Thread by @DAcemogluMIT

Preliminary but fairly clear results from the runoff of the Turkish elections show that President Erdogan will have a historic third term. This has implications for democracy and the economy.

For Turkish democracy, it’s not great news, but how bad things will be will depend on several factors. Let us distinguish five facets of democracy. First, judicial independence was very bad and probably cannot get much worse.

Second, the imperial presidency that Erdogan brought and jailing of politicians weakened the other pillar of separation of powers, the legislature, and there may be further sidelining of parliament, esp. since AKP now has fewer seats. This is one big threat.

Third, freedom of TV and print media was already pretty bad and it may get a little worse if there are controls on social media. A complete ban on all dissident voices would be a significant hardening, which is unlikely.

Fourth, autonomy and impartiality of bureaucracy and security services may be further eroded. This is another important concern, esp. in regards to control of corruption and other irregularities.

Fifth, civil society and broader freedom of expression were already weak in Turkey before AKP rule and have become more impaired. This may continue and, to me, that’s the biggest concern. (Consistent with the thesis of the Narrow Corridor, amazon.com/Narrow-Corrido…)

For the economy, there is a lot of uncertainty. In the short run, some foreigners may see an Erdogan victory as good for stability (esp. compared to a contested outcome). But continuation of current policies is concerning all around.

Policy of negative real interest rates, complete lack of independence of agencies and broader mismanagement will have mounting costs. This can be seen in the rundown of CB reserves (as authorities attempted to maintain the value of Turkish lira; reuters.com/business/finan…).

The bigger threat is the cementing of the current three major problems: lack of productivity growth and efficiency improvements; corporate and financial balance sheets; and worsening fiscal situation. All three are very costly.

My work with Murat Ucer has emphasized that Turkey has had no total factor productivity growth or technological upgrading for over 15 years now: economics.mit.edu/sites/default/… for Turkish readers see the volume: bilgiyay.com/kitap/cikmaz-y…

Economic growth has been low-quality, driven by the construction sector, credit expansion and government spending, without enough investment or technological and efficiency improvements. Corruption and patronage make things worse.

Corporate balance sheets have worsened, but it is impossible to know how bad they are. This is both because of the COVID economy and government pressure not to lay off workers. Real estate exposure may have made things worse.

Banks, and especially state banks, probably have a lot of non-performing loans, partly because of corporate balance sheet problems, and partly because they have been pressured not to cut lending.

Government spending has increased and there are huge implicit guarantees via the FX-protected lira deposits (introduced to stop a run on the lira), various private-public schemes that commit future revenues, and state banks balance sheets.

All of this is made much worse by the fiscal and economic costs of the mega devastation caused by the earthquake and the rebuilding that this requires (plus the refugee problem, which is still ongoing).

On the current path, all of these are likely to get worse and certainly no better. Tourism revenues and money from the Gulf and perhaps Russia can prop up reserves for a while, but there is a lot of uncertainty ahead.