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December 21, 2013, Saturday

Economy hit by corruption allegations

The corruption scandal that hit the Turkish government last week has, unsurprisingly, led to an explosion of speculation on the political fallout from these spectacular allegations.

One of the most important questions raised is, of course, the effect on the upcoming elections next year. Has the Justice and Development Party (AK Party) indeed lost one of its most valuable assets -- the image of being an honest fighter of illegal practices -- or will the ruling party manage to limit the damage by using the classic diversion tactic in Turkish politics: blaming outside powers and producing conspiracy theories? It is remarkable to see that for the second time in a row, as with the Gezi Park protests, the government, instead of trying to understand the background of societal tensions or seriously investigate detailed and grave accusations, is trying to present Turkey as the poor victim of dark forces that want to block the country's progress. That might convince many AK Party voters and save the party from electoral defeat, but it has fatally undermined the government's credibility abroad. The repercussions of that loss of trust, especially on the Turkish economy and particularly in the short term, could be devastating.   

The same day the corruption bomb exploded, the new edition of the influential Foreign Affairs magazine was published. It contains a section on six countries or regions whose size, recent performance and economic potential will make them, according to the editors, particularly interesting to watch and attractive for investors over the next decade: Mexico, South Korea, Poland, Turkey, Indonesia and the Philippines, and the Mekong region. The piece on Turkey was written by Daniel Dombey, the well-informed and connected İstanbul-based correspondent for the Financial Times. Dombey gives a good summary of the economic successes of Prime Minister Recep Tayyip Erdoğan's governments during the last decade, but also sums up the major problems: a dependence on foreign funds and fuel, and an unsustainably high current account deficit. Apart from these economic pitfalls, Turkey's other main challenge, according to Dombey, is political. He refers to Prime Minister Erdoğan's heavy-handed suppression of the Gezi Park protests and particularly his denouncement of Koç Holding, which has led to fears in business circles that such an atmosphere could scare away the foreign direct investment that Turkey so desperately needs. Dombey concludes: “The risk that Erdoğan's erratic policymaking could wreak economic damage is especially great in a country with few natural resources and little capital of its own. If the government continues to punish the media for broadcasting bad news, if big decisions come to depend on the mood of one man and if companies fear predatory fines, Turkish growth seems unlikely to continue at the rates to which the country has become accustomed.”

I guess that sums up pretty well what is stake these days. For most outside observers and analysts the most important element in the current battle within the conservative coalition that was so successful in strengthening both Turkey's economy and democracy in the last 10 years, is ultimately not who is to blame for which revelation. It is the overarching impression that the government is trying to cover-up corruption allegations by punishing the people who had the courage to shed light on practices that many knew existed but which everybody was afraid to disclose.

A foreign businessman who has been working in Turkey for over 10 years told me last week that he was not surprised at all by the allegations of corruption at the highest level. Without close connections in the ruling party and, apparently, big bribes, it was impossible to win any tender in the highly profitable energy sector, he explained. His calculation was that the present scandal would definitively have a negative effect on short-term foreign investments with companies uncertain about the government's transparency and the predictability of its policies. He also said, to my surprise, that in the long run, the current disclosures could be helpful in restoring confidence that in Turkey a level playing field between companies could be achieved without bribes and other dirty dealings. But, he stressed, that will only happen if the present cases are investigated and finalized without government interference and pressure. Unfortunately, it does not look like we are heading there.      

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