Interview with Professor Erinç Yeldan: Understanding Current Economic Discussions in Turkey

Interview with Professor Erinç Yeldan: Understanding Current Economic Discussions in Turkey

Assessment of the Turkey’s Turbulent Year Series – III

Centre for Policy and Research on Turkey (Research Turkey) conducted a long interview with Professor Erinç Yeldan about economic dynamics of Turkey. Recently, there have been some discussions between the government authorities of Adalet ve Kalkınma Partisi (Justice and Development Party) (AKP) and the executives of Central Bank, especially on the issue of determining the interest rates. The Turkish Lira has depreciated considerably under the influence of the domestic dynamics and global conjuncture. We examined the underlying reasons for the current problems with Professor Yeldan. Firstly, we discussed the model of speculative growth and also the Central Bank’s price policy. Moreover, we discussed the structural problems of Turkey’s economy in detail, and specifically talked about the negative impacts of regional inequalities in Turkey on investors. In this discussion, we had to tackle the solutions vis-à-vis unemployment, the principal problem of regional inequality in Turkey. We then moved from the context of Turkey to Greece, and talked about the policies of Syriza party that won the latest elections and finalised our interview with the developments in the Middle East.

Professor Erinç Yeldan graduated from the Department of Economics at Boğaziçi University. After completing his doctoral degree at the University of Minnesota in 1988, he became a member of Bilkent University. He received his associated professorship degree in 1990 and professor’s degree in 1998 from the same university. He worked as a visiting professor at the University of Massachusetts Amherst. Professor Yeldan currently works in the Department of Economics at Bilkent University and his research is on international economics, applied general equilibrium, and macroeconomic models. Erinç Yeldan, who has numerous studies and articles in the Turkish and international economic literature, is the author of the book entitled “Turkish Economy in the Globalisation Process” (İletişim Publishing, 2001), and contributed to a large number of books as co-author. Yeldan received Science Encouragement Award (1998) from the Türkiye Bilimler Akademisi (Turkish Academy of Sciences) (TÜBA) and is a founding member of the research group called the Association of the Independent Social Scientists.

Interview Summary

Turkey’s transformation in the 1980s that was marked by a process of leaving the capital flows of Turkish economy totally uncontrolled, has created very liberal, uncontrollable and completely outward-oriented economic conditions.

Moreover, the turbulences of 1990s and the crisis of 2001 were a result of the uncontrolled financial liberalisation, and the lack of regulatory authorities and financial infrastructure.

In recent history, during the period of Adalet ve Kalkınma Partisi (Justice and Development Party) (AKP) governments, Turkey’s growth performance was determined completely by speculative capital inflows and outflows in the years of 2003 and 2008, and until the days in which the crises of 2008 hit Turkey.

This process creates good results if there are capital inflows from abroad, but when the pace of capital inflows slows down –especially as a result of a political tension– this process creates negative results.

Furthermore, there are some decisions taken by the U.S. FED that will influence the global financial markets. Especially, in those decisions there is an expectation of the rise in interest rates under the auspices of the FED.

Turkish economy became obliged to give much more severe responses to these speculative ebbs and flows due to some structural conditions such as higher level of unemployment, lower level of investment performance, and relatively higher level of inflation.

The disaccord between AKP government and the Central Bank, let’s say, cannot be considered solely based on today’s conjuncture in terms of monetary policy.

Firstly, as a reflection of Turkey’s accumulated structural problems, these intense fluctuations in the exchange rates lie behind the newly emerged negative balance between current account deficit and growth.

“Secondly, there are some interventions in the political variables of the Central Bank –as an independent, autonomous institution– for assuring price stability and financial stability.

As the tensions arising from Turkey’s domestic politics rose to the surface in addition to the structural conditions, Turkey and Brazil became the most disadvantaged economies due to the stagnation in the real economic growth rate.

Imagine a line from Zonguldak to Hatay and two parts such as Eastern Turkey and Western Turkey: On the one hand there is a picture of Turkey fallen into the poverty trap, on the other hand, there is another picture of Turkey stuck in the middle-income trap in which important industrial investments are realised, but it makes Turkey a centre of excellence in limited fields.

If the government takes the lead in housing constructions based on unearned incomes by the means of the Toplu Konut İdaresi (Housing Development Administration) TOKİ in Turkey, it also creates a real estate bubble stemmed from those unearned incomes. However, it does not make Turkey a centre of technology design in Eurasia beyond the middle-income trap.”  

The most recent example of the crisis based on the housing bubble is Spain. A little earlier example is Malaysia and Thailand geography before the Asian crisis of 1997.

A growth model which is carried out through housing speculation based on low-cost labour might create a growth just before the elections, but when its resources become exhausted, it collapses like a house of cards.

This gap between Eastern and Western Turkey retards or prevents realisation of some effects such as spill over and externalities resulted from a foreign capital investment. Therefore, the first intervention for overcoming this obstacle is eliminating regional unemployment in Turkey.

Eliminating regional unemployment proposes that Turkey seems to need a diversified educational perception which does not only refer to those people with a higher education, but also vocational education and training qualified staff.

Turkey should form an energy pattern heavily stemming from solar and wind energy sources. As we always talk about, this can be realised by improving investments for agriculture and innovation.

Greece or any other country cannot reach the growth point by using the formula of ‘Once you have surplus in the budget, and then move to growth stage.’ This practice can only coexist with growth and social gains.

I think that the political focal point of the Middle East region and North African countries will be maintained through not oil, but violence and arms economy.

The Full Text of the Interview

Professor Yeldan, firstly, thanks a lot for accepting to do this interview with us, and making time for it.

I thank you. I wish the best of luck for you and your journal.

Thanks a lot. As you know, the whole country faced the polemics on dollar recently. Turkish people have always tested the pulse of the economy by following the course of the dollar. If the dollar is gaining value, it means for the people that something is probably getting worse. The rise in the value of dollar has begun to worry everyone in parallel with the President’s statements. The dollar/lira parity increased to the level of 2.60. Recently, Minister of Economy Nihat Zeybekçi interpreted this increase in this case as speculative. How do you evaluate this polemic, and the discussions around it? How do you think the rise in the value of dollar will affect the Turkish economy?

