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Abstract
Recent debates on financialization in emerging market economies highlight the terms of unequal exchange that they are embedded in, where international capital flows steered by powerful financial actors and transnationalized banks have a major impact on economic growth performance. As a result, many of the small open economies in the Global South have become increasingly sensitive to international market volatilities, as the post-2008 Global Financial Crisis (GFC) episode has shown. Yet, we know much less about the political implications of these interactions. How do unequal financial relations influence political trajectories in emerging market economies? Using process tracing and based on original evidence from Turkey, we find that when GDP growth is dependent on financial inflows under a credit-led growth model, the constraints on the domestic policy space following an economic crisis allowed the ruling party to instrumentalize monetary and regulatory institutions as financial agents of political repression.
Acknowledgements
The authors would like to thank three anonymous reviewers for their very helpful feedback on our work. We would also like to thank Ümit Akçay, Lucio Baccaro, Puneet Bhasin, Emmanuelle Mathieu, Georg Rilinger, Jonas Schmid, Erol Ülker, Matthias vom Hau, F. Borge Wietzke and Galip Yalman for their very helpful comments on our paper. Earlier versions of this study were presented at Society for the Advancement of Socio-Economics Annual Meeting 2021, International Public Policy Association Annual Meeting 2021, Critical Finance Studies Conference 2021 and the Max Planck Institute for the Study of Societies Research Seminar Series, May 2021. Finally, we are grateful to all the interviewees for their willingness to participate in our study.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 Financialization broadly refers to “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operations of the domestic and international economies” (Epstein, Citation2005, p.3).
2 We build on Bermeo (Citation2016) and Waldner & Lust (Citation2018, p.95) to define democratic backsliding as a case where legislative and judicial power is gradually concentrated in the hands of the executive through a series of incremental actions including measures that make elections less competitive, imposition of restrictions on political participation, and erosion of accountability that include answerability and punishment.
3 Orhangazi and Yeldan (Citation2021) show that post-2001 period in Turkey is best described as “speculation-led growth model that relied excessively on hot-money inflows and external debt accumulation.” This is consistent with Stockhammer’s conceptual definition of credit-led growth where “…credit-financed consumption growth and residential investment have become the key source of demand growth” (Stockhammer, Citation2011, p.87). Building on these, we identify Turkish economic growth model as credit-led under the AKP.
4 Following Kentikelenis et al. (Citation2016, p.547) we define policy space as “a government’s ability to select the policy instruments via which they address their economic problems, free from coercive conditionalities.”
5 AKP has arrived on the political scene following a major banking and currency crisis in 2001 and has been in power since 2002.
6 Figure 1 in the Supplementary Appendix A shows a positive correlation between capital inflows and GDP growth rate in Turkey.
7 This had three major implications: on the monetary policy front, the Central Bank of the Republic of Turkey (CBRT) accumulated foreign reserves (during the early stages) and resorted to unconventional instruments beyond the weekly repo rate. On the production front, credit-led growth policies pushed most local firms to borrow in international reserve currencies, contributing to rising private debt-to-GDP ratio while exposing many to exchange rate risk (Akçay, Citation2021, p.7). At the household level, financial deepening reforms enabled many low-and-middle income earners to finance their housing and consumption by taking on greater debt.
8 For a discussion on comparative growth models and the implications of credit-led growth in EMEs see Schedelik et al. (Citation2021).
9 > AKP brought together business groups with otherwise different ideological preferences during the first five years of its rule. This was a broad coalition of businessmen including large exporters (such as TUSIAD) as well as SMEs and other small business owners (organized under MUSIAD and Gulen Movement’s TUSKON) that catered to the domestic market (Öniş, Citation2006, pp.113-121).
10 Where net reserves are low, these economies need a constant inflow of USD for imports and exports. In emerging markets, this has also led to an increase in the dollarization rate in savings and loans (Dalgıç, Citation2017).
11 For recent examples that problematize the politics of rising private debt, see Rethel (Citation2010), Karaçimen (Citation2014), Kaltenbrunner and Painceira (Citation2018).
