September 28, 2023No Comments

Taiwan: What’s Next?

For our first Webinar of the 2023/24 season, we had the pleasure of hosting a great team of experts on Taiwanese affairs: Dr. Dafydd Fell, a distinguished Professor at SOAS University and the Director of the SOAS Centre of Taiwan Studies, and our very own ITSS researchers Sandra Watson Parcels and Ho Ting Hung (Bosco).

Our guests navigated the complexities of Cross-Strait relations, the upcoming Taiwanese elections, and the future of the semiconductor industry.

May 6, 2023No Comments

Turkey’s Election: The Earthquake, a Fragile Economy, and Why Erdogan May Win Again

Authors: Riccardo Bosticco, Miguel Jiménez, Michele Mignogna - Political Economy Team

In February, Turkey was hit by an earthquake that devastated the country. This sudden movement along faults appears to have brought to the surface not only a natural disaster but the policies of the incumbent president. Tayyip Erdogan’s rule was characterized by a period of rapid expansion in the aftermath of a previous quake in 1999; nonetheless, the increased power of the Turkish president has allowed him to deploy controversial economic policies which have contributed to the country’s to record inflation numbers. However, this growing control of all means may allow Erdogan to reshape the narrative and remain in power. Elections on May 14 will serve as a testing ground for this. 

Groundhog Day

Literature on natural disasters is broad, and its economic impacts have been intensely scrutinized. Among natural disasters, earthquakes take a particular spot, given their destructive nature. They represent adverse shocks that can affect the distribution of economic activity within a region and propagate throughout the economy via supply chains and trade linkages. Not surprisingly, beyond the inherent destructive power of each earthquake, the pre-existing economic conditions of the region hit may make the earthquake’s effects more severe. Hence, the economic growth of poorer economies with lower government spending and weaker institutions may take a more brutal blow from these events. Sitting at the intersection of three major tectonic plates, in the last three decades, Turkey has suffered two notorious earthquakes preceded by epochs of economic fragility. 

Back in 1999, an earthquake hit Kocaeli province near Istanbul with a death toll of over 17,000. The impact was magnified as a result of a preceding unstable economic period characterized by macroeconomic imbalances and external crises which hit the confidence of emerging markets, leaving the economy with modest growth and ill-prepared to face the earthquake. Although the 1999’s earthquake was lower in magnitude and occurred in less densely-populated areas, the regions hit were economic and industrial powerhouses, accounting for 7% of the GDP and 14% of the industrial value added. Furthermore, due to the linkages of these regions to the country’s main cities, the earthquake had spillover effects extending to an area accounting for 35% of the country’s GDP and half of the industrial output.

Despite these past events, the country has yet to improve its resilience against future earthquakes. As a matter of fact, the natural disaster that occurred last February brought ghosts from the past to the surface. The aftermath of the 1999’s earthquake appeared promising, with measures headed in the right direction: an earthquake tax was levied, and more than US $38 billion were raised to enhance Turkey’s urban resilience. Nonetheless, when the latest earthquake hit, causing damage that amounted to over US $34 billion and claiming the lives of over 50,000, some of the more than 20,000 collapsing buildings belonged to that wave of apparently earthquake-proof constructions

Tayyip Erdogan, who took office shortly after the 1999 incident, managed to renew 3 million housing units; however, much of the construction boom which has characterized his mandate could contain  numerous irregularities. To begin with, despite initial compliance with the government’s standards, construction developers managed to circumvent these initial premises due to poor monitoring and this, in turn, allowed them to cut back on the necessary materials needed to ensure resistant buildings. To make matters more dubious Erdogan accepted the amnesty program that forgave many of these developers for their millions of buildings’ faults. This happened weeks before the 2018 general election. It was seen as a popular move that enabled his government to reap the political dividends and to claim to have solved the housing problems for many city residents.

These facts and the latest earthquake demonstrate that the insufficient attention paid to natural disaster prevention in Turkey magnifies crises. Moreover, as shown below, they potentially contribute to economics that weaken Turkey’s finances and could make Erdogan’s position in the imminent elections more fragile. 

The Unorthoxy of Erdoganomics

As Turkey prepares for its May 14 elections, its economic crisis and inflation have emerged as significant campaign themes. Erdogan was already dealing with serious issues due to the country’s high inflation rate, the second highest in the G20 after Argentina. Now, the earthquake has made it a much more difficult situation. 

The currency poses a problem since Turkey’s central bank utilized $7 billion in reserves to stabilize the currency following severe earthquakes, encouraged banks to make derivative transactions on Borsa Istanbul, and increased the spread between Foreign Exchange and gold trading to reduce the demand for foreign exchange. After a string of unconventional interest rate cuts supported by Erdogan drove inflation to a 24-year high above 85% in October, it fell to 58% in January with a positive base impact and to about 50% in March. Projections establish that it should be around 35/40% in June, even if Turkish officials argue that due to the earthquake’s effects, it is likely to remain approximately 40-50%.

