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The Political Origins of Populism  

In our last post, we discussed the roots of Hugo Chávez’s rise to power and noted that these are intimately linked to the elite control of Venezuelan politics and economy. 

But why did this lead to a personalistic dictatorship? Why did many Venezuelans continue to support Chávez even after 15 years of disastrous economic management in the midst of a huge oil boom from which Venezuela should have benefited much more? 

The answers are related to what we refer to as the iron law of oligarchy in Why Nations Fail, whereby an extractive regime is followed by yet another extractive regime even if the rhetoric sometimes changes. 

In the case of so-called “Latin American populism” of which Chávez is just one example, there are some specific reasons for this iron law of oligarchy.

Populism often refers to a rhetoric of aggressively defending the interests of the ‘common man’ against the privileged elite and to policies that are motivated by such a rhetoric. Chávez, as been discussed in our last post, clearly satisfies this. 

But as one of the classic accounts of the economics of populism in The Macroeconomics of Populism in Latin America by Dornbusch and Edwards notes, populist regimes and policies often seem to hurt many of the constituencies they appeal to. They write:

Populist regimes have historically tried to deal with income inequality problems through the use of overly expansive macroeconomic policies. These policies, which have relied on deficit financing, generalized controls, and a disregard for basic economic equilibria, have almost unavoidably resulted in major macroeconomic crises that have ended up hurting the poorer segments of society.

How can we make sense of this?

One idea is to think that voters are just irrational. Venezuelans, for example, may not know what’s good for them and may just be taken in by Chávez’s showmanship against their real interests.

Though this is certainly possible, it is not the only possibility.

In “A Political Theory of Populism”, Daron, Georgy Egorov and Konstantin Sonin propose an alternative explanation.

According to this theory, the problem in many Latin American countries, including Venezuela, is their weak institutions. Voters are (legitimately) afraid that politicians are in the pocket of the rich elite or the “oligarchy”. Whatever their rhetoric, once in power they will implement policies in the interest of this rich elite. Weak institutions are central for this explanation because they prevent politicians from being bought or unduly influenced by this rich elite.

Given these concerns, many voters will reward signals of anti-elite behavior, because this will reduce the likelihood that the politician in question is in the pockets of the elite. The main theoretical result is that because of the signaling motive, ‘moderate’ politicians, who ideologically would like to adopt the best policy for median voter but still value being in office, will systematically choose policies strictly to the left of the preferences of the median voter, and will be rewarded for these policies at the polls.

Paradoxically, even closet right-wing politicians or those in alliance with the rich elite may also end up choosing policies to the left of the median voter’s preferences in order to masquerade as moderate or honest. 

In the Venezuelan context, this suggests a possible mechanism for why Chávez, despite his policies that were not beneficial for the median voter, remained quite popular.

An interesting consequence of all of this is that the rich elite may actually end up worse off relative to a situation in which they could not have disproportionate impact on politics. The fear of ‘political betrayal’ may lead to such a populist bias in politics that they will lose out even when they can control a significant fraction of politicians in the country. This too this provides a possible interpretation of the dynamics of Venezuelan politics.

A hallmark of politics in Venezuela, as well as in Ecuador, Bolivia and several other Latin American countries in recent past, is the willingness of the voters to dismantle checks and balances on presidential powers.

Venezuela is again an exemplar. After his first election in 1998, Chávez organized a constitutional assembly which re-wrote the constitution moving to a unicameral legislature, reallocating a wide range of legislative powers to the president. In contrast to what one might have expected from the standard principal-agent models of politics, voters did not oppose this lifting of checks and balances and constraints on presidential powers. The new constitution was ratified by 72% of the people who voted in a plebiscite in December 1999. In 2000, things got more extreme. Chávez now obtained the right to rule by decree for a year without having to get the approval of the legislature. In 2007 this power was renewed and extended to 18 months. It was renewed again in December 2010 for another 18 months. 

What explains this enthusiastic dismantling of checks and balances by voters? Once again, even if voter irrationality is a possibility, it is not the only one.