Well, let’s start with Mr. Zeybekçi’s analysis. The increasing value of dollar, as you highlighted, is surely speculative. It is speculative, for sure because that is not solely peculiar to the Turkish economy. The world economy was marked by a series of events since U.S. dollar gone off the gold standard in 1971. Turkey’s transformation in the 1980s, specifically complete liberalisation of capital flows in 1989 –as a further footnote, the process of leaving capital flows in Turkish economy totally uncontrolled by the infamous decision no. 32 in 1989– created very liberal, uncontrolled and completely outward-oriented economic conditions that were more advanced than those in many European countries of that period, even those in the OECD countries. The turbulences of 1990s and the crisis of 2001 were solely a result of such uncontrolled financial liberalisation, and lack of regulatory authorities, infrastructure and financial infrastructure, as you know. Therefore, speculation surely always exists in this process. Considering the recent history of the Adalet ve Kalkınma Partisi (Justice and Development Party) (AKP) governments, Turkey’s growth performance was determined completely by speculative capital inflows and outflows between the years of 2003 and 2008, and until the days in which the 2008 crisis hit Turkey. Whenever there was a high volume inflow of foreign currency in Turkey, its character was determined by the flows called as hot money flows which were mostly of a short-term and debt-creating nature. Then by 2006, there was an additional capital inflow which included foreign direct investment flow stemming from privatisation, land sales and business combinations, but it was mostly formed by company handovers and privatisation. Whenever there is such a large capital inflow in Turkey, the Turkish economy is growing. Whenever capital flows slow down, capital inflows slow down as well. Please note that I do not say capital outflows because there appears to be a serious crisis if there are outflows. Whenever the pace of capital outflows slows down, the growth rate gradually decelerates. We described this process as speculative-led growth in reference to Aylin Graber’s 1995 article; a process marked by speculative-driven or speculative-led growth through emulating and projected to the concept of export-oriented industrialisation. Speculative-led growth is the common characteristic among the developing countries called as emerging market economies such as Turkey, Brazil, Mexico, Thailand and Malaysia that are middle-level developing, outward-oriented countries excessively dependent on foreign capital inflows. Why do we have to emphasise this? The fact that dollar’s movement is speculative, as Mr. Zeybekçi states, is surely related to the reforms carried out in the Turkish economy after 1980, transformation of 1989, and the crisis of 2001. It is also related to the fact that –we will surely talk about it in relation to your following questions– the Central Bank has turned into a passive institution that has broken its connections with real economy, and tended purely and simply to price stability. All these processes have been directly supported and designed by the AKP governments under their own responsibilities. This process surely creates good results if there are capital inflows from abroad. However, once the pace of inflows decelerates… This pace might occur as a result of a political tension in the country, of dissolution in the country or in the bureaucracy, or of a conflict between the president and various elements of economic administration. But here is the problem: as you know, the dollar illustrates the fact that the operations called as quantity easing came to an end in the global markets and also in the U.S. economy. So the end of quantity easing refers elimination of U.S. FED’s operations of funnelling too much cash, liquid, hot money to the global markets. It also means rise of interest rates in the U.S. markets under the leadership of FED in line with the ambiguity of –see those very famous esoteric concepts– FED’s patient, impatient, cautious or incautious approach towards the points of that the positive signals coming from small domestic markets of the U.S. create an inflationist pressure. There is a debt crisis in Europe. European economies stagnate, and even the future of European Union has been brought into question through the Syriza events. Dollar is now considered a powerful harbour in the whole world. However, while the U.S. dollar is gaining value in the face of emerging market economies in the whole world, and the domestic currencies are losing value, interestingly, the course of this process in Turkey and Brazil seems to reach severe and serious levels. As did in the winter of 2009, the global crisis that erupted alongside Lehman’s collapse had repercussions in Turkey as a very serious crisis in real economy. The real economy of Turkey was one of the two most severely affected economies together with South Africa according to some indicators such as heavy losses in industrial employment, sharp decrease in national income by 4.8 %, loss of almost 400,000 people in industrial employment, and sharp increase in total open unemployment up to 14.5 %. Therefore, the point is that the speculative-led growth is a prevalent process for all the middle-income, emerging market economies. Turkey has already turned into an economy limited and conditioned by this process of speculative-led growth, but why do fluctuations with ups and downs in this process occur so severely in Turkey? This is the question that should be asked. Therefore, as Mr. Zeybekçi stated, it is true that dollar movement is speculative, but this is already known. The major question that should be asked and answered is why Turkish economy is the most severely affected economy by these speculative movements, and this needs further analysis. First of all, this is a result of Turkey’s accumulated problems; I mean the problems that emerged as a result of severely increasing external deficit that roughly started post-2001 crisis, mainly in the 2004 and 2005, and a result of that, the balance among growth rate, current accounts deficit and growth rate of national income has reached a quite different level in structural terms after 2010, meaning after the recoveries following the 2009 crisis. Let me clarify what I mean: Before 2008, the 5-6% current account deficit, a rough national income rate of 5-6% was simultaneous with a 6%, time to time 7% real growth rate. In a context of shrinking capital flows, the growth rate also declined, and currently it is in stagnation. This is a reflection of the major global stagnation, a phenomenon termed great recession. However, much lower growth rates in the range of 2 and 3% are now correlated with the rates of current account deficits of 7 or 8%. Therefore, much larger current account deficits create much lower rates of real economic growth. The final results are higher than expected such as unemployment rates, weak investment performance, relatively higher inflation rate, and in relation to the phenomenon that we just mentioned, the Turkish economy seems to be obliged to give much more severe responses to these speculative ebbs and flows. Therefore, the accumulated problems since the period of 2003-2004 are the reason why Turkish Lira has been affected so severely against the dollar. First of all, the current account deficit is not the major problem among all others. The current account deficit is actually not a problem if it is financed. The problem reveals itself if the current account deficit is not financed. Nowadays, economic bureaucracy and even credit rating institutions have been pursuing this extremely false tautology. They have ignored the sources behind Turkey’s increasing current account deficit, and also the real problems. Through the intense privatisation initiatives between the years of 2007 and 2008, Turkey increased its direct foreign investment incomes with these privatisation incomes. Long-term capital inflows together with large amount of hot money inflows led to the fact that the current account deficit suddenly increased to more than 7% of the national income in the period of 2007-2008. After the recoveries in 2009, this process was maintained along the same line. The current account deficit rose to almost more than 9.5-10 % of national income in 2011 and 2012. By accumulation, specifically as a 12-month accumulation in different times, the Central Bank stated that financial stability is important for them as much as price stability, hence their interventions since 2010.

