Why Populists at the Helm Are Bad for the Economy

Recep Tayyip Erdogan’s economic track record has been relatively successful in performing a balancing act between sane economic policy and populist inclinations.
Hans-Georg Betz CARR, Center of Analysis of the Radical Right, Recep Tayyip Erdogan news, Turkey news, Turkey populism news, Turkey economy news, populism effects on economy, Turkey nationalism news, Turkey Erdogan news, Turkey football clubs

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Recep Tayyip Erdogan is a man on a mission. The goal: to make Turkey great again. Making Turkey great again, I guess, means wiping history clean of a series of humiliations, from the ignominious decline of the Ottoman Empire, dismissed as the “sick man upon the Bosporus” in the late 1800s, to the no less ignominious Treaty of Sèvres of 1920 that forced Istanbul to cede vast parts of its territory to France, the UK, Italy and Greece. The treaty not only marked the beginning of the empire’s demise, but also the origins of Turkish nationalism, which led to the establishment of the modern Turkish republic.

President Erdogan is but the most recent and arguably most egregious expression of Turkish nationalism that seeks to restore past glory by gathering all Turkish peoples under one roof, similar to what once was known as pan-Slavism. This explains why Erdogan has been adamant in his support for Azerbaijan in its conflict with Armenia over Nagorno-Karabakh. Ironically enough, Erdogan has been amazingly sanguine with respect to the oppression of Muslim Uighurs in China’s Xinjiang province. As so often, money trumps convictions while hypocrisy runs rampant.


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This is deplorable, but, as US President Donald Trump has put is so eloquently, albeit in a different context, “It is what it is.” In any case, the topic here isn’t Erdogan’s attempt to establish himself as the champion of pan-Turkish nationalism or his attempt to affirm his claim to champion the cause of Islam, exemplified in his recent attacks against French President Emmanuel Macron. Instead, the focus is on Erdogan as a typical exponent of contemporary authoritarian populism.

Claim to Legitimacy

Populists base their claim to legitimacy on the notion that they promote the interests of “ordinary citizens” against an aloof elite far removed from everyday life, an elite that could care less about people’s concerns and worries. Against that, populists maintain that if elected, they will make the concerns and wellbeing of ordinary citizens their main priority. This is how Erdogan, Trump, India’s Narendra Modi and Brazil’s Jair Bolsonaro swept into office. This is what has been their claim to legitimacy.

Unfortunately, hard reality is a far cry from lofty promises. Decades of experience with populist regimes shows that populists in power have a disastrous economic track record. To make things worse, populists appear to be particularly resistant to taking advice from those who have studied populist economics or learning from the glaring mistakes made by populist regimes in the past.

There is, by now, a substantial record of serious analysis of populist economics, largely based on the experience of Latin American populism. Take, for instance, Jeffrey Sachs, who certainly is above any suspicion of harboring right-wing proclivities. In a paper from 1989, he analyzed what he called the “populist policy cycle”: Overly “expansionary macroeconomic policies,” he observed, “lead to high inflation and severe balance of payments crises.”

In a similar vein, Rüdiger Dornbusch and Sebastian Edwards noted in 1991, “Again and again, and in country after country, policymakers have embraced economic programs that rely heavily on the use of expansive fiscal and credit policies and overvalued currency to accelerate growth and redistribute income.” After a short-lived economic boom, problems emerge, engendering “unsustainable macroeconomic pressures that, at the end, result in the plummeting of real wages and severe balance of payment difficulties. The final outcome of these experiments has generally been galloping inflation, crisis, and the collapse of the economic system.” Ultimately, those supposed to benefit most from populist economic policies, i.e., the poor, end up worse off than they had been before the populists came to power.

Recent developments in Turkey suggest that Erdogan’s regime might be heading in the same direction. Take, for instance, the evolution of the country’s currency, the lira. Over the past nine months, the lira has lost almost 25% of its value compared the US dollar and the euro. This reflects investor worries about rising inflation, depleting currency reserves and the fact that Turks appear to be fleeing into foreign currencies.

