Plan

I received several contrarian reactions to my 200th post on the New American Plan in the Middle East.

Some people felt that I was giving too much credit to the American foreign service and national security apparatus. This group included a few senior insiders and they were adamant that the US foreign policy is usually a mess, full of contextual misconceptions, logistical errors and terrible overreach.

Other people felt that my model was too mechanical and I was overlooking a lot of nuances to reach my Occam's Razor conclusions.

I plead guilty on both counts. But as the saying goes, these are features not bugs.

American diplomats may appear like bumbling idiots occasionally and we all read about some of their ignorant remarks, showing a profound lack of understanding on their part. But that is not convincing to me. I will not even argue that for a caricature of oversized obnoxious Yankees they did a hell of a job maintaining US supremacy for a century.

The point is that I look at the US like an astronomer observing a black hole. It is not the mechanics of it that interests me. My understanding is based on the behavior of the objects near the black hole. When they change shape and color, move erratically and defy laws of physics, I know that the hole had something to do with it.

From that observation, I try to come up with an explanatory model that I can test with further observations. So, indeed I overlook a lot of nuances. But that is because I try to edit a lot of noise, misdirection and biased reporting to see if actions could actually corroborate my admittedly mechanical model.

To illustrate my contrarian method, I want to give you several examples showing how the US-Iran rapprochement changes the regional dynamic dramatically.

Before the 24 November agreement, you remember how the Gulf countries were adamantly opposed to any deal with Iran. Once the deal was signed they all understood what that meant. And that, within days.
UAE Foreign Minister Abdullah bin Zayed was the first of his Gulf counterparts to visit Tehran to show his country's support, calling for stronger ties between Iran and the UAE — "ties beyond the normal relations between neighbors and partners."
Then Bahrain (yes the same Bahrain that has been ruthlessly persecuting its Shia majority and blaming Iran for its troubles) extended an invitation to Zarif.
The little Gulf kingdom that for the past couple of years has continuously accused Tehran of interfering in Bahrain and backing the uprising against the ruling family invited Iranian Foreign Minister Mohammad Javad Zarif to take part in the forthcoming Manama dialogue next month.
After months of hard lobbying against a deal with Iran, Saudi Arabia chimed in the day after the agreement.
Saudi Arabia views the agreement as a primary step toward a comprehensive solution to the Iranian nuclear issue provided it leads to a Middle East and Gulf region free of all weapons of mass destruction, including nuclear weapons.  The Kingdom hopes that such a step will be followed by more important steps that lead to a guarantee of the right of all countries in the region to peacefully use nuclear energy.
What about Israel and Netanyahu's campaign against the deal?
There’s no panic at all among Israel’s professional military echelons. Nobody talks about a catastrophe or an imminent second holocaust. People discuss the merits of the agreement with levelheadedness and discretion.
Despite Netanyahu's doomsday predictions, the past and current military and intelligence chiefs are perfectly fine with the agreement.
 Former Mossad Director Meir Dagan and former Shin Bet Director Yuval Diskin believe that the agreement with Iran — while not perfect and with a few holes — has benefits that outweigh the damage. Stopping Iran’s stampede, it sparks hope for a positive final agreement. These two are fully at peace with their historic stance that blocked an Israeli offensive. This position is also shared by the IDF’s former chief of staff Gabi Ashkenazi and former Military Intelligence Director Amos Yadlin, who hinted at his position on several public occasions. Yadlin’s predecessor, Maj. Gen. Aharon Ze’evi-Farkash, is also of the same opinion.
What about the current leaders, like chief of staff Lt. Gen. Benny Gantz, Military Intelligence Director Maj. Gen. Aviv Kochavi, Mossad Director Tamir Pardo and Shin Bet Director Yoram Cohen?
They cannot speak up and express their feelings, yet in internal forums they continued all along to oppose an independent Israeli military move. As for the agreement, the voices that come out of the IDF’s Military Intelligence Directorate are slightly different from what Netanyahu and his senior ministers are saying. An analysis of the Geneva agreement by military intelligence points to its pros and cons. The agreement has advantages and achievements but also drawbacks, mistakes and problems. The main thing that Israel’s military intelligence does not demonstrate — in contrast to the government’s position — is panic.
Okay, I hear you say, I'll bite, how any of this shows that the US was doing this to get the Palestinian peace process back on track?

The Iran deal was to show everyone that the US can back a different horse and make life difficult for everyone (without seriously jeopardizing anyone's security as, like Mursi in Egypt, Rouhani and Zarif have their own reason not to rock the boat).

What other issue exist that Netanyahu can grab on, in order to claim that the peace negotiations are not acceptable? Why, it is Israel's security of course.