Considering the recent history of the AKP governments, Turkey’s growth performance was determined completely by speculative capital inflows and outflows until the days in which the crisis of 2008 hit Turkey

Well, you talked about the Central Bank’s inability to determine the monetary policy. In the light of these current discussions, how do you evaluate this situation?

Well, your question is very important, but it cannot be considered merely based on today’s conjuncture, and current discussions that focus on the disaccord between the AKP government and the president or the administration of the Central Bank in terms of monetary policies. As I stated before, as a result of Turkey’s accumulated structural problems, this lies behind the newly emerged negative balance between intense fluctuations in the exchange rates, current account deficit, and growth. Secondly, there are some interventions in political variables of the Central Bank –as an independent, autonomous institution– for assuring price stability and financial stability. In addition to those negative structural conditions at the background, by considering the tensions arising from Turkey’s domestic politics, the whole picture becomes comple. Therefore, Turkey and also Brazil have turned into the most disadvantaged economies due to the currency and the stagnation in the real economic growth rate. Together with the Central Bank’s hastily conditioning of ‘we do have any other solution’ after the crisis of 2001, referring to Margaret Thatcher’s famous operation offered as an acronym called as ‘There Is No other Alternative’ (TINA), the Central Bank introduced the control of monetary policy that was making inflation targeting and would never intervene in the currency markets. There were prerequisites for inflation targeting, and also for positive forecasts stemming from the currency market’s quote unquote ‘independence,’ but these conditions were not available in the period of 2002-2003 in Turkey. I think that it was actually a political objective based on neoliberal economic theories formed in textbooks and theoretical seminars, proposing that the markets should be liberalised, and the central banks should just make predictions against inflationist pressures –the system is actually called as inflation-forecast targeting, not inflation targeting. In such totally liberalised economy with completely passive capital flows, the neoliberal economic theories suggest that resource allocation can be realised in an optimum manner. However, these abstract models formed in the seminars do not fit in with the realities of a group of countries that I mentioned before, including primarily Turkey. The most incompatible condition is that the financial system in these countries is so superficial alongside open economy conditions without any single intervention, orientation and control in the currency against very large volume of hot money flows in the global markets. Therefore, it was already known that these economies would lead to speculative fluctuations against the ebbs and downs of huge amount of hot money flows. The Central Bank’s approach was like ‘I deal with only and only price stability; I set goals just for it; I have only instrument to achieve these goals such as the inflation target or the goal of assuring price stability: The short-term interest rate that is the interest rate of politics.’ Even though this had various definitions in diverse periods, it has been usually formed as weekly repo interest rate in Turkey. Therefore, after 2003, Turkey was one of the economies that offered the highest rates of interest in the world. High interest rates were bringing hot money flows to Turkey. As a result, the Turkish lira could reach an extremely valuable position against dollar, euro and any other currencies. Therefore, the import costs decreased, and this provided an opportunity of importing at lower prices for customers, industrialists, construction sector, design in the service sector and technology transfer, and reduced inflationist pressures. In this way, it led to a consumption boom and a cheap import boom in Turkey. By the crisis of 2009, this uncontrolled process got stuck in that fact: ‘Just a minute, the emperor has no clothes; we have difficulties in financing it; we keep the wheels spinning just by offering high interest rates; we cannot maintain the leverage effect.’ Therefore, Turkey has become part of the process called as the great recession since 2011. Now, the Central Bank has abandoned all the intervention methods imposed on credit allocation and exchange rate in various ways, including indirect, market-friendly methods as well. It actually presented this as a requirement of modern central banking. However, the Central Bank is the ultimate borrower. It opened up the banking system with the way of reserve requirements not only on the Turkish Lira exchange rate, but also on credit allocation, loan distribution in the real economy, and cost of credit. It had quite effective tools of monetary policies that have been developed throughout the 200-year history of central banking, for instance direct intervention in the credit market. As a result of all these, together with the dogma, belief or obsession that ‘the central banks focus only on price stability, and they set no goals apart from this,’ the Turkish economy has turned into a passive centre of quote unquote modern central banking. When the current account deficit reached very high levels, and financial instability turned into a very serious threat in 2010, the facts became more visible especially for the IMF, and for the monetary policies of all the central banks in the world. It was finally understood that the inflation targeting cannot be the only goal; the price stability cannot be provided unless the macroeconomic stability is not assured; and the central banks cannot succeed by just dealing with the price stability without providing macroeconomic stability. At this point, the Central Bank started to present the unconventional monetary policies as the tool of financial stability, such as interest rate corridor, forecast operations, and determination of coefficients in the Reserve Option Mechanism (ROM). What we said until this point, and all these criticisms were in this direction. However, in the last interest rate discussions, the term called the interest-rate lobby was formulated by the President, and he was also supported by his economic advisers and by the economic bureaucracy of the AKP government. It was started by such an analysis: ‘The Central Bank has already come under the rule of domestic and foreign capital flows; it has bowed to their blackmail and threats; the Central Bank is already not independent.’ Later, it was directed to the discussion of that ‘the Central Bank should reduce the interest rates,’ and then to the point of an intervention expressed as ‘Hey, the Central Bank!’ Well, it is actually true that the Central Bank is a passive part of the speculative capital flows at the background. However, this design is a reflection of the macroeconomic frame developed after the crisis of 2001, and the AKP government had clung to it. As I always said, as long as there were capital inflows from abroad, everything seemed going very well, and this success was attributed to the AKP government. But whenever the capital inflows decelerated as a result of shocks created abroad and at home, one can suddenly see that the emperor has no clothes. Who is responsible for that? I often emphasise in my articles that at the point when economic indicators worsen, all the governments in all countries begin to search for a foreign enemy that is usually related to a border quarrel, an unsolved problem with neighbouring country due to sharing water resources, a land problem or an ethnic problem. This works to distract the people from the problems in the domestic system, and to draw their attention to a foreign enemy, a foreign power. Well, the interest-rate lobby is not a technical term in terms of economics. The people would be united against this created foreign enemy, ghost enemy, and this really fitted in with the AKP’s usual strategy based on a victim government, victim leaders, and a victim discourse fighting against the inner and outer enemies of democracy. The AKP government, which until recently was maintaining the speculative-led growth with speculative capital inflows created by the high interest rates, has suddenly started to search for an enemy, and preferred to fictionalise it around the interest-rate lobby. I pointed this it out in a more technical manner. In the public opinion, there is such a perception that the Central Bank determines the interest rates through which the Turkish economy operates. However, it is not like that. The Central Bank determines, as we just mentioned, the short-term, political interest rates, but not the elements such as investments, employment, technology preference, loan distribution, households’ preferences for loans, and most particularly the decisions regulating the foreign financial invertors’ capital inflows and outflows in Turkey so that they are determined by the indicators of interest rate such as the credit interest rate and long-term interest rates which are designated in the market. The short-term interest rate is actually already determined by a series of elements affecting the country risk ratings such as speculation, forecasts, macroeconomic indicators, performance of the government in running economy, and prospective investment targets. The Central Bank can merely indicate this due to the reasons that I just mentioned. It has already abandoned all of its instruments. You have already rasped and pruned the tools for intervening in the real economy, and deprived the Central Bank of them, but now you are saying that ‘the Central Bank…,’ and even ‘Hey, the Central Bank! Reduce the interest rates!’ Well, one cannot expect that it has influence on the real economy in this political situation, but the simple fact is that the economic decisions are made by considering the real prices in economics. To make a decision by considering the real prices, we also need to talk about the prices excluded from the inflation figures. If you exclude the interest rate from the inflation, you can see that the interest rates are already 0% or directly negative in real terms in Turkey. Including the available inflation forecasts and the Central Bank’s short-term, political interest rates, all the interest rates in Turkey are already negative. Even in some periods, specifically when the current account deficit increases up to 10 % of the national income, as I mentioned before, the interest rates become -4 or -4.5 %. Therefore, there is no point arguing that ‘the Central Bank has to decrease the interest rates.’ The Central Bank’s real interest rates and the real prices as the ones affecting the decisions of rational economic individuals are already negative in Turkey. Now, you might ask me: ‘Professor, well then, why did this discussion start, and why do we have these contradictory concepts?’ Well, I think that the government needed to search for an enemy and to create a victim scenario as long as the great recession exists in Turkey, the inflation rate cannot be declined in one way or another, financing the current account deficit is getting difficult, and also Turkey is getting back to almost 11% unemployment rate. And to maintain its victim scenario, the government put the blame on the international speculations, vultures, vulture capitalism exploiting Turkey, this system of exploitation, and the Central Bank as being an instrument of this exploitation. However, this system was established during the process from 1980 through the years after 2001, and the Turkish economy has been made a passive economy, depending on the international capital flows. The fiscal discipline, budget discipline, monetary policies, and fiscal policies of the country were all disabled, even the fiscal policies lying behind the perception of ‘Turkey should be administered like an incorporated company.’ Therefore, current problems are a result of turning Turkey into an uncontrolled, aimless, speculative economy depending on the logic of the international capital.