A companion paper by Daron, Jim and Ragnar Torvik, “Why Do Voters Dismantle Checks and Balances?” provides one answer. 

When voters are afraid that the rich elite will be able to buy off politicians — the president included — checks and balances become a disadvantage rather than an advantage. The reason is related to the raison d’être of checks and balances: they constrain the executive and reduce his rents. But an executive with little rents is very cheap to buy for the elite. 

Thus, paradoxically, voters may prefer to allow a president like Chávez to pursue policies that are self-aggrandizing and provide rents for himself, because this will make it less likely that the elite will be successful in co-opting him. 

In fact, if you listen to Rafael Correa in Ecuador, who have successfully campaigned for the dismantling of such checks and balances, this is more or less the reasoning that he articulates (though, unsurprisingly, he does not quite stress that he himself could also be bought off). 

For example, Correa argued explicitly that the major objective of his proposed constitutional changes was to reduce the de facto power of the traditional elite:

a new constitution is required … to extract the country from the economic, political and social blockade, to which the mafias who have always dominated, have condemned this country… of course today there are still other de facto powers and we are seeing them, these are powers that believe that they are owners of regions and the country, owners of truth, owners of the president of the republic.

He also emphasized that the serious threat was for the elite to use its financial power to bribe all level governments and politicians:

this government is not submissive, it’s not for sale and it doesn’t know, as someone said a long time ago “the geometry of the bent knee”,

… Maybe that’s why they don’t understand who we are. They try to find the man with the bag … in the figure … of the vice-president of the republic; they judge that way because there is a saying “each criminal judges based on their own condition.

All of this reiterates the challenge of the iron law of oligarchy.

Even when voters have a voice at the polls and can organize to take actions against the traditional elites, weak institutions inherited from decades or even centuries of elite rule and the fear of dominance of politics and society by this very elite can shape how the alternatives will play out, creating yet another type of path dependence of extractive institutions.


Paradoxes of Chavismo  

President Hugo Chávez of Venezuela is dead. What will happen now? What is his legacy for Venezuela?

To think about it, we must recognize that at its core, there was a fundamental contradiction about Chavismo, the project of Hugo Chavez. 

On the one hand, his project was a reaction by the mass of Venezuelan society against the elites that have held a stranglehold on the institutions and the economy of the country since independence — or in fact since even before independence. But on the other hand, his battle against the elites also enabled him to create his own dictatorship that was potentially even more damaging to Venezuela’s economy, and in the process, undermined the possibility of creating new and more inclusive institutions. 

The roots of the rise to power of Hugo Chávez after 1999 are easy to understand. First and foremost, they lie in a pre-existing oligarchic party system, the ‘punto fijo system’, named after the pact of 1958 between the two major parties, AD (Acción Democrática) and COPEI (Comité de Organización Política Electoral Independiente) to share and rotate power. Underpinning the power of the elites of the political parties, and being supported by them, was a group of economic elites known as the ‘twelve apostles’. These created a Venezuelan oligarchy, often referred to as a ‘partidocracia’. 

Second, these problems were exacerbated by a specific type of ‘political betrayal’ — an experience of new forces coming to power promising alternative platforms and then changing their mind and allying themselves with the traditional elites once in power. In Venezuela this process was manifested in the presidency of Carlos Andrés Perez who implemented free market reforms after being elected on a completely different platform. In 1992 he faced a military coup masterminded by Chávez and a group of military officers under the banner of the Movimiento Bolivariano Revolucionario 200. Though the coup failed, the officers were released from prison in 1994 by Perez’s successor Rafael Caldera. 

Chávez was first elected president in 1998 in large part as a reaction to a political system that was quite clearly captured and also appeared unable to reform itself. In desperation they were attracted to something radical. After his election, Chávez focused on the process of getting the constitution re-written. 