A recently retired four star Marine Corps General John R Allen and his team are currently in Israel drawing up plans to increase Israel's security in the event of a Palestinian peace deal. What that means is that the US is no longer willing to accept any blanket claims about Israel's security and will not allow that to be used to stall peace talks. They have their own expert to draw up plans and they will follow his advice over Netanyahu's.

If you know a little bit about the region, you know what a big deal this is.

There is also this:
US Secretary of State John Kerry was meeting Israeli Prime Minister Benjamin Netanyahu for the third time in 24 hours on Friday for talks understood to be focused on security. 
Kerry, who is seeking ways to drive forward stagnant peace talks, met twice with Netanyahu on Thursday for more than six hours of talks about potential security issues in any peace agreement. 
He also held a three-hour meeting in Ramallah with Palestinian president Mahmud Abbas.
Three meetings in 24 hours.

Maybe I study objects near the black hole too much. And I see the world a tad too mechanically.

But sometimes I wish people paid more attention to actions.

27 November 2013

Iran and the New American Plan for the Middle East

This is my 200th post.

It falls on a momentous event, namely the international accord on Iran's nuclear ambitions.

This provides me with the opportunity to retrace my starting hypothesis and use it to explain the new agreement from a contrarian perspective.

First, let me ask a question.

For as long as remember, we have been told that the US will never do anything against Israel's and Saudi Arabia's wishes. For the former, we are given have a mixture of explanations, ranging from AIPAC's power and the prevalence of the so called Israel firster politicians to a genuine desire to protect Israel, a vulnerable island in the middle of an Arab sea.

For the latter, we are usually offered one word, oil.

Last week's agreement with Iran was vigorously and vociferously opposed by both Israel and Saudi Arabia and they failed miserably. How did that happen?

All the commentary I read suggested that the US is now charting a whole new course in the region. But no one was sure why. Moreover, no one offered a framework that explains both the old and the new.

Let me give it a try.

Starting Point: Rethinking the Arab Spring

When I started this blog, my goal was to provide an explanatory framework for seemingly contradictory events, actions and statements in the larger Middle East. I was especially concerned about the Arab Spring and the attempts to present it as a spontaneous revolution. The yearning for more freedoms might have been genuine. But the fact that, in key instances, the "Spring" was brought forward by traditionally oppressive institutions, gave me pause. And it made me doubt the spontaneity and the revolutionary nature of the upheaval.

A long time ago, I learned from Thomas Kuhn that when an explanatory framework cannot provide answers to all your questions, it might be best to look for a framework that does. The mainstream Spring narrative could not explain why the US trained and equipped Tunisian and Egyptian armies stood by complacently and allowed the autocratic rulers of their respective countries to be deposed within a short period of time. In Egypt, the man who earned the nickname of Mubarak's Poodle for his obedient suppression of people, ordered his troops to protect the protesters against Mubarak's thugs.

When the New York Times reported that the Egyptian army was working closely with the Muslim Brotherhood from the beginning of Tahrir events, I knew that I needed a new perspective.

It was clear that the US was somehow involved especially since I knew that these armies would not act in a manner to jeopardize their relationship with Washington. It is not just the money they have been getting from the US; there is also the equipment, training and privileged relations with American armed forces, including long term exchange and cooperation structures.

But why would the US support an Islamist regime and ostensibly put the security of its closest ally in the world, Israel, in jeopardy?

The American Plan for the Middle East

What if, I said, the US was attempting a massive nation building exercise in the region in order to bring stability to it.

From an American perspective, this begs two questions.

One, why would you want to stabilize the Middle East in the first place, if you are not actually dependent on their oil? The US does import quite a bit of Saudi crude but it does not have to. Contrary to what you might read in corporate media, between Canada, Venezuela and its own oil production, the US does not need other sources. In fact, with the expansion of dubious practices like fracking, very soon, it is likely to be fully energy-independent.

That's why I never understood "X country in the Middle East is important because of US dependency on oil" type of arguments to explain America's blind devotion to Saudi Arabia or, for that matter, its determination to invade Iraq.

In my eyes, the mark of a superpower is not its military might. Its dominant position in areas that are critical for the economies of other powers is much more important. What makes the US a superpower is its dominant position in capital, technology and energy.

Consequently, as far as I am concerned, the real importance of the region stems from what it represents to other rising superpowers like China and India. A little over 70 percent of the world's oil and gas supplies move through this region. Whoever controls their distribution controls the current and future energy needs of China and India and of course, the European Union.

There is no other way of explaining the Iraqi misadventure and the bogus weapons of mass destruction pretext that led to it. Even Wolfowitz later admitted that WMD line was just to get public support for the invasion. What a Wall Street oil analyst said at the time is much closer to the real reason: "Think of Iraq as a military base with a very large oil reserve underneath."