“We will improve the investment further with a structure based on a free-market economy integrated with the world,” the ruling party’s manifesto states. It aims to achieve a GDP of $1.5 trillion and an annual growth of 5.5 percent by 2028. In 2022, the GDP was a little less than $1 trillion. Consequently, the auspicious leapfrog is unlikely, given the projected $84 billion loss due to the earthquake (about 10% of Turkey’s GDP) and a devastated populace.

Source: https://unsplash.com/photos/CNrNqsaGKFo

Recent questionable institutional and democratic changes can be considered to be at the root of Turkey’s economic problems and have allowed Erdogan to cut interest rates in the face of galloping inflation. According to someone, he has emerged as a political strongman since the bloody crackdown on the Gezi Park protesters in 2013. He has since consolidated further authority through a constitutional reform that changed the parliamentary system to a presidential one. He seemingly influences the country’s monetary policies through his control over the central bank, while technically still being an independent body. Three governors have been forced to quit in the last two years alone for defying the president’s unconventional requests.

All this may have given Edogan the opportunity to implement the so called “Erdoganomics,” the president’s alternative to neoclassical economic models, holding that higher interest rates raise inflation and not the other way around. In response to roaring inflation, Erdogan has continuously decreased rates, recently dropping by 50 basis points despite the earthquakes.

While casting doubts on economists, Erdoganomics also provides a puzzling issue for political scientists: why does the president continue to decrease rates despite the political fallout as the presidential elections get closer? Erdogan’s grip on the state’s institutions and the prominent position he has carved out for Turkey at the internal stage allow him more freedom to act according to his electoral needs. As argued below, the type of power system established by Ergogan could help him overcome the general idea that sees the economic crisis and earthquake badly managed.

Erdogan’s Grip on Power: Shielding from the (Un)wanted?

The earthquake crisis has added to the challenges facing Erdogan’s re-election, but the last word on the election’s outcome is difficult to predict. Two powerful party coalitions now dominate Turkey’s political scene. The Nationalist Movement Party (MHP) and the Great Unity Party (BBP) are now members of the People’s Alliance, which is being led by President Erdogan (AKP). The Nation Alliance, which unites six opposition parties, represents the majority of the opposition and is led by Kemal Kilicdaroglu, also known as the “Turkish Gandhi”. However, a third group could be crucial to how the future elections turn out. It comprises minor left-wing organizations, but includes a political powerhouse too, the Peoples’ Democratic Party (or HDP), the most prominent pro-Kurdish organization, which, according to Soli Zel, the HDP will probably influence the election outcome with 12% to 15% of the vote.

Even if the earthquake mismanagement and Turkey’s economic turmoil blow a wind of change in Turkish politics, President Erdogan can still turn things in his favor. The President’s established system of power and influence can strengthen Erdogan’s rally-around-the-flag and help him win support. The national earthquake crisis has overwhelmed Turkey’s rescue teams, and the state has activated a level-4 alert, requiring international help. Despite the abovementioned issues regarding emergency preparedness and Turkey’s economy, Erdogan could still arrive safely at the next election. 

If opinion polls indicate stormy weather for the president, he could potentially extend the state of emergency to postpone the elections – the last state of emergency declared in Turkey, in 2016, lasted two years. Moreover, the from many considered illiberal power system shaped by Erdogan could give him access to defeat the opposition and stay in power. 

Turkey’s president has purged courts, law enforcement agencies, civil service, intelligence agencies, military officers, and the media while strengthening his ties with the loyalists. Turkey’s judicial system is not entirely independent. In December 2022, Ekrem İmamoğlu was sentenced to two years for “insulting public officials”. He was a popular figure from the secular center-left. Similarly, more than 100 politicians from the People’s Democratic Party, pro-Kurdish, remain trialed for terrorism offenses, the movement risking being outlawed. 

Erdogan’s media power can be considered disproportional: as a Reuters investigation found, in Turkey, “[t]he biggest media brands are controlled by companies and people close to Erdogan and his AK Party, following a series of acquisitions starting in 2008”. While social media could serve as an alternative to the politicization of traditional media outlets, they can hardly be exempted from delivering misinformation, an article from Politico writes. In fact, the government has taken a more proactive stance against them: “[w]ith a new controversial social media law, Turkish authorities now have the right to control and, if necessary, restrict online free speech in ways that would be unthinkable in any democracy”, noted Aslı Aydıntaşbaş, a visiting fellow at the Brookings Institute.

