The current currency crisis in Turkey has led many citizens to demonstrate against the AK Party government over the past couple of days. Before analysing the crisis, it is important to highlight Turkey's economic and social development performance since the early 2000s.
According to the World Bank's "Country Partnership Strategy 2018-2021" report, Turkey developed its economy rapidly and opened up to foreign trade and finance during this period by implementing regulations corresponding with European Union (EU) standards. The report confirmed that it also recovered well from the global financial crisis of 2008/09.
It is not a coincidence, therefore, that the bank also acknowledged that this economic improvement has been impressive, leading to increased employment and income, and making Turkey an "upper-middle-income country". What does that mean? The World Bank says that lower-middle-income countries have to reach per capita Gross National Income (GNIs) between $1,036 and $4,045, while upper-middle-income economies should be between $3,046 and $12,535. That's why Turkey is in the latter category with GDP per capita of around $8,610.03 in 2020.
If that was the case last year, why has its currency collapsed so dramatically recently? At the start of 2021, the Turkish lira was already down in value by more than 40 per cent against the US dollar, and became as much as 15 per cent lower on Tuesday. This is a considerably worse situation than Turkey's 2018 currency crisis in the wake of sanctions imposed by then US President Donald Trump.
Less than 25 years after the biggest recession during the last period in office of former Prime Minister Bulent Ecevit (1999-2002), Turkey's manufacturing sector is now facing a different type of crisis. As the impact of the coronavirus pandemic was seen across the globe in early 2020, it is undeniable that manufacturers in all industries scrambled to navigate the new normal in Turkey. This is one of the foremost reasons for the current currency crisis. When demand is high the manufacturing sector must be strong to meet the demand. This is the basic explanation for those countries who are trying to become strong in the face of high demand during the pandemic.
In his book How Nations Succeed: Manufacturing, Trade, Industrial Policy, and Economic Development, Turkish economist Professor Murat Yulek explains the correlation between the prosperity of nations and manufacturing. Yulek cites the example of South Korea, which was one of the poorest countries in 1945 after the Second World War. Nevertheless, its government knew that it could not depend on foreign aid if it wanted economic growth and prosperity. Hence, it started a circular economy model by funding small industries. "Now, American markets are flooded with Korean manufactured automobiles and Korean companies are present in other high-tech sectors such as mobile devices," wrote Yulek. "Samsung is the closest competitor to Apple and is ahead of several other companies such as Nokia in the smartphone segment."
Turkey's defence industry has been booming throughout the past ten years. As a long-established member of NATO, for the first time Turkey started to sell its own weapons to other NATO countries, such as Poland. In May this year, the Polish government signed a contract for Turkey's armed drones for the Polish Air Force. Turkey is demonstrably one of the world's leading manufacturers of such weapons. However, this is not enough to be immune in the face of a massive recession such as that which is being seen in Turkey.
According to leading economists, the government in Ankara needs to implement a capacity building process in every manufacturing sector, such as renewable energy, automobiles and IT technology. Energy production is also really important, as more manufacturing increases the bill for energy imports. Sustainable energy production policies will save Turkey money and create economic independence. In the process, it can build other industries using its own energy. Turkey took a major step forward in 2018 when it started its energy exploration in the Eastern Mediterranean in the search for greater energy independence.
In an uncertain global economic environment, the best way to withstand external shocks and sustain growth is to get the basics right in terms of small and large manufacturing concerns. As such, to maintain sustainable economic growth, Turkey needs to continue its support for manufacturing and a favourable business environment.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.