The second question is, how do you go about stabilizing the Middle East? The two main sources of instability are the Palestinian and Kurdish statehood questions. The first one inspires most of the Jihadis to join the fight against the US. It functions as a limitless source of suicidal terrorists. The second creates massive internal frictions, if not civil wars, in Turkey, Iraq, Syria and Iran, as the contiguous Kurdistan is composed of parts of these countries.

These are the two most intractable ethnic problems in the world. How do you solve them?

To solve the Palestinian problem, the US needs to convince Israel to work in earnest towards a two-state solution. In essence, it is a move to save Israel as a Jewish state. Without a two-state solution, within a little over a decade Arabs will be the majority in the combined Israeli and Palestinian territories, leaving Israel with two equally unpalatable solutions. Accept a Palestinian government to run the country or turn Palestinians into second class citizens.

But it is a well-known truism that no American president can push Israel. The evangelicals are solidly behind Israel (awaiting the return of Jesus to the Holy Land), the Republican Party is utterly devoted to the Likud-wing of Israeli politicians and the Democrats are either too afraid of AIPAC (which is completely aligned with Likud) or genuinely supportive of Israel's conservative politicians. Papa Bush tried to nudge Israel by threatening to withhold loan guarantees and paid a price for it.

When you look at the issue this way, it appears that Israel could only be pushed towards solving the Palestinian problem, if the situation in its own neighborhood dictated a different approach than allowing ever larger settlements in Palestinian territory and hoping the problem would go away miraculously by itself.

As for the Kurdish problem, the US needed to push Turkey towards making peace with the PKK. And gently move them to form an alliance with Iraqi Kurdistan. Grabbing some land from Iran and Syria would come later and that would be a bonus, as it would weaken these two regional troublemakers. Fortunately for the US, pushing Turkey is a lot easier than pushing Israel.

What else do you need in this stabilizing mission? Since the Jihadis are mostly the product of ultra-conservative Wahhabi and Salafist schools, you need an alternative brand of Islam, one that emphasizes worldly achievements over the the next world, like economic success, education, a sense of duty to one's nation and a peaceful social conservatism.

Enter Turkey

After the Iraq debacle, the Obama Administration knew the US could no longer hope to become a regional actor. Too much bad blood in every sense of the term. Military bases with oil reserves underneath was no longer a viable option for stability. So they looked for a stand-in. There is only one country in the region that can challenge Iran. Turkey. As luck would have it, it was perfect for the job, as it had several other trump cards up its sleeve.

One, Turkey already had several pipelines going through its territory, including a major one from Iraq. And, having no significant oil reserves of its own, it really, truly, desperately wanted to be the energy hub for the region. So, they had an excellent incentive to work with the US.

Two, as the heir to the former Ottoman Empire, it has the same cachet (and the accompanying love and hate relationship) in the region, as Britain does in Commonwealth countries. But, at the time, Turkey, after 60 years of carrying NATO's and America's water, did not look like a credible actor. Worse even, it was one of the first six countries to recognize the state of Israel in 1949 and until the 1973 oil crisis, it was the only Middle Eastern country to have a diplomatic presence in Israel. The Turkish and Israeli armies and security agencies cooperated closely and since 1996 they had a mutual defense agreement in place.

In short, Turkey looked like an American agent in the Middle East. Even its Islamist government could not change that perception. However, if something could be arranged to make Turkish PM Erdogan like he was standing up to Israel (and therefore to the US), the love part of the Ottoman legacy might be actualized.

In 2009, the man who, until then, never made any statement about Israeli occupation or lifted a finger for the Palestinian cause, stood up in Davos and accused Shimon Peres of being a child killer and stormed off their joint panel. Within minutes, he was the new hero of the Middle East. (In fact, his posters were up within two hours which prompted some Turkish journalists to wonder how this could have been done without preliminary preparation.)

Turkey's third asset was its largely pragmatic Islamist government. Economically, it was very successful. At the time, it avoided overtly religious social policies and maintained a commitment to secular system. The AKP government with its this-worldly emphasis and economic success could be very nicely presented as a model for Muslim countries. You know, democracy, economic prosperity and a reasonable dose of piety.

The final trump card in the deck was a preacher by the name of Fethullah Gulen. And as I mentioned recently, he was (and still is) living in the US. His school of thought appears to be the only coherent Islamist philosophy that could stand up to Wahhabi and Salafist schools. He emphasizes education, economic success, a Calvinist sense of duty to one's society, allegiance to a nation (as opposed to a wider religious community) and a fairly moderate (next to the Salafists) understanding of what a Muslim society should look like. (Essentially, he wants women to cover their heads but wants them as educated as men and has no real problem with women being in the labor market.)

Initial Success

If you have been reading this blog or following events in the Middle East, you might know that the arrangement of using Turkey as America's stand-in was a resounding success initially.