The changes he implemented included the dismantling of checks and balances, such as moving from a bi-cameral to a unicameral legislature, a movement away from the use of super-majorities so that, for example, future constitutional changes could be approved by a simple majority of the legislature. Also significant was the fact that the legislature could grant by a majority almost unlimited decree powers to the president, a feature which has seen heavy use. In 2000, President Chávez obtained the right to rule by decree for a year without having to get the approval of the legislature. In 2007, this power was renewed and extended to 18 months. It was renewed again in December 2010 for another 18 months. In 2004, the National Assembly passed a law expanding the size of the Supreme Court from 20 to 32 members and making it possible to ratify the appointment of new judges with a simple majority. 5 justices resigned in protest, allowing Chávez to nominate 17 new justices. 

How did Chávez defend such changes? As he himself put it, the problem was:

how to break with the past, how to overcome this type of democracy that only responds to the interests of the oligarchical sectors; how to get rid of the corruption. 

His arguments were persuasive because as the Venezuelan sociologist Fernando Coronil has argued ordinary people viewed elites as:

a corrupt cogollo (big wigs) that had privatized the state, looted the nation’s wealth and abused the people … The people have been betrayed by their leaders and democracy has become a façade behind which an elite had used the state for its own advantage.

This type of rhetoric and motivation is very common in the recent leftist regimes of Latin America. For example, upon assuming the presidency of Ecuador for the first time Rafael Correa noted:

Let’s not be naïve … We won the elections, but not power. Power is controlled by economic interests, the banks, the partidocracia, and the media connected to the banks.

The word ‘partidocracia’ is exactly the same one used in Venezuela. On February 28, 2007 Correa made a significant speech while proposing the holding of a referendum to have a constitutional assembly. He began the speech:

We said we were going to transform the fatherland in the citizen’s revolution, democratic, constitutional … but revolutionary, without getting entangled in the old structures, without falling into the hands of those with the traditional power, without accepting that the fatherland has particular owners. The fatherland is for everyone without lies with absolute transparency”.

So Chávez, like Correa in Ecuador and Evo Morales in Bolivia, gained support because his proposed political platform stroke a chord with the average voter. These politicians’ diagnosis of the problems on Venezuela, Ecuador and Bolivia is that the economic ills their countries face stem from the fact that society has been captured by an elite.

How to change this situation? They argued that measures needed to be taken to break the grip on power of elites. The approach of Chávez, and of Correa and Morales, is to strengthen the president and the removal of checks and balances which in the past have been tools for the elites to block reformist agendas, for example that of Carlos Andrés Perez. It is almost as if one needs “fire to fight fire”: institutions have been captured by elites, so we need to break down these institutions in order to build a different society.

Yet paradoxically this call for a different society has not led to different institutions being built in Venezuela because Chávez’s personal power and influence are so tied to the de-institutionalization and personalization of Venezuelan politics. Yet this in itself may only have been a transitional phase. The greatest problem with any revolution, such as the one Chávez led in 1998, is that it may just involve an old elite being replaced by a new one. Though people, rightly, complain that Chávez’s style of government made it difficult to institutionalize the post-partidocracia regime, in the short run this may have had some redeeming consequences. The most important was perhaps that the attack on the old elite did not create a new entrenched elite (think: the Arab spring in Egypt without the immediate triumph of the Muslim Brotherhood). 

If Venezuela is lucky, this will have created a more fluid political society where there may be a chance to create something very different and much more inclusive.

An interesting comparison here is to Argentina. The attack in the 1940s by Perón on the traditional elites created a political machine, and an associated band of political elites, which have dominated politics and run the country ever since, with far more disastrous economic consequences than the previous regime in Argentina. Chavismo, by its un-institutionalized nature, seems not to have created such a machine, which is possibly his greatest legacy and the only cause for hope for the future of Venezuelan democracy.


Response to Bill Gates  

Why Nations Fail received the harshest reviews from those who see geography and culture as the root causes of poverty, and enlightened leaders — or even more enlightened outside donors and organizations — as the keys to economic development. Perhaps unsurprisingly, given his dedication to international aid, billionaire foundation chief Bill Gates falls into this category: His Feb. 26 review of our book was particularly uncharitable. Unfortunately, however, it was also dead wrong on many counts.