Firstly, as a reflection of Turkey’s accumulated structural problems, this drastic volatility in foreign currency, new balance between the current account deficit and growth, this is what lies behind the negative new balance

Professor, it may be a little hypothetical, but based on your talks, how do you think this pressure could be eliminated? What interest rate policy, fiscal policy should be followed? Because the course of events does not seem to be positive at all in the picture that you drew.

It is not positive in the sense that, firstly when we look closely at the signals of the real economy, at the real economy’s indicators, for example, the share of the manufacturing industry in total national income was about 22%, 23% in the beginning of 2000’s, in 1998 it was 24%, in 2013 and 2014 it decreased to 15.5%, roughly 16%. Turkey seems to have lost its priorities of industrial production and Turkey as an economy, seems to have given up its objectives like industrial exports, industry, technology, industrial design. It seems that Turkey’s economy desperately shifted to construction and housing, and even to housing speculation and it seems that it obviously embraced a choice of creating employment and added value via housing rents and construction. When you look at this, for example, the share of construction in national income is about 6%, 7%, the share of the education expenses in national income is about 2%, 3% and the gap is getting bigger to the detriment of education. While Turkey is presenting extremely esoteric goals like being the production, design and technology base of Eurasia, even of North Africa in its presentations, in its medium-term programs, in its shiny, very colourful charts, actually the truths show that the industry in Turkey has declined, the quality of education in Turkey has decreased and that Turkey has fallen behind in its investments in the sectors with advanced technology, with high technology. Now it is time to reverse this image. Among the most important policy intervention tools to reverse this image, we have public investment and as maybe a beginning to your questions about income distribution special to Turkey, we see that very important problems including regional income differences, these big regional differences between regional production, investment and labour quality that keep Turkey from taking this jump, from making this move towards transition of industrialisation with advanced technology. This process that we are talking about, meaning Turkey’s economic slowdown, big slowdown process since 2000, roughly since 2011, has been reflected as an issue of middle income trap by the business press and also by the professional researchers. Now, I will answer your question indirectly as follows: Middle income trap is a technical concept emphasised by Barry Eichengreen with a group of his colleagues at UC Berkeley, which looks like an economic structure where per capita national income is approximately 15,000 dollars and the share of manufacturing industry in the total added value is 30%. According to this concept, now capital is cheap, raw materials are cheap, we came to the limits of growth obtained from redistribution of resources like labour transfer from rural to urban areas, so middle income is now maintained, an emphasis is put on to the point that from now on, middle income trap will be overcome thanks to the reforms that necessitate technology but also institutional innovations like design, research and development, increasing the quality of education, building better institutions including democracy, instead of investing more, raising capital or cheap labour or growth resources depending on cheap raw materials like iron, steel, coal etc. I think this thesis is intentionally or unintentionally constructed so wrongly, defended so wrongly in Turkey; being middle income is like modernity, contemporaneity, saying ‘We are now middle income. We used all of our resources, our labour. Now it is time for design, for technology.’ Thus middle income is also presented as a kind of prestige element. However the truths are not like that. It is not like that according to numbers also but non-numerical statements. ‘Turkey’s income is 10,000 dollars or not yet 15,000 dollars’ It is not like the example of traffic lights ‘Stop at red light or it is green light now,’ ultimately it is a qualitative definition not a quantitative one. But this qualitative definition has very important dimensions. First of all, compared to moderately high income countries, which Turkey claimed to be a part of, mostly remote Asian countries like Korea, Thailand; total investments in national income is much below the average in Turkey’s economy, meaning that Turkey is not a country that reached a maturity in fixed capital investments yet. They have an investment level between 28%, 30%, we have an investment level between 22%, 20%; in addition to this, 6%, 7% points of these investments are financed by external deficit. There is not a sustainable investment movement in Turkey. Second of all, I compiled some data from an OECD report in my article in Cumhuriyet newspaper last week about the level of education, quality of labour. In Turkey, the percentage of being in education for the population under age 29 is about 15%, which is almost 10 points less than the OECD average. Turkey cannot allocate money for its young population’s education as much as OECD average, it cannot educate these young people, when combined with unemployment, these people are not in education or in employment, OECD call them inactive; not in education, not in training, not employed. Who are these people? What are they doing? Inactive meaning that, with a vulgar expression, they are staying in their father’s house. In Turkey, this population presents 35% of the young population under age 30. The OECD average is 20%, in our neighbour Greece, this percentage is 26%; it means Turkey is standing out by having the most crowded inactive young population, also as a country with the least number of young population in education in OECD countries. Now under these circumstances, it is impossible to explain the concept of middle income trap or being caught by middle income trap. ‘Why Turkey’s national income is navigating in a low speed’ in this big slowdown process. What explains this slowdown process or not being able to accomplish this movement in one way or another? In addition to a series of requirements, structurally, regional income differences that we highlighted and as a reflection of them, the fact that the differences of productivity among sectors are very high are the reasons that lie under this. If you draw a line roughly from Zonguldak to Hatay, if you divide Turkey roughly into two as East Turkey and West Turkey, on one side there is this Turkey that fell in poverty trap, especially in the poorest geographic regions such as Bingöl, Adıyaman, Urfa, Şırnak, you can see that duration of average education has decreased to three years meaning that a labour force quality that did not even finish elementary school has emerged, there are not enough savings for investing, they do not have natural resources, capital, labour force is uneducated, hence the poverty trap. On the other hand, there seems to be an economy that reached the middle income trap: Integrated into the world with its financial system, accomplishing important investments in industry; but it is a perfection centre all in a narrow area, on an islet composed of islets of Kocaeli, Bursa, İstanbul, Eskişehir and surroundings, somehow a little Ankara and İzmir. In economics literature, this is named as Belindia model by the structural school. In 1960’s, 70’s, 80’s, Belindia comes from Belgium and India. This means narrow perfection centre islets like Belgium on one hand, on the other hand the country India in English, an immense recession, law quality labour force, law quality technology usage, so in an immense sea of recession. We see that between Belgium and India economies, there is a dual structure where there is not even a little connection, the input and output connections are very few, there is no technology transfer in question, decisions and institutions work based on very different principals. Istanbul is producing the poor Turkey and poor Turkey is feeding Istanbul with its cheap labour force, cheap raw materials, by working as a warehouse of vote and also of consumption. It means there is not a convergence between these two regions. The case is not one that can be depicted as high income Turkey growing slower and low income Turkey growing faster so that the average of these two getting closer. We see that geographically the inequality between these regions is getting deeper with a divergence.

In the latter case; Turkey’s economy has suffered from the foreign currency with the interventions to policy variations of Central Bank for maintaining the price stability and financial stability as an autonomous institution and from the stagnation in the speed of real growth

This deepening that you mentioned as well, if a line is drawn from Zonguldak to Hatay and two regions are analysed separately, this increase in the gap reminds this; from Thomas Piketty, Turkey having much more billionaires than Japan that is much richer than Turkey, this…

A very accurate observation.

In Turkey if you draw a line from Zonguldak to Hatay and if you divide it into two, on one side there is one Turkey that fell in poverty trap, on the other side there is one Turkey that reached the middle income trap, where important investments in industry are accomplished but which is a perfection centre in a narrow area

…and distribution of the resources of income unfairly; I mean at this point it is actually very obvious but… The gap keeps getting bigger, what do you think?

Here we came to this point in a very indirect way. Let me remind you, the question you asked was in fact a question of what to do. In a structure like this, resource allocation based on market signals will not succeed in breaking this structure any more, here, a public investment and regional development strategy that will design the very famous word ‘take off’ of the development literature should be brought on the stage. I think we need a new nationalisation (with the Kamu İktisadi Teşebbüsleri (State-Owned Enterprises) (KİT)) movement, that I do not see any reservation to make a slogan out of this, not based on a profit-cost thing in short term; but based on social value and social cost principal in long term, in the region that we mentioned. There is this dogmatic belief in Turkey that I criticise a lot; ‘Does state produce fish? Does state produce milk? Does state produce fabric?’ State produces what is necessary to be produced. In some conditions, in 1930’s conditions, it produces fabric. In 2000’s conditions, it creates the conditions that will support the livestock production but if state attempts to accomplish housing construction which is based on housing rents in this region or in whole Turkey, if it pioneers this with the agents like the Toplu Konut İdaresi (Housing Development Administration) (TOKİ), it only provides temporary increase in employment during a temporary construction. It creates a housing bubble on account of housing rents. However, a Turkey that will overcome the middle income trap, which will be the technology-design base of Eurasia, will not rise from here.