Turkey and Israel maintained what I call the Kabuki theater (for a more detailed discussion go here, here, here, and here). As a result, Erdogan (and the AKP) became the darling of Arab streets.

Turkey signed up many pipeline projects and appeared to be on the verge of realizing its dream of becoming the most important energy hub in the world. It pursued a policy of "zero problems" with its neighbors.

After the "Spring", Egypt made the transition to an elected government. The new Muslim Brotherhood administration was extremely careful not to offend Israel and went to great lengths to express its dedication to Camp David accords and regional peace. The Egyptian army seemed like a decent security guaranty for Israel in case President Mursi lost his way and turned against Israel.

Hamas began to make conciliatory noises. It moved its HQ to Doha, Qatar and Khaled Meshaal seemed genuinely interested in a reconciliation with al Fatah. And even in an eventual peace with Israel.

Another "Spring" movement took off  in Syria and that one seemed to be moving in the direction of partitioning the country according to a certain Pipelineistan logic. It was also poised to repeat the Kurdistan formula that worked so well in Northern Iraq.

Turkish government grudgingly announced a peace initiative with its Kurdish population and their largest organization, the PKK.

Iran became gradually more isolated in the region, with only the Hezbollah and Syrian President standing by it. Extensive sanctions seemed to contract its economy, jeopardizing its domestic stability.

When Israel finally decided to go back to the negotiating table, from where your humble blogger stood, it all made perfect sense.

The American plan was working.

The Saudi Wrench

Except, some people were not happy with that plan. Starting with the Saudis. They were fine with Turkey acting as a stand in. But that was not enough. Turkey was not capable of resolving what they perceived as the most pressing and important problem in the region, namely the Sunni-Shia rivalry. Only the US could destroy one side and make the other side victorious.

So, they urged the Obama Administration to bomb Iran into a giant parking lot, as the favorite neocon saying goes, and to put boots on the ground to overthrow the al Assad government in Syria. Even though they had the help of an unusual (and normally very persuasive) ally in making their case, the US did not budge. They had a working plan and they wanted to stick to it. The Saudi alternative was nothing but risk with no upside in terms of ending turmoil in the region.

The Saudis also did not like this democratic and economically vibrant Turkish model rubbish. Worse still was the idea of a moderate Islam. The new Brotherhood government in Egypt seemed to align themselves with the Turkish government and together they appeared to have taken the upper hand in Syria. The House of Saud and the House of Wahhab could not tolerate something like this. They also hated the Muslim Brotherhood with a passion, as they suspected them (if you can believe this) radicalizing the Saudi youth.

So, they decided to take the matter in their own hands and approach the Egyptian military. The Supreme Commander General al-Sisi was well known to the Saudi Royal family as he was Egypt's military attache in Riyadh for a long time. Normally, the Egyptian army's ties to the US are too important for them to take this bait. But the Saudis came back with an offer General al-Sisi could not refuse. $12 billion dollars in funds, a promise to give some more and a possibility of backing General Sisi as president. As the old adage goes, everyone has a price and this was al-Sisi's.

With the Brotherhood on the run, they no longer had any presence in Syria. Instead, the Hezbollah moved in to help al-Assad and suddenly the rebels were losing ground. Saudi Arabia increased its support for hardcore Jihadis and they gradually sidelined the Free Syrian Army to take the de facto leadership of the Syrian uprising.

Israel lost all interest and incentive to work with Palestinians towards a peace agreement. They met several times with absolutely no progress. Instead Netanyahu announced new settlements.

As for Turkey, it was the biggest loser in this process. Erdogan's harsh rhetoric against the Egyptian army turned him into a meddlesome villain for those Egyptian who welcomed the coup d'etat. Its relations with Saudi Arabia (source of a lot of incoming hot money) faltered. With al-Assad winning battles, Syria began to look like it could turn a major problem in the near future.  Moreover, Syrian Kurds seemed capable of resisting both the government and the Jihadi rebel forces. With massive help from Barzani, they moved to control their own region.

That left Erdogan with only undesirable choices. Pressuring Barzani to stop helping Syrian Kurds could lead to al-Assad remaining in power and making life difficult for Turkey for years to come. Working with Syrian Kurds would require working with the PKK in Turkey as they are closely aligned. This in turn could lead to bigger demands from Ocalan in exchange for his cooperation. Maintaining his covert support for Jihadis has a terrible PR price as these fanatical fighters relished their own horrendous actions so much that they put them up on Youtube.

On top of all that domestic situation in Turkey took a turn for the worse and Erdogan seemed incapable of controlling the agenda for the first time since he came to power.

The New American Plan

Let's assume that my working hypothesis is valid and the US has been trying to bring stability to the Middle East. And for that it created a situation where Israel felt pressured to solve the Palestinian problem and Turkey was given enough incentive to handle the Kurdish statehood issue.