Read the rest here.


The Road Ahead for Turkey  

Some may read our account of Turkish institutions and political economy so far as bleak. After all, haven’t we seen an authoritarian turn and the erosion of civil liberties

These worrying signs notwithstanding, a cautiously optimistic read is also possible. Perhaps Turkey is going through the pains of “institutional rebalancing”. 

To make this case, we need to revisit the origins of the ascendancy of the Justice and Development Party (Adalet ve Kalkınma Partisi or the AKP). This can be found in two conflicting trends. First, as we have noted, the Turkish state building project was not wholeheartedly embraced by a large segment of the Anatolian population — to say the least. Religion, which was perceived to be under attack as part of this project, became one of the means of resistance to it. The sidelining of the Ottoman religious-legal establishment and religious scholars, the ulema, increased the importance of the religious fraternities, the tariqah, which, though outlawed during the Republican period, came to play a central role in this resistance. 

Second, though the conflict between the Kemalist military and bureaucratic elite and the more religious, conservative Anatolian population has been important throughout the history of the Republic, the Turkish state has periodically inculcated and relied upon a Muslim-nationalist synthesis, centering Turkish nationalism on a Turkish-Muslim identity. This identity, based on Sunni Islam, was carefully distinguished from the Islam of non-Turks, the Islam of the minority Alevis, and non-Muslim identities. This became particularly pronounced after the September 12, 1980 military coup. 

The coup took place in the midst of a period of escalating violence between leftist and rightist groups. Though both sides were equally responsible for the carnage (and Turkey was indeed in danger of becoming ungovernable in the run-up to the coup), the military identified with the objectives of at least part of the rightist groups, with which it had not only anti-communism but also nationalism as common cause. The coup was thus, for all practical purposes, against the left. 

The military’s subsequent strategy to weaken the left relied first and foremost on coercion. But it also turned to religion as an attempt to prevent the blossoming of leftist ideas in schools. Religiosity became state sanctioned, and resources started flowing to religious groups and schools. This trend became stronger under Turgut Özal’s two governments starting in 1983. The resulting Muslim-nationalist synthesis has since shaped every aspect of Turkish society (for a sociological account see Jenny White’s Muslim Nationalism and the New Turks

But as we have argued in the past, non-democratic rulers turning to Islam to prop up their regimes often sow the seeds of a different form of challenge to their power — as Nasser, Anwar Sadat and Hosni Mubarak in Egypt, Zulfikar Ali Bhutto in Pakistan, Saddam Hussein in Iraq, the Assad family in Syria, and Houari Boumediene in Algeria discovered. In cultivating religion against the left, the Turkish military and bureaucratic elites also created a formidable foe. 

This started becoming clear in the mid-1990s, when the strongly Islamist Welfare Party, Refah Partisi, expanded its vote share and came to power in a coalition government in June 1996. But this was to be short-lived. On February 28, 1997, the Turkish military engineered another coup. This time it was a bloodless, “memorandum” coup; following the meeting of the National Security Council, the military issued a memorandum, including a strict ban against headscarves in universities, closing down of religious schools and clamping down on anti-military media, which the Prime Minister Erbakan was forced to sign. The coalition government duly collapsed. The rest was done by the Constitutional Court, which followed with proceedings to ban the Welfare Party.

But once the genie was out of the bottle, there was only so much that memoranda could do. Another religious party was soon formed. But a group of young politicians and activists, including Recep Tayyip Erdoğan and Abdullah Gül, argued that the uncompromising, almost militant religious tone of the Welfare Party and its successor were too rigid. They also criticized its anti-European policy, presenting membership of the EU as a major objective. They formed the AKP as a milder religious party — modeled perhaps in part on the conservative Christian Democrat parties in Europe.