12 Most of these economies are exporters of raw materials, low value-added products and semi-finished goods (Bonizzi et al., Citation2019, pp.6-7). Additionally, the manufacturing industry in EMEs often depends on imported goods as input. Since both transactions are conducted in foreign currency, the central banks in EMEs typically seek to accumulate foreign reserves.
13 Redistribution refers to the greater provision of public goods (e.g., by increasing taxation) and the provision of private goods to the members of the winning coalition that support the ruler. Repression refers to measures that pertain to the use of physical force (e.g., through domestic security spending) and/or weaponizing resources (e.g., by strict regulations, constrained access to procurement, financial sanctions) with the purpose of constraining or eliminating critical voices.
14 Capital structure arises out of decisions taken to finance projects before making investment decisions (Asai, Citation2021). These include firms’ financial resources in the form of equity and debt through internal sources, bank-lending and/or access to international markets. Debt structure refers to the type and maturity of a firm’s liabilities on its balance sheet.
15 For example, domestic business may be divided between export-oriented producers and import-dependent industries: the former may favor devaluation of local currency to compete in international markets (Broz et al., Citation2008; Steinberg & Shih, Citation2012; Walter, Citation2008), the latter may prefer an overvalued currency to contain fixed-costs and the exchange rate risk.
16 See the Supplementary Appendix A for a detailed description and evaluation of these hypotheses based on the critical tests used in process tracing.
17 “Kar bahane, amac tuketim.” 2.6.2003, Milliyet.
18 Following the 2001 banking crisis, the coalition government in Turkey turned to the IMF for assistance. One conditionality included structural reforms and a commitment to a new institutional framework that separated monetary and fiscal policy. When the AKP won the elections in 2002, monetary policy was under the control independent CBRT, and majority of the regulatory institutions acquired de jure autonomy (Bakır & Öniş, Citation2010).
19 Interview, B11.
20 Interview, B14.
21 See https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2008&locations=TR&start=2000 and https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2008&locations=TR&start=2000
22 Interview B2.
23 See https://www.imf.org/external/datamapper/HH_LS@GDD/TUR, accessed on November 22nd, 2020.
24 During this period, Turkey’s current account balance remained mostly negative thanks to fast-rising imports. See https://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS?locations=TR, accessed on November 15th 2020.
25 See https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=TR, accessed on November 15th, 2020.
26 As we further detail in testing H1a (see the Supplementary Appendix A), in the absence of a major economic crisis, and despite threats to its political survival, AKP did not take immediate action for controlling monetary institutions prior to the 2008 GFC. There is systematic evidence showing that the cost of distribution remained lower than cost of repression thanks to access to cheap credit in international markets. Meanwhile, the cost of repression remained high also due to the IMF agreement, which the party agreed to implement.
27 Specifically, the Fed has been more concerned about economic cycle and growth while buying mostly low risk assets while the ECB prioritized credit easing with a looser transmission mechanism (Gros et al., Citation2012, pp.13-15).
28 For example, TUSIAD, a business association which brings together large and export-oriented conglomerates, began to publicly criticize the government. See https://www.al-monitor.com/originals/2014/01/erdogan-tusiad-treason-turkey-business-tax-politics.html. Indeed, TUSIAD members are internationally networked with finance capital and access to international markets can shield them from exchange rate instability and rising interest rates (Doruk, Citation2021).
29 Following the Fed’s quantitative easing program and the subsequent monetary expansion with lower interest rates, the inflow of portfolio investments to Turkey also increased between 2008 and 2012. The net inflows were rather volatile, but largely remained positive during this period. See https://data.worldbank.org/indicator/BX.PEF.TOTL.CD.WD?end=2012&locations=TR&start=1974
30 While the CBRT management wanted to increase the weekly repo rate in response, they were under growing political pressure to maintain their rates (Interview, B17). According to a senior CBRT official, it was politically risky to impose strict limitation on the banks to dispense credit to businesses, and therefore they were reluctant to prevent borrowing in foreign currency (Interview, B17).