What would they do if some regional powers worked to circumvent this plan by promoting a regime change in one of the key countries in that plan?

If I were the American decision makers, I would go and find another country that represents even higher stakes for the actors who destroyed my plan.

If you read my post on Iran, you know that the dynamic duo Rouhani and Zarif were clearly aided and abetted by the White House in their effort to bring Iran into a whole new setting. After three decades of isolation, Washington changed the narrative completely. The media were mostly positive and accepting, despite articles by neocons. And Netanyahu was sidelined and ostracized.

When France (to please both Saudi Arabia and Israel) sort of sabotaged the nuclear talks in Geneva, both Kerry and Obama dismissed Netanyahu's demands for further sanctions. And they quickly renegotiated with Zarif to agree to a partial (if temporary) lifting of the sanctions.

If Saudis and Israelis were unhappy about the Brotherhood government in Egypt and the leverage it provided to the US, a rapprochement between Iran and the US should scare the living daylights out of them.

Seeing the writing on the wall, Netanyahu quietly shelved recent plans for more settlement building in Palestinian territory in an effort to placate the US. When that did not happen, he gave the go ahead again.

But now it is too late, Iran is back as the regional power and they have a direct line to the White House. Despite the sound and fury I expect Israel to return to the peace talks with some renewed urgency.

I also expect Turkey to begin assisting the Syrian Kurds and return to the peace initiative with Ocalan. The Minister of Foreign Affairs already announced that Turkey would no longer tolerate Jihadi arms shipments. I expect them to grab the olive branch Rouhani held recently.

Iran does not pose an immediate security threat to Turkey. But an Iran in strategic partnership with the US could easily undermine Turkey's rising regional power status. Iran could also influence pipeline locations and damage Turkey's aspiration to become the region's energy hub.

To be sure, the American overture towards Iran is very cautious. They are making sure that no one reads it as a full-fledged support. But they are using it to signal to their stubborn allies that they could make life difficult for them.

After all, they really don't need the oil.

16 November 2013

Darkening Horizon For Turkey and Its Ruling Party

Most analysts agree that, in recent years, Turkey's rise to prominence has been spectacular. And most of them give the credit to Turkey's ruling Islamist party, the AKP.

The list is long. The GNP per capita tripled in less than a decade. The infrastructure was expanded and modernized. The government invested heavily in education and R&D. Turkey now ranks 18th among the top 20 countries in the world in terms of research output. It created a booming export economy ($153 billion in 2012). When the world economies were mired in deep crisis after 2008, Turkey grew by 9.2 percent in 2010 and 8.5 percent in 20111.

Until recently, it was the fastest growing economy in Europe and one of the fastest in the world.
Hence, Turkey has been meeting the “60 percent EU Maastricht criteria” for public debt stock since 2004. Similarly, from 2002 to 2011, the budget deficit decreased from more than 10 percent to less than 3 percent, which is one of the EU Maastricht criteria for the budget balance.
Nominally, it is the 17th economy in the world (15th by Purchasing Power Parity). Symbolically, Istanbul has 37 billionaires (ranking fifth in the world after Moscow(84), NYC(62) and London (43) and Hong Kong (43)).

Domestically, the change was even more dramatic. It is no longer a country where the army was so powerful that, after three coups (in 1960, 1971 and 1980), it could topple a duly elected government by simply issuing a memorandum. In the last four years, the elected government finally rose above the military and effectively placed them under civilian tutelage.

Internationally, Turkey underwent an equally profound transformation. From a second-tier country desperate to join every club (NATO, EU and even CENTO), it turned into a country that was courted by other clubs. After waiting for 54 years to join the EU (it first applied as an associate member in 1959) it is now sending subtle signals that it may no longer be interested to get in.

Moreover, in the same time frame, Turkey has become a regional superpower and an indispensable actor in the Middle East. After eclipsing post-Iraq war Iran, it has established itself as the leading power broker in the region and the only country capable of challenging all regional actors. It has also emerged as the main regional partner of the US, besides Israel. (If you were to believe this humble blogger, it has been doing the US' bidding in the Middle East).

This is such a rosy picture that people began talking about the Turkish Model.

But your contrarian blogger is here to argue that the glory days are fast fading and Turkey and its ruling party are entering a very difficult period.

The same forces that propelled them forward may now be reconsidering their support for the current team.

It's the Economy, Stupid

The main problem Turkey is facing is a serious possibility of sharp economic decline. There are several reasons for that.