The Kemalist military and bureaucratic elites would have none of it, however. They were suspicious of the AKP from its inception, partly because of its religious roots and partly because it represented the ‘Black Turks’ who they instinctively want to keep in a subservient position in society. The distrust reached crisis proportions in April 2007, when the military, alarmed by the prospect of Abdullah Gül and his head-scarfed wife moving into the presidential palace and the AKP increasing its control of the government, attempted another coup via memorandum, this time posting on its website. Many in the AKP are reported to have expected a harder clampdown to follow, some even packing their bags for an extended stay in jail, where the military routinely sent politicians it did not agree with.

But it did not come to pass. The military was already weaker, and perhaps its leadership more split on coming out of the barracks to defend a pure notion of secularism. Turkish civil society was also stronger and clearly supported the AKP as witnessed by the party’s vote share in the subsequent elections. 

In a manner reminiscent to the spirals of conflicts in international relations, the conflict between the military and the AKP spiraled from this point onward. As power gradually shifted to the AKP and away from the Kemalist elite and the EU accession process hit a wall, removing an external check on Turkish politics, groups within the Turkish police and judiciary loosely allied with the AKP started turning against the military and the Kemalist establishment (more details on this can be found in Dani Rodrik and Pınar Doğan’s blog

So doesn’t this all justify pessimism rather than cautious optimism? Aren’t we seeing the emergence of a new authoritarianism? Perhaps a lurch towards Islamism?

Though there isn’t much to condone in the recent developments, there are also several reasons why this may be an inevitable part of the process of institutional rebalancing in Turkey.

First, a reaction was inevitable to the domination of Turkish institutions throughout the 20th century by the Kemalist elite and the military. Though we would all like such reactions to be within the context of the rule of law, the reality is often messier and uglier. The hope is that, in the same way that French democracy came out of the ashes of the lawlessness and carnage of the Terror of the French Revolution, Turkish democracy will emerge from the pains of institutional rebalancing away from military rule. The difficulty, however, lies in the fact that such processes are both slow and uncertain. It took almost 80 years for French democracy to find its footing. That’s an awfully long time for us to wait for inclusive political institutions in Turkey. What’s more all that waiting may be in vain if things go wrong — if instead of “broadening the base” this institutional rebalancing brings to power a new coalition at the expense of the rest of society. In fact, truly broadening the political base in Turkey would necessitate sharing power with the millions of Kurds and Alevis, who are still discriminated against — a prospect cherished neither by the AKP nor the Kemalist elite. 

Second, the Turkish society is politically more active today than in the 1980s, when military repression severely depoliticized it. It is true that press freedom has taken several steps back and many are afraid of speaking their minds. And yet a politically active society that has become more consistently organized in political parties and civil society organizations will, sooner or later, demand greater voice and participation in the political process too. 

Third, the AKP is far from monolithic. Power struggles within the party can be the beginning of greater institutionalization of power. Perhaps we are already witnessing some of this in the recent struggles between the founders of the party, more closely associated with the Naqshbandi tarqiah, and those from the Nurcu movement associated with the influential and controversial preacher Fethullah Gülen, which has been active in the police and state bureaucracy (for more on this power struggle, see Gareth Jenkins’s article). 

Fourth, as our last post illustrated, the Turkish economy is doing reasonably well, and one optimistic read — but not the only one as we noted there — is that this is because Turkish economic institutions are becoming more inclusive, and this can start a virtuous circle of the sort we have discussed in Why Nations Fail. 

Fifth, AKP rule has been associated with the empowerment of the less powerful — almost the disenfranchised — segments of Turkish society. Another emphasis in Why Nations Fail is on how this type of empowerment can be transformative for political institutions. Here, research by Erik Meyersson is particularly interesting. He shows, using regression discontinuity applied to the 1994 municipal elections, that the election of a mayor from the Islamist Welfare Party is associated with a significant increase in female education (presumably because conservative families found it more acceptable to allow their daughters to go to school dominated by mayors from this party). But this increase in education also appears to have had beneficial long-run impacts, particularly on the likelihood of adolescent marriage and future political participation. So the Islamist parties in Turkey may — and again it should be emphasized that this is just a “may” — be part of a broader social transformation benefiting those previously excluded from economic and social advancement. 

