Turbulence ahead for the business climate in Turkey

Turbulence ahead for the business climate in Turkey

The appointment of Prime Minister Binali Yildrim comes against the backdrop of elevated government meddling in domestic economic affairs. The AKP ongoing interference in the private business sphere of Turkey follows a heightened drive to reform the political system and move toward a presidential republic.

Turkey and its economy have weathered President Recep Tayyip Erdogan’s abrupt ouster of Prime Minister Ahmet Davutoglu earlier this month. Investors let out a sigh of relief upon seeing that Deputy Prime Minister Mehmet Simsek, a proven technocrat, will continue to head the treasury and central bank in the new cabinet.

As a result, the Turkish lira has recovered from its earlier fall. Ankara’s mid- to long-term economic challenges, however, are structural, and cannot be remedied through window dressing. The government’s erosion of the rule of law and property rights continues to damage the country’s business climate and undermines investor confidence.

A government-led campaign against business conglomerates

In March, a Turkish prosecutor charged Aydin Dogan, the eponymous founder of Turkey’s leading media conglomerate, and Ersin Ozince, the chairperson of Turkey’s largest listed lender Isbank, with overseeing a fuel-smuggling network.

The accusations were based on shaky foundations and added to the widespread perception that the government was widening its crackdown on independent businesses (the indictment seeks 24 years in jail for each businessman). By the next day, shares of Dogan Holding and Isbank fell more than 3 percent each, bringing Turkey’s BIST-100 stock index down 1.7 percent.

This latest case is not the first attempt to pressure the two corporations. In January, Erdogan’s eccentric economic advisor Yigit Bulut (best known for claiming Turkey’s enemies are trying to assassinate the president through telekinesis) sent shockwaves through the economy by calling for the government to seize Isbank.

In an attempt to prevent a run on banks, Deputy Prime Minister Simsek rushed to declare that the bank is one of the most prominent lenders in Turkey, and insisted there be no plans to nationalize it. In a similar campaign against Dogan Holding, the company’s media outlets deemed critical of the government were levied a $2.5-billion tax fine in 2009, months after an earlier penalty of $500 million.

Dogan Holding and Isbank are associated with the secular establishment that Erdogan’s Islamist-rooted Justice and Development Party (AKP) has rolled back during its 13-year rule. However, the two companies’ fates are not much different from those of other media and financial institutions tied to religious circles that have also run afoul of the Erdogan government.

The Erdogan-Gulen feud: a source of government meddling

The Islamic lender Bank Asya, associated with the U.S.-based cleric Fethullah Gülen’s religious network, profited from the Erdogan-Gülen alliance between 2002 and 2013. It did however later become the target of a crackdown once the two former allies fell out.

After months of harassment, the government seized the bank in May 2015 by order of the Banking Regulation and Supervision Agency. In similar fashion, since October 2015 courts have appointed trustees to two media networks, Koza Ipek and Zaman, affiliated with Gülen, turning them overnight into government mouthpieces.

In light of the government’s disregard for private property rights and seizure of critical media outlets, Selin Sayek-Boke, the economic boss of the main opposition Republican People’s Party (CHP) has argued that the country’s lack of the rule of law is bringing the economy to a “slow death.”

The opposition’s worries are echoed by Turkey’s former economy czar, the now-sidelined Ali Babacan, who in his 2016 budget talk warned that the rule of law is fundamental to strengthening the Turkish economy. Former speaker of the parliament Bülent Arinc, one of the leading AKP figures now also marginalized by Erdogan, reiterated Babacan’s call for the rule of law in his recent blunt criticism of the government’s violation of due process.

Moving toward a presidential republic

It is ironic that the AKP’s swift rise to power in 2002, only 15 months after the party’s founding, was in part owing to its promise to remedy a similar disregard for the rule of law, due process, and property rights in the aftermath of the military intervention of 1997.

In what is now known as the “post-modern coup,” the military brought to end the one-year tenure of Turkey’s first Islamist prime minister, Necmettin Erbakan. In an eerie parallel to the AKP’s ongoing crackdown, businesses belonging to pious circles including the Gülen network (as well as media outlets owned by secular conglomerates like Dogan) became victims of the new regime.

Now Turkey seems to have come full circle. During his first week in office, the new Prime Minister Binali Yildirim stressed that he would prioritize pushing for a centralized presidential system as demanded by Erdogan, and has shown no signs that strengthening the rule of law or property rights is on his agenda.

What’s even more worrying is Yildirim’s recent curbing of the powers of Deputy Prime Minister Simsek by taking the Economic Coordination Board, and the regulatory agencies for commercial lenders and capital markets, from under his jurisdiction.

Turkey’s business climate and investor confidence will no doubt be further undermined as competent technocrats lose their portfolios to political hacks. Adding fuel to the fire, Erdogan’s eccentric economics advisor Bulut lashed out to pundits celebrating his exclusion from the Cabinet by vowing he would continue to be their “nightmare.”

If Erdogan’s attempts to consolidate power continue with the appointment of yes-men and the further erosion of the rule of law and property rights, it will be Turkey’s economy that ultimately pays the price.

Dr. Aykan Erdemir is a senior fellow at the Washington-based Foundation for Defense of Democracies, and a former member of the Turkish parliament (2011-2015). He holds a PhD in Anthropology and Middle East Studies from Harvard University, and has taught at Bilkent University and Middle East Technical University in Ankara, Turkey. Dr. Erdemir is a founding member of the International Panel of Parliamentarians for Freedom of Religion or Belief, and recipient of the 2016 Stefanus Prize for Religious Freedom. Follow him on Twitter @aykan_erdemir

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