The phenomenal growth I mentioned was primarily financed by two sectors: construction and real estate on the one hand and credit-based consumer spending. To give you an idea on the latter, the credit card debt that was 4.3 billion Turkish Lira in December 2002 climbed to almost 80 billion Liras in May 2013. Credit card use increased 20 times in the same interval and the annual transaction volume hit 450 billion Turkish Liras (the parity with dollars is roughly 2 to 1 so we are talking about $230 billion dollars). Consumer credits went from 2 billion liras to 216 billion liras, a 108-fold increase.

In the last ten years, Turkey's current account deficit increased 76 times to reach $53,6 billion. The net reserves of the Turkish Central Bank are roughly $40 billion, which means that the country does not have enough money to cover a single year deficit.

Construction/real estate is the other variable in the growth equation. The feverish rate of construction led one observer to call Turkey the biggest construction site on earth. There is also a real estate boom, or should we say, a real estate bubble like the ones we saw in the US before 2008 and Spain, Italy, Ireland, Greece and a number of other places. Banks made generous real estate loans and remained highly profitable as long as prices kept going up.

The current account deficit was financed with a constant flow of incoming capital, known as hot money. Not only did this provide fresh capital for the banks and construction sector, it also pushed up the Istanbul stock market. But since mid-May there has been a net capital outflow. Among emerging economies, Turkish stock market was the biggest looser with a drop of 22 percent on 22 May 2013. The bank stocks were hit hardest as they lost roughly 26 percent of their values. In total, the top ten companies lost $25 billion of their paper value. They have since recovered some of these losses but the trend remains downward.
Now Turkish assets are hovering around record lows again, with the lira's 17% decline making it one of the worst emerging-market performers, alongside India, Brazil and Indonesia. (...)
The losses magnify the imbalances in an economy dependent on imports and foreign capital, which analysts say leaves Turkey dangerously exposed to a hefty correction. 
"Were global liquidity to dry up or risk appetite turn sour, the economy would be forced into a sharp adjustment," the International Monetary Fund warned in its last report. A June report from Morgan Stanley ranked Turkey as one of five emerging markets most vulnerable to a withdrawal of foreign financing.
I would venture that the investors were also spooked by the rising jingoistic discourse and polarizing policies of the AKP and the growing authoritarianism of its leader, Prime Minister Erdogan.

It's Also the Politics, Stupid

With the economy seriously slowing down, with much smaller reserves than other emerging market countries, you would think the government would do everything in its power to create a stable political environment to pull foreign investors back in and the hot money flowing again.

Well, think again.

Just around the Gezi debacle, Erdogan decided to borrow a page from the Nixon-Rove playbook. Remember Nixon's Southern Strategy? Or Karl Rove's 50 percent plus one framework?

Basically, you do your best to polarize and divide up the electorate between "us" and "them" and you demonize one side by using the fears of the other side. You also act aggressively and when called on it, you claim to be the victim of, well, political correctness police, the effete liberal elite and the unpatriotic and godless elements in society.

You know. Them.

Since May, Erdogan has been attacking "them" at every chance he gets, using imaginative accusations that would make Bush's Brain blush. For days, he screamed at large rallies that Gezi protesters drank beer in a mosque. When the imam and muezzin of that mosque (civil servants in Turkey's strange separation of state and church) refused to corroborate these allegations, they were transferred to marginal mosques.

In his case, "them' also had a foreign component, usually in the form of an anti-semitic dog whistle like his strange crusade with the interest rate lobby. (Even though at times the anti-semitic undertone was more audible than a dog whistle, though some observers were more charitable than this blogger).

Lately, as a good Rovian, he has been introducing outlandish ideas hoping for a loud reaction, so that he could turn to his people with teary eyes and show the terrible hurt he experienced by their oh-so-mean outburst. (By the way, he cries publicly and as much as John Boehner).

As with the GOP of the last three decades, the strategy calls for him to be both the bully and the pearl-clutching perennial victim.

Case in point: Two weeks ago, Erdogan arranged for four female AKP MP's to show up in Parliament wearing headscarves, a very popular issue with Islamists and a very sensitive one with secularists. Previously, they could not do this according to the bylaws on the books. He was hoping for the main opposition party to make loud noises as these female MPs entered to Assembly so that he could go to "his people" and tell them how these lovely Islamist women were being mistreated by jackboot militarists.

Instead, in a rare moment of inspiration, the main opposition party, CHP fielded their double amputee female MP, Safak Pavey to give a rousing speech.

That's Ms. Pavey on the right walking to the podium with her exposed prosthetic leg.

She was previously prevented by the AKP MPs from wearing trousers in the National Assembly, as they claimed that such an outfit would be against Parliamentary bylaws.

You can see the irony. And how Erdogan lost his touch. Rove would not have been happy with his new pupil.

This was followed by another political faux pas. A couple of weeks ago, Erdogan stated that he was going to authorize the regional governors to conduct raids to see if university students lived in a co-ed setting in privately rented apartments.