Sixth, we are also hopeful that spirals of distrust and conflict often have the seeds of their own dissolution (as argued, for example, here), so Black Turks and White Turks can one day share power within a more inclusive political institutional setting. 

All of this justifies neither complacency nor downplaying of the political risks confronting Turkey at the moment. But a modicum of hope can also be found if you are inclined to look for it.


The Political Economy of Turkey  

In previous posts (here, here, here and here), we have discussed the history of political conflict and institutions in Turkey. The natural question for a political economist is how all of this impacts the Turkish economy. This is particularly relevant for understanding how the Turkish economy has had a fairly good run in terms of its macroeconomic performance over the last decade — essentially since the Turkish financial and economic crisis in 2001, and perhaps not coincidentally more or less since the AKP (the Justice and Development Party or Adalet ve Kalkınma Partisi), came to power in November 2002..

This chart, courtesy of Turkish Data Monitor, shows the evolution of Turkish GDP over the last two decades. (The chart shows GDP in US dollars using the market exchange rate; in PPP, the increase in the Turkish GDP since 2002 is less pronounced but still in stark contrast to the performance of the Turkish economy in the 1990s).

So what explains the turnaround?

Though standard macroeconomic factors, such as the interest rate policy, government spending, confidence, and export performance, are undoubtedly important, we suspect economic institutions and the shadow of politics have been equally defining for the Turkish economy since the beginning of the 21st century.

As we have argued here, Atatürk and his party, the CHP (the Republican People’s Party or Cumhuriyet Halk Partisi) engineered a state building project, modernizing the economy and strengthening the control of the state over the economy and society. But this did not involve building inclusive political or economic institutions. Though, as part of this effort common with many other examples of state building and extractive growth, the CHP did encourage industrialization and improved certain aspects of the Turkish economic institutions, the state played a major role in the economy and was certainly more than an equal partner with private business. For business, connections with the CHP, which could grant extensive subsidies and protection, were often as important as entrepreneurial innovation. As seems common with other episodes of ‘state capitalism’ (as we have argued elsewhere), the motivation for state control was not just ideological but was dictated in part by the desire of the CHP elites to keep control over the economy and society. 

A major turning point was the 1950 election of the DP (the Democratic Party or Demokrat Parti) which not only started the political ascendancy of the ‘Black Turks’, but also loosened state control and encouraged and supported the Anatolian entrepreneurs. The result was a major economic boom during the first term of the DP. 

But it would be wrong to see the DP as the harbinger of economic inclusivity. Though it did level the playing field in business, several other factors meant that the extent of this was rather limited. First, the DP had no intention of challenging the monopoly of a few established companies. Second, the DP found it politically expedient to turn connections with the conservative Anatolian businesses and landowners into a clientelistic patronage network, which was then perfected by its follower, the AP (the Justice Party or Adalet Partisi). Third, seeing itself as embattled and harassed by the CHP, military and bureaucratic elites, it had no intention of creating independent state institutions, preferring instead, to the extent possible, to take control of them. Fourth, once electorally challenged, the DP did not hesitate to pursue unsustainable macroeconomic policies, with significant costs on the Turkish economy. 

The DP episode highlights a host of parallels with the later attempts to loosen state control over the economy and society, pursued, albeit often half-heartedly, by the AP in the 1960s and the 70s; the ANAP (the Motherland Party or Anavatan Partisi, in the 1980s); and by the AKP in the 2000s. First, it was these parties, with roots in conservative circles in Anatolia, that often spoke for the ‘Black Turks’. Second, it was these parties that brought some more economic inclusivity — even if this was often just for business. But third, this was always limited and came woefully short, often getting mired in clientelism and sometimes just creating another group of highly connected businessmen making money thanks to state support. 