If state attempts to accomplish the housing construction which is based on housing rents, with agents like the TOKI, it creates a housing bubble on account of housing rents. A Turkey that will overcome the middle income trap, which will be the technology-design base of Eurasia, will not rise from here

You actually answered but did this housing bubble burst or…

No but there is this; saying the emperor has no clothes is not easy even in children’s tales but human history is full of stories where the meaning of the emperor without clothes was learnt with bitter experiences. The most recent example of this is Spain. An earlier example is the geography of Malaysia and Thailand before the 1997 Asian crisis. In Spain, between the years 2006 and 2008 more houses were being constructed than those constructed in entire Europe and land too is becoming more and more valuable. Employment that comes with construction and because most of it is part-time, unqualified, low quality, at the point the bubble in housing sector bursts, it strikes directly the most unprotected, the most unqualified and part-time labour force and the sudden boom in unemployment rate appears as a result of this.

Actually there is an experience before us…

Yes, we have these examples ahead of us as well. It is supposed that ‘Now the conditions are different, we are different.’ This defence of ‘Now the conditions are different, we are different’ does not give an assurance. Of course the conditions are dissimilar, of course they are different. World history does not consist of simple repetitions. The economies before Asian crisis and before Europe debt crisis are of course structured differently. Turkey has of course very different structures than the structures before 2001 or 1994 crises. But the threat is always the same threat. A speculative bubble which has been uncontrolled or ignored and which is an element of fragility is blowing. Positive conjuncture of growth, positive employment and increasing profits which were created by the blowing of this bubble hoodwink everyone. But the disregarded truth is that this is an unsustainable, fragile structure and that if it continues with this pace, the whole economy will pay the bill of the crisis that will burst. Now, housing speculation leaning against low labour force like this, a growth design which is handled over land rents may create you an activity, a growing economy before elections, but it would be like flash in the pan; at the point where the resources of this stop, all the system collapses like a house of cards because those activities will not bring foreign currency. These are not activities that will bring the labour force education, technical skills, that will educate the labour force while working. As long as Turkey puts back to take the jump in industry and in sectors of services with advanced technology and as long as it keeps skidding and staying still, this kind of activities continue to create a perception like there is a big economic activity. In my opinion the biggest danger, the biggest problem seems to be this at this point. Ultimately debt crisis in Europe is a conjectural phenomenon. Ultimately from the worst to the most positive scenario, like European Union will dissolve, Eurozone will collapse, this and that will happen… Maybe after 2020’s, based on the infrastructure of human capital that it built up, Europe will live its costs, its crisis and then it will continue the way, maybe inside one European Union or maybe one that is split  into five. But since Turkey does not have this kind of aggregate natural or human capital and it is delaying to have these, the perception of cyclical crisis at the moment should not mislead us, Turkey’s economy concerns us a lot, as an economy that will be far behind the OECD economies at this race.

Growth objective based on housing speculation leaning against low labour force may create a growth before elections but at the point where the resources of this stop, it collapses like a house of cards

I want to ask this; now Turkey attracts direct foreign investment. This is going on, maybe in descending scale, but it does not have a quality that can increase employment, as you mentioned. What should be done? I mean, in order to transform this investment to an increase in employment or to increase employment? Because the indications are present in that data too, I mean what should be the investments to increase job opportunities? How could it be? Putting these investments aside, there is also issue of employment of young people here. You also mentioned this recently, I think it was in your article last week, based on 2014 data of the TÜİK (Turkish Statistical Institute), that the unemployment rate reached 10%, but more seriously, that the unemployment among young people reached to 17.8% in these statistics, that their share in unemployment increased, you even characterised this as ‘the gift of New Turkey to youth.’ I mean, of course, inability to increase the employment, also inability of young people to take part in employment…

Yes also staying inactive.

Absolutely. You have just mentioned it. It is a big problem and also a big obstacle before sustainable development. From the very beginning you have described this negative tableau and we need to get out of this tableau. However, the question I am thinking is not in regards to ‘What kind of future is waiting for us?’ because it is obvious; rather what needs to be done to get out of this tableau?

