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.

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