He was hoping that the core electorate of the AKP would rally behind him as the defender of morality, family values and various sacred things. It did not happen. Since what he suggested would be plainly illegal and unconstitutional, his speech was met with sarcasm and disbelief.

But it proved to be a turning point for the AKP.

A Power Struggle Within the AKP?

The AKP has always been an umbrella party. It is a large tent that covers a core Islamist group, social conservatives, small business owners, nationalists who also cherish their Muslim identity and economic opportunists in the best capitalist sense of the term.

The Islamist core is divided into hard core fundamentalists (but not in the Salafist sense), formerly pious-recently affluent folks and people who are "inspired by" Fethullah Gülen, the Islamist preacher who lives in a large compound in Pennsylvania on a special visa. He is the kind of Islamist whose Green Card application was supported by Graham Fuller, George Fidas and Morton Abramowitz. You draw your own conclusions.

The President Abdullah Gül and Deputy Prime Minister Bülent Arinç are among the founders of the party and are the most visible members of the fraction "inspired by" Fethullah Gülen. A couple of years ago, Erdogan floated the idea of a constitutional change to establish a presidential system. He wants a system closer to the Russian regime (as opposed to the US or French arrangements) where the President can dissolve the Parliament, presides over Cabinet meeting and appoints all rectors, ambassadors and half of the Constitutional Court judges. And he wants to be that President.

Erdogan assumed that Abdullah Gül would simply cede the presidency (as he gave up his Prime Minister post in the past), even though the Constitutional Court ruled that the President was eligible for a second and final term despite a constitutional amendment that shortened his mandate from seven years to five.

Instead, Gül signalled his intention to stay put by launching a full-fledged re-branding effort. He used to be known as a hardcore Islamist, more conservative and ideologically principled than Erdogan. His new image is a lot more centrist, open minded, tolerant and democratic.

Last October, he addressed the Parliament to urge them to pass democratic reforms, to extend liberties and to adopt a position of reconciliation towards Kurds. Since then, he kept pushing for more democracy and distancing himself from the government and the PM at every chance he got. Especially after the Gezi incidents, Gül's (and Arinç's) tolerant message which disapproved of police brutality stood in sharp contrast to Erdogan's vociferous law and order rhetoric.

In fact, Gül is now seen as the wise elder statesman and opinion polls show that a majority of the electorate prefer him over Erdogan as President. Even the opposition CHP stated (albeit hypothetically) that they would support him for president.

To sharpen the divide, Gül also advocated, rather publicly, a more peace-oriented foreign policy, especially towards Turkey's neighbors. And he favored continuity over Erdogan's seemingly impulsive foreign policy priorities: When Erdogan suggested to abandon the EU in favor of Shanghai Five, Gül became the voice of Turkey's longstanding European aspirations.

Moreover, the Gülen movement closed ranks behind Gül and used their considerable media muscle to support his re-branding effort. Pro-Gülen media organizations began criticizing Erdogan's policies while voicing support for Gül's more moderate alternatives. This is what they wrote about Erdogan's female MP stunt. Moreover, the co-ed story was leaked by their flagship newspaper Zaman, which happens to be the largest Turkish daily.

The movement was especially worried that the seriously flawed prosecution of Sledgehammer and Ergenekon cases reflected badly on them and turned the public opinion against them, as there is a widely held belief that the justice system has been infiltrated by pro-Gülen prosecutors and judges. The movement figured that supporting Gül's more democratic and centrist message would be mutually beneficial.

There are some observers who believe that Gül may be creating his own political organization.

However, I am not entirely convinced that Gül needs to undertake such a drastic effort. Especially since all he has to do is wait. You see, Erdogan and 73 AKP MPs (of whom 18 are Cabinet members) cannot stand for re-election, as they will have reached their self-imposed term limits by the 2015 general elections. This is why Erdogan wants to be President as it enables him to bypass these term limits.

Simply blocking Erdogan's path to presidency would be enough to get rid of him and his most important lieutenants. So, all Gül needs to do is to work on his image as a moderate politician who believes in a multi-cultural country and make Erdogan look like an out-of-control-autocrat.

And the best way to do that is to give Erdogan enough rope with which he can hang himself.

The co-ed apartments statement provided just the perfect length.

After the (pro-Gülen) Zaman daily reported that Erdogan was contemplating to direct the authorities to conduct raids against mix-gender housing arrangements, Deputy Prime Minister Bülent Arinç, as the spokesman for the government, denounced it as a fabrication. He suggested that Erdogan could not have meant what was reported since such raids would be illegal and unconstitutional. Within a short span of time, Erdogan retorted that he was planning such raids and that he meant every word.

In the past, when such public disagreements surfaced, Arinç always retreated. This time, he did not flinch. He went on TV and said that he stood by his views. He looked into the cameras and added that clearly there was a contradiction between the two statements but it was up to the PM to explain the discrepancy.

