Economic challenges and Erdogan's transformation

TURKISH leader Recep Tayyip Erdogan is highly admired by many Muslims around the world due to his Islamist background. He also has a laudable history of defending and speaking out for oppressed Muslims around the world.

For example, he was the only leader who dared to loudly criticize the military coup carried out by General Abdel Fattah Al Sisi in Egypt who wrested power from the democratically elected Islamist government led by the late President Morsi. When Al Sisi arrested and imprisoned members of the Muslim Brotherhood movement with trumped up charges, Erdogan provided protection to many of them who moved to Istanbul. Similarly, many members of the Palestinian Hamas movement who are pursued by the apartheid state of Israel have found refuge in Turkey.

Turkey has also provided protection to refugees from China and Syria. In addition, Turkey is also the only country that has dared to openly condemn UAE's decision to normalize relations with the apartheid state of Israel. As a result of those bold actions, many consider Erdogan to be in the same category as the great Salahuddin Al Ayyubi, the famous Islamic leader of the 12th century.

However, Erdogan has recently taken several actions that have disappointed many Islamists. They include increased political and trade cooperation with Israel and China. He has also warned Muslim Brotherhood members in Istanbul to reduce the volume of their criticisms of the Egyptian government.

The main reason for Erdogan’s changed stance is the economic problems facing him. Over the last decade, the value of the Turkish currency has fallen from 2 Lira for 1 US Dollar to 9 Lira currently. This is a very severe devaluation. In addition, Turkey is facing a very high external debt problem. Prior to 2000, Turkey’s external debt was less than USD100 billion. However, the amount has increased to about USD446 billion, an increase of more than four times. Turkey’s total government debt versus GDP has also increased from 27.4 per cent in 2000 to 39.5 per cent now.

The inflation situation in Turkey is also worrying. In 2005, the rate was 10 percent. But now, that figure has risen to 20 percent. This situation has had a very significant impact on low-income earners as the prices of goods and services have risen while their wages have not increased. It is therefore hard not to conclude that Erdogan has failed to manage the Turkish economy.

Erdogan’s misplaced policies are rooted in his experience when he started holding the reins of power to replace the previous regime. At that time the inflation situation in Turkey was so high, reaching 100 percent in the late 1990s. In an effort to control it, the previous regime raised interest rates, which is the standard prescription in most countries to reduce consumption and demand. The move understandably caused a lot of pain, especially among highly indebted parties, and was one of the factors that helped to topple the previous regime.

When Erdogan took power, interest rates were lowered by the Turkish central bank. This kept the cost of financing low and encouraged spending leading to economic expansion. For many this proves that Erdogan is a good leader. There were also those who thought this was a proof of blessings from God to Turkey for choosing an Islamist as a leader.

In reality this was a misunderstanding. In an economic system dominated by banks and where debt is a big industry, low interest rates will result in increased indebtedness in society. Not only is this against the teachings of Islam, it will eventually lead to a recurrence of inflation.

To make matters worse, in the hope that it will boost the Turkish economy, Erdogan changed some financial rules to make it easier for Turkish businesses to borrow funds from foreign banks. Unfortunately, the move exposed the companies to debt risk when the Turkish currency depreciated. This occurred in 2018 when the US Federal Reserve decided to raise interest rates to curtail inflationary pressures in the US economy.

The increase in US interest rate attracted funds from emerging economies including Turkey. This outflow caused the Turkish Lira to depreciate significantly, thereby increasing the value of overseas debts incurred by Turkish businesses. Their difficulties in paying their debts directly contributed to the start of the current Turkish economic crisis. Erdogan is now forced to rely on foreign investors to save the Turkish economy. He is desperate to encourage exports and this is why he needs to strengthen trade relations with countries that were once targets of his harsh criticisms.

One important lesson that can be learnt from Turkey’s case is the process of Islamisation should begin with a change in society's values and be followed by a change in the economic system to reduce dependency on debt. Unfortunately, political leaders are often more focused on achieving short-term political popularity and hence the effort to spur economic growth. In an economy that relies on debt, that growth is always accompanied by an increase in the level of debt which will create other problems. If the debts are from external sources, those problems will be compounded and may lead to social and political issues in the long term regardless of whether the country is led by Islamist leaders or not. Whether leaders from other Islamic countries will learn appropriate lessons from Turkey’s experience will be another matter.

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* Prof Dr Mohd Nazari Ismail is a lecturer at the Faculty of Business and Accounting, University of Malaya

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.