Politics is equally often subject to over-simplification, as it is to over-complication. Given the complexity of our world and its challenges, it is not surprising. In the case of the Turkish economy, which is experiencing a major structural crisis, people lost their faith in the government to produce meaningful policy outcomes. Both citizens and politicians are overwhelmed by the problems that are amassing in the country’s economy and the spill-over effects that come with low economic performance. As one of the first problems that comes to mind when talking about Turkey’s current economic situation, is its continuously under-performing currency, the Turkish Lira (₺). Since 2008, the currency showed remarkable consistency in gradually losing value without any indication of recovery, whatsoever. Further, since 2017, the domestic inflation rate (according to World Bank data) constantly exceeded the 10% mark, but also never fell under 6%/year before that – in comparison, the European Central Bank, the world’s most advanced financial institution, designates a yearly inflation of approximately 2% as an indicator for a healthy economy. The adjusted net national income, however, just grew by 1-6% a year in that same period, which means that Turkey’s purchasing power significantly drops every year. In line with this trend, Turkey displays a constant trade deficit in goods, which adds to the inflationary spiral together with the worsening exchange rate. Although this deficit is made up for with a correlating excess of service exports, the ordinary citizen is rather affected with prices in the goods market. Finally, the Turkish economy shows an above-average of income inequality with a Gini-Coefficient of approximately .40 – just behind countries like Bulgaria and Mali and only slightly better than Djibouti and Senegal (based on current estimated of the CIA).
However, while there is a lot that does not go well in Turkey, I might just have found a way to overcome it. Certainly, it is not an exclusive way, but a workable plan nonetheless.
Step 1 – Shift The Attention To The Capital Market: With its treasury drained, the Turkish government excessively burdens the tax payers to make up for bad economic performance, an expensive bureaucracy and the tax exemptions that corporations get in an attempt to lure them to the domestic economy. Accordingly, taxing the corporations, the government fears, will create an even bigger whole in the economy, because corporations might just leave. However, in Turkey’s situation where there is little domestic production and exports, there is an inherent need for foreign direct investment (FDI), in order to finance economic development. Here, the capital market is a good place to look for foreign money. While Germany’s biggest 30 companies (listed on the DAX30 index) are valued less than tech giant Apple, Turkey’s biggest 100 companies (listed on the BIST100 index) are valued 13 times less than the DAX30 companies; in other words, there is a lot of upward potential.
Step 2 – Make Turkish Companies Attractive: There is a common misconception that investors solely look at the profitability of companies, when making investment decisions. However, there is a lot more to it. Factors like sustainability, long-term growth, structural positioning, trust, transparency, ethical governance and sector potential are only a few among many that investors include in their calculations before pumping billions into companies. Listed companies in Turkey are often owned to a large portion by families or a bunch of wealthy individuals, who usually hold over 50-60%, because they want to retain control over the company. Unfortunately, this makes companies not very attractive to global investors, because they also expect some sort of say; ultimately, they want to put tons of money into the company. In order to make Turkish stock exchange companies more attractive, the government needs to impose free float requirements of at least 40-50%, ideally above 70%. Further, they need to impose strict transparency rules that adhere to, or even exceed, the standard of the world’s leading companies. Turkey already has a great system for public company information disclosure in place, but the quantity and quality needs to be improved greatly.
Step 3 – The Turkish Tiger: One of the macroeconomic success stories of our time is the rise of the Asian Tiger states, South Korea, Taiwan, Hong Kong and Singapore. Their economic success was mainly based on striking the perfect balance between state intervention and free market capitalism – a system that might work for Turkey as well. While Turkey should definitely maintain its welfare state, the government needs to build a stronger legislative construct for the corporations. Especially on the capital market, the government needs to define stricter rules for profit spending, executive pay, quality standards, diversity standards and education funding, while reducing tax exemptions, introducing reinvestment requirements and, most importantly, fight nepotism (ideally, also leading by example in the government). Generally, these measures are already a reform package in their own right and will guarantee economic success from 5 years onwards, but they will also show genuine commitment to the principles of good economic governance, which will attract foreign capital.
Step 4 – Reinvest: The logic behind success is reinvestment. After increasing the capital market’s value throughout application of steps 1 to 3, the Turkish government needs to reinvest the money into fiscal reconstruction of its low-quality economy. Here, the government needs to identify key sectors of the future and fundamental sectors that will shoulder the material output of the futuristic sectors. In a series of projects, the government gives funding to promising entrepreneurs and help them enter the capital market directly, in order to allow future financing from outside and relieve the treasury. This will pave the way for future competitiveness in relevant sectors, rather than merely following the innovative economies.
Step 5 – Stick to Principles: Once success kicks in, we often tend to move back to our old habits. However, one should be aware that these measures are no bridging policies, but reforms that are here to stay. Turkey has a 1000+ year tradition of following innovation (at best) and not leading the field. In an attempt to overcome this, these reforms lay the foundation for future economic success and entrepreneurship; in other words, the success needs to be institutionalised. However, there are reasons why the economy is so bad right now and we need to get rid of the aspects that led us there. Nepotism, laziness and unfair competition created a landscape of economic actors that solely work for their expensive lifestyles and care little about innovation and progress. The above-mentioned measures might pave the way for new ways of thinking, but one cannot do the thinking part on the behalf of others. Of course, the owners of the big corporations will not be happy about increased free floats, but reforms are never comfortable. It is better to make a few rich people unhappy for a while than a whole country. Eventually, the owners will win regardless, since these reforms almost guarantee success and will help their companies become competitive on the global market.