And that was that. Erdogan refused to talk about it any more but the damage was done. He stood there as an-out-of-control bully and Gül, Arinç and other "inspired by Gülen" politicians appeared as law-abiding, tolerant and democratic people.

The re-branding of Gül was complete and in the process, he let Erdogan to re-brand himself as a terrible autocrat.

There is one more thing.

Erdogan once suggested that Turkey was a democracy train that carries him to his destination (at the time, widely assumed to be an Islamist end point). This summer, during Gezi incidents, when a group of foreign investors met with Gül to express their concerns, he used the same metaphor but to highlight the difference:
While the Gezi protests were going on, during a meeting with representatives of foreign companies in Turkey, Gul indicated that Turkey’s democratic vocation is clear, saying that the necessary rails have been laid for it. He added, however, “If there is a problem with the locomotive, that locomotive can be changed.”
When asked if they could report this to their senior management, Gül said that they could quote him verbatim.

I don't think the message could be any clearer.

Is it Dusk or a New Dawn for Erdogan?

No one knows the answer to that, at least not with any certainty. Personally, I am not very optimistic about his chances for survival.

Besides his under-reported health issues, to succeed, he has to overcome a number of intractable problems. And with his diminishing regional political capital and tightening room of maneuver, I seriously doubt that he can tackle them.

Take a look at a sample of regional problems:

- In Syria, he aligned himself to the Muslim Brotherhood only to lose them after the Egypt coup. He refused to acknowledge my long held belief that Kurds are the sword to cut the Syrian knot. Instead, he backed the bloodthirsty Jihadis in an effort to weaken the PYD in Syrian Kurdistan. This support is coming back to haunt him and any opening towards PYD (and the PKK in Turkey) will be that much more difficult to negotiate. Yet, without them he has a huge problem in his Southeastern border.

- In Iraq, Turkey's other Southeastern neighbor, he made gas and oil deals with the Kurdistan Regional Government (KRG) and openly backed its leader Masoud Barzani. Now, Barzani is getting involved in Syrian Kurdistan and Erdogan is trying to backtrack by attaching new importance to Baghdad. But the Iraqi PM Nouri Maliki is clearly aligned with Iran. Forming an alliance with him will infuriate Saudi Arabia as the Kingdom is likely to see this as a betrayal against the backdrop of a sharp Sunni-Shiite divide in the region.

That would mean further loss of hot money coming from the Gulf and the peninsula.

- In Iran, his newly initiated efforts to placate the regime constitute a serious problem for the Saudis and the Israelis. Besides, if Iran manages to get the sanctions lifted, it could become a serious rival in the region. A rapprochement with Iran could also negatively affect Turkey's relations with Israel especially with Natanyahu fighting a loosing battle to demonize Iran and Avigdor Lieberman is back as Minister of Foreign Affairs. With Syria's simmering civil war and Lebanon and Jordan in jeopardy, regardless of what I called the Kabuki theater rhetoric, Israel remains a strategic partner Erdogan cannot afford to lose.

- In the general region, how could Turkey be crowned again the leader of the Sunni alliance without creating a host of other problems? There is a massive resentment in Egypt caused by his fiery rhetoric after the coup. Since the coup was orchestrated by the Saudis, the resentment is shared by them. If Erdogan disavows his early reactions and welcome General al-Sisi, the AKP's rank and file would rise up against him, as they see themselves the targets and victims of previous coups in Turkey.

Domestically, the situation is even more challenging for the embattled leader of the AKP.

To win elections convincingly, even the upcoming (March 2014) local elections, he needs to get the economy going again. In the short run, this means he has to find a way to get the hot money faucet fully open. But with Europe still mired in crisis, Russia sitting on the fence because of Syria, the only major source of foreign capital is the Gulf countries and Saudi Arabia. They will not budge unless he changes his foreign policy in a certain direction.

Chicken and egg conundrum.

Also, to convince other foreign investors that Turkey is a stable country open for business, he needs to scrap his "interest lobby" rhetoric, appear more conciliatory and give up his Rovian polarization strategy. Without such steps, hedge funds and Western investors will simply go to other emerging markets.

Moreover, if he is to fight off the Gül-Gülen challenge, he needs an even more dramatic image make-over.

But re-branding Erdogan quickly might be very difficult. His polarizing image is too vivid and too fresh in people's minds. More importantly, the core groups that support him might be turned off by such a move. They don't see him as a polarizing autocratic politicians. To them he is their dragon slayer, their hero who stands up to the international "interest lobby" and their backstabbing partners inside the country.

As you can see, he does not have many straightforward options.

To use Gül's train metaphor, I would not be surprised if there was a change of locomotive in the next year or so.