First let’s talk about attracting long-term foreign capital investments. It is not as easy as one would imagine and it is not an automatic process in which all expectations are realised. Because you are converting the foreign capital into domestic capital and/or you are working on such a conversion operation; and a technological transfer is in question. Processes do not happen overnight and by themselves. This process is not as easy as depicted: ‘Let’s remove all of the bureaucratic obstacles and make Turkish Republic attractive for foreign capital; then, the foreign capital comes and builds factories and suddenly our labour force starts to work there; at the same time, let’s transfer the technology, so that the domestic capital also looks at the foreign capital and through transformation of technological experiences from this foreign capital, domestic one improves its know-how; moreover, the effects of this kind of investments like spill overs would develop our economy in a more rapid and efficient way.’ This is a children’s tale-like caricaturisation. First of all, only 20% of the foreign capital investments in the world are green field that takes place as new investment, a new technology, a new employment, a new capital investment. More than half of these investments are going to Chinese economy. So, what we call as foreign capital investments usually mean estate purchasing or company mergers. A part of this occurs through privatisations, transmissions from public or mergers of private companies which are bought at a low price. The important phenomenon here is not about whether foreign capital will come or not, but under what conditions they will come and what they will bring. Now, it is not an automatic process that so called learning something from foreign capital, creating a productive resource distribution and the point that resource will be also used productively. For this regard a national research-development, a dynamic entrepreneur, a labour force that is open to learning and technologically, a transportation system that will enable technological exchange conveniently is needed. The gap between Zonguldak and Hakkari that we mentioned delays or restrains the realisation of effects of foreign capital investments such as overflow and spill overs. Then, the first intervention to overcome this situation is to eradicate regional unemployment. Turkey seems to need a new, diversified understanding of education quickly, one that does not only aim the higher education, university education just in the theoretical sense or a good higher education; but this new understanding of education should have a diversified professional education. Our education system is highly politicised and unfortunately monotone. For instance, if you look at the American education system there are, on the one hand, a highly standardised secondary education within which there are perfection points, high degree of collaging within which again as a perfection centre there are research preferred universities and around these, on the other hand, there are liberal arts colleges, vocational high schools, and community colleges. This widespread vocational education system provides people to gain technical skills and handicraft, to learn foreign languages or ensures a direct cultural development. Turkey develops within a standardised secondary education and university system and in the world there is no place where it is possible to provide a good university education for everyone or make everyone university graduates. There is no such a need anyway. But it is important to provide everyone higher education, a higher education after university. This can have various components. The most important component is certainly Turkey’s need for eradicating this foreign language problem. Presumably very few countries in the world build such a strong consensus around providing foreign language education while reserving enormous resources, to such disappointing results. Including our graduate students, we do not teach foreign language proficiently to our youth. Indeed more philosophically, I have another heart-breaking observation that let alone teaching foreign language proficiently, we cannot teach our mother tongue. Our students cannot speak our mother tongue, they cannot express themselves in our mother tongue and they struggle with coherency. We face a severe educational situation: neither adequate mother tongue skills nor professional and vocational foreign language skills are of quality. While we intend to teach them English, French or German, we fail in providing sufficient mother tongue skills that will let them sustain their vocational, technical, professional lives. We are face to face with an extremely disfiguring educational system education system. Turkey urgently needs an education reform that will provide quality vocational education in mother tongue and one that will enhance this with foreign language proficiency. Unfortunately as we all watch closely, rather ghastly, the matter of education is highly politicised. Every 10 or 20 years, our educational system has been constantly intervened. In Turkey we have a mediocre understanding of education: It is fully test-oriented and discards creativity. There is no political will right now in Turkey to implement this education reform but it has to be done and it has to be designed in a way that it would abolish regional unemployment. Anatolian High School system that was implemented during 1960s and 1970s should be redesigned and extended to East Anatolia. This system should be equipped with education models that bring vocational skills. These should not only provide a specialisation in a particular area; rather, it should equip people with knowledge and skills that enable to achieve oneself in accordance with their needs; and proficiency in a foreign language is on top of these knowledge and skills. A labour force that is loaded with flexible human capital is needed; meaning with people able to use Internet and computer; keeping track of the latest global developments in their profession and renew themselves through the accelerated public courses offered by the Türkiye İş Kurumu (Turkish Labour Agency) (İş-Kur); people who adapt to these. There is a famous phrase: ‘If you think education is expensive, try ignorance.’ Turkey is now trying the ignorance, ignorance with diploma. Turkey is dragging on a more costly and inefficient direction. In that sense I think that a modern conscious educational reform which would raise high-tech technicians as well as intermediate staff who would not imprison in a specific area but would be able to improve himself/herself is needed. As soon as foreign capital observes such a labour force in Turkey, they will come and contribute to this.

The gap between the West and East Turkey delays the realisation of the effects of a possible foreign capital investment. The first intervention to overcome this, is the eradication of regional unemployment

It will be long-term. Otherwise, if you do not provide these conditions, foreign capital will go invest in Belinda’s Belgium, take the profit he gained outside the country via profit transmittance and in fact this structure, that seems like cyclically contributing to the solution of current account deficit, will in the near future morph into a problem that deepens the current account deficit through profit transfer. This model of distorted industrialisation, twisted foreign capitalisation will damage Turkey in the medium-long term. A strictly serious duty of investment strategy falls to the public administration, as I said. We currently conduct another project on the effectiveness of employment incentives after 2008 that have been given by the Ministry of Labour and the Sosyal Güvenlik Kurumu (Social Security Institution) (SGK). According to our first-hand results, active workforce policies and employment incentives have been between 5 per thousand and 8 per thousand of our national income. We, at the time being, witness that an employment of 150,000 people in total is being mentioned in a year that almost every TL 1,000,000,000 creates approximately employment of 29,000 – 30,000 people. However, if this sort of investments were built as a conscious public investment; long term employment and a long term increase in the production could have been achieved. These would have been more dynamic with much longer range and not limited to one or two years. That is to say, Turkey has enough resources in such designs, however, instead of cyclical short term designs over market system; an investment design with much more fertile, much more positive outcomes will be, in my opinion, more invaluable in a system that is directly supported by public investment. This would not maybe provide that much gain in the short term, but it would be more beneficial in the long term, when necessary foundations and necessary infrastructures are established. Turkey, to some degree due to the conjuncture of election, is conditioned to getting immediate results and to short term thinking; and always tries to build something out of the market system. Mr. President stated that ‘Turkey should be managed just like a joint-stock company.’ No, Turkey should invest economically as the Republic of Turkey, with a design that looks out for future generations. A joint-stock company, as the name implies, thinks of today’s profits and gains. It plans prospective investments over today’s pricing signals. However, today’s pricing signals could be insufficient to give long term signals, could be wrong or could be not high enough, and this could imprison you in Belinda’s Belgium. For this, new institutions should be established, for instance these regional development agencies were constructed as instruments of such a vision as a matter of fact. However they are still far away from creating economic initiatives and thereby regional plans are being left on paper.

Obviating regional unemployment would be possible through not only higher education, but also through a conception of education that is diversified in terms of vocational and intermediate staff training

Maybe its autonomy could be discussed.

The political dimension of the issue is a different matter. But we are at a point where economical reviving is at the forefront. That is to say, political autonomy is very much out of the context of our political design issue. What it will bring to or take away from Turkey, economically or politically, in terms of the political peace, is a whole different contemplation.

In fact, I was going to ask you couple of questions on global economy but before that, there is one more study that you conducted on Turkey, with Aziz Buzaher and Şebnem Şahin. There…

Yes, climate change, carbon…

…with a more environment friendly economy, both development and growth are actually possible but beyond that, what kind of future do you think is imaginable given the current energy and development pattern according to this research?