32 Non-financial firms rely on predominantly short-term debt finance (Köksal & Orman, Citation2015). During this period, TUSIAD members with stronger connections to international financial markets did not support Erdogan’s call for lower interest rates and publicly supported CBRT’s interest rate hikes in 2014. On the other hand, MUSIAD, a business association that represented small and medium sized businesses, demanded lower interest rates because it does not own the large banks, but TUSIAD did not share this concern because it principally represents holding companies that owned banks (Bozkurt, Citation2021, p.27; Yağcı, Citation2018). Also see https://www.sondakika.com/ekonomi/haber-tusiad-merkez-bankasi-faiz-karari-ile-onemli-bir-5607897/?yodk
33 Interview, B11.
35 Interview, B20.
36 Interview, B20, Interview, B23.
37 For example, the Association of Exporters in Turkey has publicly complained about the exchange rate policy and overvalued currency in 2010. See https://www.dunya.com/gundem/quotithalattaki-artisin-nedeni-yanlis-kur-politikasiquot-haberi-124413 and https://www.cumhuriyet.com.tr/haber/ihracatcilar-kurdan-rahatsiz-167758.
38 See for example: https://www.haberler.com/kompen-genel-muduru-kucuksehir-insaat-sektorunu-3566571-haberi/
39 For more information on trends see Supplementary Appendix A.
40 Interview, B14.
41 According to a senior CBRT official, Erdem Başçı and Ali Babacan worked in harmony, and shared a similar point of view as opposed to Erdogan. Interview, B17. Babacan was especially popular among international financial investors and his position was supported by TUSIAD. He later resigned from the government in 2015 citing irreconcilable differences. See https://www.ft.com/content/14806d84-a179-11e9-974c-ad1c6ab5efd1 and https://www.haberler.com/tusiad-abd-deki-15-yilini-babacan-in-da-katildigi-5170607-haberi/
42 Interview, B17, Interview, B13.
43 Interview, B11.
44 Interview, B26.
45 Interview, B17, Interview, B1
46 Banks’ optional reserves deposited in foreign currency are not part of the CBRT’s net reserves: in theory, they need to be paid back when the depositing banks demand them. Interview, B13.
47 Çağlayan who was a businessman and served as the Deputy Chairman of pro-AKP peak trade association, The Union of Chambers and Commodity Exchanges (TOBB) before assuming political offices in AKP governments, has been an ardent supporter of the construction sector, praising them for driving economic growth on numerous occasions. For an example in 2021 see https://www.sondakika.com/haber/haber-bakan-caglayan-insaat-turkiye-nin-en-babayigit-3373508/
48 See https://www.milliyet.com.tr/ekonomi/dovizdeki-artis-k-r-marjlarini-dusuruyor-1754252, accessed on November 30, 2020.
50 Interview, B16. Also see Supplementary Appendix A for the decline in portfolio inflows.
51 During this period, Erdogan once again amplified his calls for lower rates. However, while the CBRT largely sought to comply with Erdogan’s call, the private banks began to increase their rates. The result was a gradual divergence between weekly repo rates and market figures. Interview, B11. According to a senior CBRT official, the government’s repeated insistence on controlling interest rates reflected poorly on the CBRT’s credibility and thereby rendering the monetary transmission mechanism ineffective. Interview, B17.
52 Led by an Islamic cleric, this movement included a vast network of local businessmen organized under the association (TUSKON) which had the highest number of members across the country. (Buğra & Savaşkan, Citation2014).
56 Interview, B5.
57 Interview, B6, Interview, B5.
58 During this year, the peace talks to resolve the Kurdish conflict had collapsed and AKP set-up an electoral alliance with the ultra-nationalist MHP to compensate for vote losses following the end of their partnership with Gulen movement. This was a critical election where AKP lost a significant share of support in June elections (around 9%) and Erdogan called for another round of elections in November 2015.
60 Interview, B13.
61 Interview, B16, Interview, B12, Interview, B24, Interview, B5, Interview, B7, Interview, B2.
62 Interview, B24.
63 Moreover, the government “seized hundreds of companies linked to Gülen, and then transferred their assets to the Savings Deposit Insurance Fund (Tasarruf Mevduatı Sigorta Fonu) with a court decision” (Bozkurt, Citation2021, 24).
64 In Supplementary Appendix A, we further test Hypotheses 1b and 1c, and reveal how political survival concerns together with rising cost of redistribution lead to executive aggrandizement with authoritarian control over monetary institutions. While these factors are individually identified as fulfilling a necessary but not sufficient condition, they are together sufficient to explain the variation on the dependent variable.