Same Direction

The concerns are hardly unfounded. In late September, the Turkish central bank raised interest rates by 200 basis points, from 8.25% to 10.25%, in an attempt to counter rising inflation. This marked a drastic reversal of previous policy. Starting in December 2019, it had successively slashed the interest rate, which at the time stood at 14%. The move was not entirely of the bank’s own making. In July, Erdogan, unhappy about the bank’s slow pace in cutting interest rates, dismissed its chief for not having “follow[ed] instruction.” His replacement dutifully embarked on a course of monetary easing, based on official projections that the inflation rate would fall to around 8% by the end of 2020.

Monetary easing provoked a massive “credit binge” by both businesses and households, which, in turn, stoked the flames of inflation, far surpassing the projected 8% mark. In reality, inflation rose to around 12% in 2020. In response to monetary easing, private debt increased substantially, with often disastrous consequences. A prominent case in point is Turkey’s professional football clubs. The four most prominent ones — Besiktas, Galatasaray, Fenerbahce and Trabzonspor — have accumulated around €1.5 billion ($1.8 billion) worth of debt.

The reason? In line with Erdogan’s goal to turn Turkey into a major global power, the country’s top football clubs endeavored to move into the Gotha of European football, on par with the likes of Real Madrid, Bayern München and Manchester City. In order to reach this goal, they borrowed heavily in euros and dollars in order to be able to attract international star players. The partial collapse of the Turkish lira, together with the drying up of revenues in the wake of COVID-19, has pushed all four clubs to the abyss of financial ruin.

It would be going too far to suggest that this might be a preview of things to come for Turkey as a whole. In fact, the regime’s economic track record has been relatively successful in performing a balancing act between sane economic policy and populist inclinations. This has been due, to a significant extent, to the central bank’s relative independence, even if this has noticeably eroded over the past several years, constantly under pressure from the president to support the regime’s economic program. The recent rate hike might suggest, or so one might hope, that realism has once again gained the upper hand.

This would certainly be a departure from business as usual as far as populist regimes are concerned. A recent extensive study by economists from the Kiel Institute for the World Economy and the University of Bonn in Germany provides an extensive and detailed account of the profound incompetence populist regimes have demonstrated when it comes to the basics of economics. Silvio Berlusconi’s tenure, for instance, did little to advance the life chances of ordinary Italians.

On the contrary, the upsurge in voter discontent and disenchantment that, for a short period of time, propelled the Five Star Movement to the top of Italian politics, reflects the opportunities wasted during Berlusconi’s reign. This has been particularly pronounced in Latin America, but not only there. In the medium and long run, as the study’s authors conclude, “virtually all countries governed by populists witness subpar economic outcomes evidenced by a substantial decline in real GDP and consumption.” It would be easy to dismiss these outcomes as the result of misguided policies, informed by good intentions but with disastrous consequences. My guess is, however, that this is only part of the story, and the less important one at that. Not for nothing those who have studied populism have emphasized the importance of the “common sense of common people” as a central trope in populist rhetoric, targeting expert “elites.”

Unfortunately, more often than not, the common sense of the common people is completely wrong. Even more unfortunately, ignoring expert advice more often than not has disastrous consequences — in economics, as well as with regard to the coronavirus pandemic.

Once again, Erdogan is a prominent example. Despite an upsurge in COVID-19 infections, the president has been more than reluctant to follow advice to impose stringent measures to contain the virus. At the same time, his political allies have accused Turkish medical experts of “treason,” reminiscent of similar slanders in the United States. To make matters worse, Erdogan’s shameful attack on President Macron in the wake of Islamicist-inspired terrorist attacks in France is hardly conducive to improving Turkey’s economic relations with Western Europe, a vital market for Turkish exports. So much for common sense.

*[Fair Observer is a media partner of the Centre for Analysis of the Radical Right.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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