… This is of course a different and profound issue; but intricately linked issue. I do not mean to imply that it is unimportant by saying that it is different. Another intricately linked issue is the question of Turkey’s energy security and the pollution created by its design, notably air pollution, environmental pollution; and threats and risks to the future generations caused by these. In the first place, above all, if Turkey will take place in the modern, the medium income world, specifically in the European Union, it needs to immediately take measures in accordance with the environmental pollution limitations and standards. But Turkey should do that not because we are being told to do so; but because we should leave the future generations a cleaner, greener Turkey that depends on more sustainable, renewable energy resources. In the study you mentioned, we looked through, notably carbon and greenhouse gases, all threats of environmental pollution that consist of liquid and solid waste. And here is the picture: As you know, Turkey functions with a design that will decrease its dependency on natural gas; it declared 2012 as the year of coal and increased the share of coal in the energy production; however we paradoxically see that coal resources in Turkey are lower quality and more pollutant. It is out of question for Turkey to meet its increased need for energy from natural coal resources; in this particular instance it comes with the threat of a dependence on coal imports. Turkey should seriously create an energy pattern that originates from solar and wind energy. But beyond that, it has to increase its energy efficiency; it has to create less energy consuming, more environmentally friendly technologies. This is achievable, as we always mention, via developing agriculture and innovation-specific investments. We emphasise that an environmental tax, a carbon tax that could be implemented in the short term; or a fund stemming from decreasing the existing employment taxes could turn into funds for the realisation of such investments. We think that such source of funding can be secured if, the environmental economy, industrialisation designs and the labour reforms are considered as a whole. Such endeavour, simultaneously deployed with investments in the Eastern region of Turkey, can be designed as a conscious industrialisation strategy that is also environmentally friendly, and one that is beneficial for the labour force training and obviating the unemployment; a win-win situation. Such design is an important duty for Turkey.

Turkey must seriously generate an energy pattern that comprises of solar and wind energy systems. This will be possible through agriculture and innovation investments as previously mentioned

I want to ask you another compelling question regarding the issue. Syriza’s European Union future and the future of European Union is being discussed within the context of Syriza, as you already mentioned. Will the Podemos movement echo in Spain, too? I mean Syriza government’s motto is ‘If we cannot change Europe, radical right will do it instead.’ How can we interpret the future of Syriza or the echoes? Will we see these in the context of Podemos or similar governments; or within the context of the European Union debates?

We will inevitably see. I mean it is not likely for the European Union to sustain neither Euro as a monetary system nor such understanding of European Citizenship, with its existing sluggish and dual structure. It has actually been a rather clear and obvious fact. In other words, EU provides a single currency system without a financial unity. So, when problems arise about the Maastricht criteria, they are covered up: ‘The countries fail the Maastricht criteria for now, but the expectation is that they will be fulfilled in the upcoming years.’ Therefore, EU turned a blind eye to the accumulating financial problems of Greece, Italy, France, and Spain until they became inevitably obvious and alternatives such as Syriza emerged. EU suddenly wants it to stop now. It is historically not possible. I believe now Syriza has moderated its strategy for Europe’s transformation and so to say he has commercialised it. The history will tell whether this can be seen as a step back or an abandon of the objectives altogether; I personally do not think so. Let’s face the facts: unless Syriza retreats from the public expenses that prioritises the human factor, both Podemos movement and Syriza are trying to execute a socio-cultural and economic program within the confines of the capitalist system –one that, I think, will be an important trigger for the transformation of the left in Europe. However ultimately, it is not an effort for the transformation of the capitalist system itself. Their program is more social and respectful of the human rights; and there are obvious obstacles and limits to this program. I guess Troika is now aware of that: the dogmatic advice of ‘Continue to have budget surpluses, pay your debts with them, then you may start to grow’ formula will not be followed. The possibility is that the Syriza government will not pursue such agenda; and if it does not succeed this agenda, the extreme right, radical, fascist movement that will emerge, will have to apply this strategy. We have witnessed a similar situation in Argentina in the recent past, ‘Tighten your belts, and stop paying the salaries, limit the retirement funds, cut all public spending; then pay your accumulated debts with the public tax surplus that will emerge.’ No government, no society can succeed in its aims through these measures. It can only be practically achieved through simultaneous economic growth and social acquisitions. It is possible for Greece; there is an accumulated natural and social capital that can be deployed as a source for the demand-led growth. Greece that is currently seen as the peripheral, external demand and consumption storage of the EU may consequently reintegrate into the production process. This aim can only be fulfilled through the creation of such an economic program; one that will be mutual.

Greece, currently seen as an external demand and consumption storage by the EU, may reintegrate into the production process

Then my last question will be about the US. US Ministry of Energy recently declared that in the years 2017-20, they will start to produce the oil needed for their consumption and in 2023-27 they will start to export. This will surely have global repercussions; but if we consider the Middle East, do you think it will have a high impact on the Middle East, one that will affect its global significance or status?

We indeed foresee a decrease in the need for oil, not just through the US oil production but also through the rising use of shale gas resources and technological improvements that will increase the energy efficiency of the resources. That is an on-going process since the 1974 oil crisis. US will surely accelerate it. We already observe the automation of the industrial production and the increasing supply of the energy input from alternative renewable resources. Moreover, most economies in Europe move towards a circular economy model; this means a design in which energy is created from waste and the dependency to a new source of energy approximates 0. This implies that Middle East will be economically less significant; but we are about to enter a 10-20 years period where the enormous personal wealth that has been accumulated in the Middle East will gain further political significance. I believe the Middle East is an important point of interest not just for its oil resources but also for the gun monopolies. As you know, there is an on-going Balkanisation movement: Iraq, division of Syria, etc. Through the Balkanisation of the Middle Eastern geography, of North African countries, the violence and the arming will continue. Hence, the political focus will no longer be the oil, but violence and gun economies.

We would like to thank you one more time.

It was a pleasure for me, too.


© 2015 Research Turkey. All rights reserved. This publication cannot be printed, reproduced, or copied without referencing the original source.

Please cite this publication as follows:

Research Turkey (June, 2015), “Interview with Professor Erinç Yeldan: Understanding Current Economic Discussions in Turkey: Assessment of the Turkey’s Turbulent Year Series – III”,Vol. IV, Issue 6, pp.34-59, Centre for Policy Analysis and Research on Turkey (Research Turkey), London, ResearchTurkey. (



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