65 Interview, B24.
66 For an example, see https://www.tccb.gov.tr/haberler/410/73534/yeni-sistem-turkiyenin-hedeflerine-yuruyusunu-hizlandiracak.
67 The increase in unpaid bank loans, difficulties to access bank-based finance for SMEs and loss of votes in critical provinces (e.g., Konya, Kayseri, and Malatya) prompted Erdogan to further insist on lower interest rates during this period (Bozkurt, Citation2021, p.29).
68 Interview, B17.
69 Interview, B16.
70 Erdogan defended his position repeating that “lower interest rates lead to lower inflation which stimulate growth.” See https://www.sozcu.com.tr/2019/ekonomi/cumhurbaskani-ilk-kez-bu-kadar-acik-konustu-merkez-bankasi-baskani-laf-dinlemiyordu-5432100/.
72 Interview, B7. Also see https://www.bloomberg.com/news/articles/2020-05-11/erdogan-says-turkey-won-t-be-beaten-by-foreign-plots-on-economy.
73 Interview B16, Interview, B10.
74 Interview, B10.
77 Interview, B7, Interview, B16.
78 Interview, B7, Interview, B10.
79 Interview, B2. Interview, B16.
80 Interview, B22.
81 A similar attack on private banks by Erdogan and Albayrak continued during the early days of the Covid-19 crisis to push them to expand lending, see https://www.bloomberg.com/news/articles/2020-02-06/turkey-to-stiffen-penalties-for-manipulation-in-banking-overhaul.
82 See Turkey Bans Lenders from Trading Liras with Citi, UBS, BNP. Bloomberg, May 7, 2020. https://www.bloomberg.com/news/articles/2020-05-07/turkey-bans-lenders-from-trading-liras-with-citi-ubs-and-bnp; Why Erdogan Aims to Seize Stake in No.2 Turkish Bank: Quick Take. Bloomberg, February 17 2020. https://www.bloomberg.com/news/articles/2020-02-17/why-erdogan-aims-to-seize-stake-in-no-2-turkish-bank-quicktake; Özel Bankalar Üzerinden Vergi Tahsilatı Bitiyor, Bloomberg HT, November 27, 2019. https://www.bloomberght.com/ozel-bankalar-uzerinden-vergi-tahsilati-bitiyor-2238914
83 Interview, B5.
84 Interview, B8, Interview, B4 and also see https://www.bloomberght.com/yorum/ceren-dilekci/2204170-spknin-yatirim-fonlari-karari-ne-anlama-geliyor
85 Interview, B2. Also see https://www.platinonline.com/ekonomi/kamu-mevduatlarina-faiz-siniri-961551
86 Interview, B24. Interview, B26.
87 See Appendix B for a brief comparison with Hungary.
88 After the 2018 currency crisis, temporary support for Erdogan’s New Economic Program by a seemingly unified business front did not last long as large conglomerates organized under TUSIAD publicly criticized government’s monetary policy stance on numerous occasions (Bozkurt, Citation2021, p.30).
89 See https://www.haberler.com/dovizdeki-spekulasyonlarla-ilgili-paylasim-yapan-11140939-haberi/. Later, the court “has accepted an indictment requesting a jail sentence for two Bloomberg reporters and 36 other people after a complaint about the reporters filed by the country’s banking watchdog.” See https://www.reuters.com/article/us-turkey-economy-court-idUSKCN1TF1CG.
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Fulya Apaydin
Fulya Apaydin is an Assistant Professor at Institut Barcelona d’Estudis Internacionals. She is the author of Technology, Institutions and Labor: Manufacturing Automobiles in Argentina and Turkey (Palgrave, 2018). Her earlier work has appeared in World Development, Regulation and Governance, and Socio-Economic Review, among others.
Mehmet Kerem Çoban
Mehmet Kerem Çoban is an Assistant Professor in the Department of Political Science and Public Administration, Kadir Has University in Istanbul. He is also an Associate Member at LAGAPE, University of Lausanne. His solo- and co-authored work have appeared in Public Administration, Policy Sciences, Business and Politics among others.