An epochal change for the Turkish economy came under Turgut Özal’s first ANAP government, which liberalized the economy more than its predecessors, lifted a whole range of restrictions on business creation, made the Turkish lira convertible, and encouraged export growth. Between 1983 and 1987, Turkish economic growth picked up rapidly, fueled in part by exports. But this rising tide did not lift all or even most boats and did not translate into a broad-based improvement in standards of living. This period also witnessed rapidly increasing inequality; there were no actions to break the hold of domestic monopolies, and connections continued to be the main currency in the economy. In fact, during Özal’s reign there was an explosion in corruption.

One hypothesis — which of course needs to be investigated more systematically — is that the beginning of the AKP government saw an opening of economic opportunities to ‘Anatolian tigers,’ Anatolian entrepreneurs and would-be entrepreneurs, unparalleled at least since the DP’s first term. This is best exemplified by the rise of several business organizations representing small and medium-sized entrepreneurs, often with conservative, Anatolian (and strongly Muslim) backgrounds, such as MÜSİAD, the Independent Industrialists’ and Business Persons’ Association and TUSKON, the Turkish Industrialists’ and Business Persons’ Confederation. MÜSİAD, for example, in name, in rhetoric and in reality opposed TÜSİAD, the powerful big business association that had played an important role in the Turkish economy and politics for several decades. MÜSİAD, founded in 1990, expanded and became a political and economic force to be reckoned with under AKP. It is natural to expect that this leveling of the business playing field, which broadened both the geographical and social basis of entrepreneurship, contributed to the robust economic performance over the last decade, though again, to the best of our knowledge, there is no systematic evidence on this. (The main competing hypothesis, which needs to be investigated, is that the rise of MÜSİAD and TUSKON was at the expense of other businesses, for example, just shifting government contracts from one to another group of businesses, thus a much more of a ‘zero-sum’ affair). 

Other factors probably also contributed to economic growth in the 2000s. Particularly important was the continuation of the major macroeconomic reforms that had started under the previous coalition government (in particular led by the then finance minister Kemal Derviş), mostly in response to the deep financial and economic crisis in 2001. These reforms brought public finances, the government budget deficit and the chronic almost triple digit inflation under control, and the AKP stuck with them. More broadly, AKP administration pursued sound, orthodox policies. In fact, in some areas, it appeared fairly surefooted, for example shielding Turkish businesses from the full impact of the global recession by sharply reducing (or pushing the Turkish Central Bank to reduce) interest rates and expanding domestic demand. The stable macroeconomic environment, together with the expansion of credit to consumers, fueled consumption growth, particularly by the growing Turkish middle class.

The greater stability of the majority government under AKP, as compared with a series of weak and ineffective coalition governments before 2002, might have also contributed to consumer and business confidence. 

But one should not exaggerate the prospects of the Turkish economy. It has experienced sizable current account deficits over the last several years and there are also other signs that it will not be able to sustain the growth rates of the 2000s, and growth already slowed down considerably in 2012. 

In fact, there is no evidence that Turkey has broken out of what some like to call “the middle income trap,” and does not seem poised to achieve East Asian-type growth rates that would be necessary to close the gap with European Union economies. 

We believe this is just a reflection of the fact that Turkish economic and political institutions are still far from being fully inclusive. Even though the AKP has gone some way towards leveling the playing field, particularly making economic opportunities more widely available to Anatolian small and medium-sized businesses, the problems in politics we identified in our first post in this series are looming large. Associated with this, businesses are still greatly beholden to the state. Even if the state is now controlled by the AKP rather than the usual ‘White Turkish’ elite, the implications are similar: the government or the state can still pick winners or in the last moment cancel contracts (as was witnessed just last week). It can even bring huge tax bills against businesses it does not get along with (e.g., against the Doğan newspaper group). 

Major structural problems also continue to dog the Turkish economy. According to the World Bank Doing Business report, Turkey is still pretty bad place to do business or to have to go to court. The judiciary is highly inefficient, arbitrary and even worse, biased. These challenges to economic growth are still waiting for reform — as they have been for a long while.

Turkey still has a long way to travel to inclusive institutions. This necessarily undercuts its growth potential.