The Kapali Carsi

Change of guard at Turkish economy’s helm

On Monday, I submitted my post for the Economonitor special “The biggest risk for 2013 that no one but me is worried about”.  Then, yesterday, I had a detailed post on one of the risks I mentioned in Monday’s post, a possible row between President Abdullah Gul and Prime Minister Recep Tayyip Erdogan on who would become the next President.

Another important risk I mentioned there was Deputy Prime Minister and economy czar Ali Babacan leaving the government. According to the ruling Justice and Development Party’s (AKP’s) bylaws, anyone can remain an MP for a maximum of three terms, so Babacan cannot run for the 2015 general elections. But I was referring to the risk that he would leave before his time was up because: 1. He could run up as mayor for a major city in the 2014 local elections. 2. There are occasional rumors that he is fed up with politics.

I wrote a column for Hurriyet Daily News on this risk when I heard rumors of Babacan leaving early at the end of October. At the time, he denied that he would run for mayor of Ankara, or any other city for that matter, highlighting that he was planning to return to his family business. Babacan repeated the same points in an interview with the Turkish daily Aksam, which was reported as “a huge shock for the economy” (in Turkish). This is in fact the expected outcome unless the AKP changes its bylaws (such u-turns are very common in Turkish politics, BTW). I would instead call it a huge shock for the economy if he suddenly decided to leave next year.

In all countries, ministers come and go, and life goes on. So you may be wondering why the presence of Babacan in the government is so important. For one thing, many believe that he is the one persuading Erdogan from going along with crazy ideas such as high interest rates beget higher inflation. Moreover, he and Finance Minister Mehmet Simsek were in a public row with Economy Minister Zafer Caglayan on the direction of economic policy (more details in a blog post)- Caglayan was asking for full speed ahead, especially from the Central Bank, whereas Simsek and Babacan were advising caution (The Central Bank became independent as part of the post-2001 crisis reform package, BTW). Even if Caglayan, who is a typical populist politician, does not get promoted to Babacan’s post (should Babacan leave), he would virtually eat the less experienced Simsek alive.

If you are still not convinced, an FT Beyondbrics blog post from early-October summarizes why Babacan is important for the smooth running of the economy. Incidentally, that post seemed, leaving the title apart, about the government’s new economic program until the very end, when the author explained why Babacan was indispensable for the economy. At the time, I had wondered why the FT had decided to mention this fact. I guess they heard about the rumors a good two weeks before I did:)…

2 Responses to “Change of guard at Turkish economy’s helm”

cureshotDecember 14th, 2012 at 2:35 am

nice points for the upcoming concerns, and it seems you already accept CHP's defeat :) there will always be uncertainty when a new guy is being appointed.. One of the recent ones was the appointment of Erdem Basci and so far it seems that Mr Basci is doing as good as its predecessor, or even better.. 3 terms is enough I believe, a new guy who is hopefully good at understanding economics would bring dynamism.

BurakDecember 17th, 2012 at 5:15 am

Good article, and I guess unless one is genuinely up to date on Turkish politics, not just financial markets and monetary policy its hard to see the big deal about Caglayan taking over in the absence of Babacan.
Ofcourse it is a toss of the coin how hawkish of a stance Caglayan would actually have if he got the post, but that is a scenario where Id rather not want to know which side the coin ends up at. Contrary to many investors I had a sense of satisfaction regarding Turkeys recent GDP, as it shows putting on the breaks against the risk off over heating is working out although perhaps a little too well. I just worry that Caglayan would brush all this aside detrimental to the central banks independence in the process. I just cant help but see him as a man who would rather see himself as one of the stars of Turkeys 2025 plans (if achieved, BIG IF) rather than focus on the steady but healthy expansion of the economy in face of a slowing global economy and a lagging business reform system in Turkey itself,.