In addition to that, in two years of power Erdogan was able to bring society closer to a more conservative idea of Islam. While Turkey’s relationship between government and religion has always been in flux despite the Constitution not recognizing any official state’s faith, the current president has refueled Islam’s force. If the process provoked protests by secularized citizens of the Turkish metropolises, Erdogan was nevertheless able to consolidate his grip in the Anatolian heartland and rewrite the narrative around Islam as a source of political identification and ideology playing a more significant role in the era of social media. Beyond that, in the past, he has shown his ability to transform difficult situations in his favor. For example, when a military putsch was attempted at Istanbul’s Atatürk Airport in 2016, Erdogan responded: “[t]hey will pay a heavy price for this. [...] This uprising is a gift from God to us.”; this episode can be seen as a confirmation of the Turkish de-secularization.

Thus, Erdogan may take advantage of the current emergencies pending in Turkey. His influence on the judicial and information system may help him rally the society around the Turkish flag, consolidating a pool of voters around the need to be united against the damages of the earthquake and a weak economy. In such a situation, Turkey’s foreign policy activity may also help in the president’s favor, not the least the war in Ukraine and Erdogan’s positioning as a mediator.

While opinion polls do not favor the incumbent, anything can be expected from the May 14 elections. Despite signs of illness registered recently, Erdogan has returned to the electoral stage in ‘thundering’ form and giving the impression that he will do anything to stay in power. 

January 23, 2023No Comments

New Year, New Debt Distress in Africa

Author: Alessandra Gramolini.

The year that has just begun does not seem to be rosy for the African continent. At the beginning of 2022, Africa suffered from the pandemic and its effects on the economy. 2023 opens with many nations facing another crisis: unsustainable debt.

The crisis has been underway for years, long-term loans have more than doubled reaching 636 billion dollars in the decade 2011-2021, a figure that exceeds the gross domestic product of more than 40 African countries taken together. The pandemic has worsened the economic situation and the war in Ukraine has pushed many countries to the brink, cutting off access to finance, depleting foreign exchange reserves and sending national budgets into a tailspin.

Living on the razor’s edge

Debt is the biggest problem they will face even though the ratings agency, Fitch, expects average debt in sub-Saharan Africa to improve and be below 65% in 2023, after reaching 72% in 2020, helped from the economic recovery after the pandemic, rising commodity prices and efforts to reduce budget deficits, but this level compares with an average of 57% in 2019, before the pandemic, and with less than 30% between 2007 and 2013.

According to the analysis of the public debt of sub-Saharan African countries, almost half of the countries (42%) have a debt-to-GDP ratio above 70%, while the average debt-to-income ratio will continue to be above 300%, double the value of 2013. This would prove the deterioration of the economic bases of these countries and their evolution prospects.

The risks these countries will face are related to high inflation, difficult financial conditions, the general indebtedness of the economies caused by the pandemic and now also by the Russian invasion of Ukraine.

Fitch also forecasts that average inflation in the region will fall from about 8% in 2022 to 5.5% this year and that GDP growth will be around 4%, close to the average of 3.8% in the five years up to 2019, but well below the growth recorded up to 2014. In some countries, however, inflation is well above the regional average. Add to this that there are eight sub-Saharan African countries with government debt payments, in 2023, accounting for a quarter of foreign reserves.

Election year

On the political front, many countries will be called to vote during 2023. The results of these elections could increase the discontent of the populations already strongly suffering from the increase in the prices of basic necessities.

Election time can be very volatile in Africa and the 2023-24 cycle will be no different, with a high risk of political protests, mass demonstrations and strikes in a number of countries. Upcoming elections in countries such as Algeria, Madagascar, Nigeria, South Africa and Zimbabwe could prove hotbeds of disruptive civil unrest in 2023. Worsening socioeconomic conditions in some of these countries, driven by subdued wage growth, rising costs of living and food security concerns, could also prove problematic for incumbent or new government administrations.

What’s next?

While African policy makers can’t influence the global headwinds, they can take steps to build resilience. Rising prices of commodities in a continent endowed with everything from diamonds, iron ore, bauxite, cobalt, copper to platinum offer a chance to create stabilization or sovereign wealth funds to insulate against future shocks. The key to building savings is to have proper governance, by some estimates Africa has 20 such funds already, but not all have delivered.

Recent research says that China and the West should work together to find solutions for African debt distress. The report says that although China’s lending to Africa did not cause the current debt in the continent, it must cooperate with the international community and African nations, to support Africa’s investment needs, after a year of recession for most economies on the continent.

The G7, led by the incoming Japanese presidency for 2023, could develop and build support for a new plan to be eventually embedded at the G20 level on debt relief and investments in Africa. The plan could include a broad-based dialogue led by the G7, African nations, and China on:

  •  Africa’s medium- to long-term external financing needs; 
  • a high-level political understanding between the West and China on the mutual benefit of strengthened cooperation to address African debt distress; 
  • and a detailed action agenda, led by the G7 and G20 Finance Tracks, to address obstacles for debt treatments.

A way out of this situation could be strong reforms to find long-term solutions that can meet African economies’ financial needs and avoid a similar scenario in the future.