Global recession and Turkish economy – Interview with Prof. Daron Acemoğlu

Welcome to Medyascope, today we are performing our exclusive interview from Bilkent University. One of the speakers of the 2019 Bilkent Summer Macro Workshop is world-wide known economist, Prof. Daron Acemoğlu and we are joined by him. We will try to analyze the current economic and political situation of Turkey and the international system.

-Thank you very much for joining us.

Thank you.

First of all, how do you evaluate the current political and economic situation of Turkey?

Today, we are still experiencing a crisis economy. The economic turmoil which was felt heavily in the last year has not ended up yet. Reflections of this situation have various impacts both on the Turkish economy and Turkish politics. So far, the real causes of economic problems have not handled correctly. These are, in the short run, problems about account deficits of companies in particular, and the problems regarding balance sheets of banks to some extent. Another issue is providing these companies practical tools which will make them launch accurate investment activities for the future. More deeply, not solving the structural, political and judiciary-related problems are the main troubles of the Turkish economy right now.

You have always emphasized the importance of institutions and democracy for high-quality economic growth. In this regard, you argue that between 2002 and 2006, Turkey’s economic growth was of high-quality. You underline the productivity of the Turkish economy throughout this period. But then it stopped at some point after 2006, and according to you, Turkey tried to sustain its economic growth by relying on a construction boom and rampant credit expansion. Can we assume that the conditional changes within the international economic system was the main reason of this turn or was it occurred due to Turkey’s political choices? And do you think that the roots of today’s crisis lie in this diffraction after 2006?

Thank you very much for asking this question because it is very important to understand Turkey’s current position. External factors have had effects on the Turkish economy, but internal factors are more responsible for the current economic situation. And it is grounded in the decline of institutions. If you look at the productivity growth of the Turkish economy between 2002 and 2006, this healthy and productive growth was fuelled by the investments of the businessmen. Thanks to these investments and foreign capital flows, new and practicable technologies were deployed. And they all ceased after 2006. The reason of this is because improvements in political and economic institutions over this period reversed completely. Even though it did not cease the growth; it reduced the quality of economic growth. Low-quality economic growth, which does not ensure productivity nor reduces the unemployment rate and relies heavily on credit consumption and construction sector rather than investments and technology, is not sustainable. As long as you implement this policy, you create more serious problems such as account deficits of banks and private companies.  It disrupts account balances too. There are credits whereas there is no productivity that can meet it. Above all, due to the lack of increasing productivity, our economic future will be stifled. Our problems did not emerge in one day. In the last 8-9 years, these problems intensified gradually and now we are in a situation where our economy is not functioning. This underlines the importance of structural reforms.

If there are decline and corruption in institutions, will it take some time to reverse it?

Yes, it will take some time because it is a political issue. Usually, politics do not change in a day or two. There are some decisions to be made by those who are in power or governments might be reshuffled through democratic processes. For three years, both outside actors like IMF and voices in Turkey have declared that this strategy should be changed. Nevertheless, this does not happen simply.

We might also say that the economic growth of the U.S. has declined when compared to the previous years. The same can be said for the European economy as well. Shall we regard the economic stagnation of Turkey as an extension of the global recession? Or is it also true that Turkey’s internal dynamics played a huge role in this economic stagnation too?

They are all interrelated. The productivity of growth has declined in the U.S. as well. This is about the difficulties that accompany technological development and globalization. It affects Turkey too. However, unlike Turkey, the productivity growth of the U.S. is not zero and it is not an abrupt halt. Besides Turkey is a developing country. Rather than comparing Turkey with developed countries like the U.S., we should compare the Turkish economy with a country like South Korea. The economic growth of developing countries has not declined as much as our growth. Therefore, we see that Turkey’s current position is the result of its internal problems. Vice versa, indeed Turkey has benefited from the outside influences over the last decade because the wistful capital with low loan interest rates had positively affected the Turkish economy but at the same time, it prevented us from confronting our deeper problems.

You argue that there is a very strong linkage between democracy and economic growth (at least sustainable and high-quality economic growth) But today, in most of the countries, we observe that anti-democratic movements are being supported and are gaining momentum. Populist leaders are winning elections and coming to power. In that sense, at least in the short term, how do you see the future of the relationship between democracy and high-quality economic growth?

Democracy has long been a subject of various debates.  In newspapers, we see lots of writings that either support or challenge democracies. These issues must be assessed carefully. When you do it, you will see that there are two very important points. The first is, if you analyze data, democracies have a hugely positive effect on the productivity of economic growth, but at the same time, democracy is not feasible at all. Even though they have positive impacts, democracies are highly vulnerable. It might be weakened or be collapsed totally and these possibilities are not low. And today this weakness is discernible at the global level. Not only in Turkey, but also in countries such as the Philippines, India, Brazil, and Hungary, what we see today is not toppling democracies but undermining the primary pillars of democracies such as independent media, respect to human rights and pluralism. When these factors couple with one-man rule systems, democracy does not collapse entirely but weakens considerably. As long as democracies weaken, it brings about harsh institutional consequences that ultimately slow down productive and high-quality economic growth.

-In this respect, how can we locate the trade war between China and the U.S.? Do you think that this trade war has an impact on the decline of democracies and on the global economic recession?

I think as for now, the trade war does not matter at all. But of course, China has its own impacts because most of the anti-democratic countries perceive China as a model for them. They receive aids from China and believe that they can be like China if they put aside democracy. But we haven’t seen the concrete outcomes of the trade war yet. It has effects on both the U.S. and Europe. In particular, its impacts of the trade war on the American economy have begun to appear slowly. But the situation will be more complicated for the Turkish economy. Economic stagnation in all around the world would be very counterproductive for Turkey but at the same time, if China does struggle to export its goods, Turkey might become the importer of the Chinese exports.

Last year, we were passing through a period in which we were experiencing a sharp currency crisis. And again in a Medyascope interview, you mentioned that it wasn’t a systematic crisis and it could be labelled as an economic recession. At that time you said that Turkey could get out of difficulties after a year of negative economic growth. After a year, do you see any difference between today’s economy and the previous year’s?

No. Maybe I could have been more explanatory. I said that if the right policies had been carried out, then we would have solved our problems.

And these policies were not carried out?

No. We cannot deal with our problems by implementing the wrong policies. Worse days are waiting for us.

Lastly, I would like to ask you a question about your recent book which you wrote with James Robinson. This book will come onto the market in the U.S and Europe in the next month. The first book, “Why Nations Fail?” was resounded widely around the world. The first book encompassed very comprehensive historical analyses that cover a wide range of issues such as inclusive institutions, innovation investments and even history of colonialism. Is the new book comparable to ‘Why Nations Fail’?

Exactly, and even it starts with prehistory. What we are trying to explain right now is not just a single economy, but also how the institutions, which defend and protect liberty, emerged and the reason why the liberty is such a certain kind of balance. The title of the book is “The Narrow Corridor”. Liberty flourishes only inside a narrow corridor and most probably it gets out of this corridor. At the same time, there are more powerful forces which can destroy liberty outside of this corridor. How shall we understand these forces from history and how shall we apply them to today’s world? We try to explain these questions.

O.Y: Thank you for joining us today. Our guest was Prof Daron Acemoğlu. We analyzed the current economic situation of Turkey as well as the global economic recession. Batu Bozkürk helped us in recording this interview. Thank you very much for watching us.

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