The Daily - The Economic Cost of Authoritarian Rule

Episode Date: August 15, 2018

Turkey is on the verge of an economic meltdown that could infect the global financial system. We examine how the country’s slide toward authoritarianism helped trigger the crisis. Guest: Jim Tankersley, who covers economic policy for The New York Times. For more information on today’s episode, visit nytimes.com/thedaily.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, Turkey is on the verge of an economic meltdown that could infect the global financial system. How the country's slide toward authoritarianism helped trigger the crisis and may make it impossible to fix. It's Wednesday, August 15th. Hello, hello.

Hello, hello. So I want you to practice this with me. Recep Tayyip Erdogan. You want me to say the whole thing? At least once. Recep Tayyip Erdogan. Yeah, I always have pronouncers. Recep Tayyip Erdogan.

Recep Tayyip Erdogan. BBC reporter Jim Tankersley, thank you. Thank you very much. Ciao. Okay, so here we go. Jim Tankersley, paint the picture for me of who this man is, Recep Tayyip Erdogan. Now, you're gathering 5,000, 10,000, 20,000. President Erdogan comes to power in 2002.

You're a nation, but isn't this a nation? And he begins to consolidate power very quickly. Recep Tayyip Erdogan, his country's most powerful leader since Ataturk himself. And President Erdogan starts, for lack of a better word, bullying everything in the country. The country continues to slide towards authoritarianism as Mr. Erdogan continues to consolidate power. He bullies dissent. What we've seen over the last years is Erdogan consolidating power, trampling human rights, freedom of the press, freedom of assembly. He bullies journalists.

We know that he's jailed about 76 journalists. When it comes to things like human rights, he's extremely backward. And he bullies the economy. For Turkey, the year proved to be a prosperous one, with GDP growth at more than 7%, an impressive sum when you consider the turmoil in Europe and the Middle East. What does it mean to bully the economy? What does that actually look like? The ruling Justice and Development Party came to power in 2002. Since then, Turkey has enjoyed strong growth, development, and renewed prosperity for many. It really means growth. Major infrastructure projects became the AK Party's hallmark, building more roads, fast trains, and airports, including this one built on a man-made island. That the president was so focused on growth that he did

all of these building projects to try to get there. He builds schools, he builds mosques, he builds roads, builds things in basically every city in Turkey, all of which gooses the economy. Big construction projects multiplied and the economy grew. Annual income per person has tripled since 2002 to almost $11,000. Erdogan is a classic populist, someone who makes big promises to people and then hands out favors,

whether it's a construction project in your backyard or a government contract, to keep his supporters happy. His populist way of running the economy is lots of projects and favors, lots of growth, and lots of reward for the people who support him. And Jim, how did Erdogan pay for all of lots of growth, and lots of reward for the people who support him. And Jim, how did Erdogan pay for all of this rapid growth, these projects that start going up all over the country?

Well, you can only pay for government spending in a relatively limited number of ways. You can happen to have a bunch of natural riches like a sovereign oil fund, which Turkey does not, or you can raise taxes or borrow money. In this case, he prints money, borrows money, and Turkey finances its projects that way. Merhaba. Welcome to Turkey, a cradle of civilizations and cultures throughout history. Turkey is now welcoming investors from all over the world. And a lot of it is borrowed from foreigners. So basically, he is doing this all through debt.

Yeah. So when all these projects got off the ground, all this building by this populist leader. Were the people of Turkey generally happy? Did it work? Yeah, they keep re-electing him. And granted, there are questions about those elections. But yeah, they keep re-electing him. And there is a lot of economic growth, growth levels that helped consolidate his popularity among the people of Turkey. Join this exciting journey.

Now is the time. Come and secure the future of Turkey. Join this exciting journey. Now is the time. Come and secure the future of your investments. Invest in Turkey. So when did things start to change in Turkey? So this week, the Turkish people woke up and found, almost overnight, that their currency, the lira, was worth dramatically less than it had been. At the end of March, the exchange rate of lira to the dollar was about 4 lira to 1 dollar. By the end of the day on Tuesday, it was almost 7 lira to a dollar.

It's the worst collapse of their currency since 2001. So how did this actually happen? And how does it relate to how Erdogan has managed the economy? So Erdogan is a type of leader who has many more levers at his disposal for running an economy than the president of the United States does. He basically controls fiscal policy, what gets spent and how it gets spent. He also controls, essentially through his influence on the central bank monetary policy, which is not something that the president of the United States would actually have influence over. And so that allows him to basically pull all of the levers at the same time in favor of economic growth with

very little regard for what economists would consider to be the big risks of inflation. And what were those risks? Interest rates, as you know, are the rate at which you borrow money and have to pay it back with interest. If you spend too much money, particularly borrowed money, while keeping interest rates very low

and you rev economic growth up very, very high, faster than the level which economists generally think your economy is capable of performing. If you do all that for too long of a time, prices and wages start to rise very quickly. It's what economists call overheating. And when you start to see overheating, you can get massive spirals of inflation, and then you're in real trouble. So it sounds like Erdogan is disregarding the basic economic principles that govern most

of the global financial system. I would go even farther than that. He's not just disregarding those principles, he is actively defying them. He doesn't believe that raising interest rates will slow inflation, as basically every other central bank in the world believes. He believes high interest rates will slow inflation, as basically every other central bank in the world believes. He believes high interest rates cause inflation. This is something he's long held. He believes high interest rates are evil. Almost no economists agree with that.

Very little historical evidence would support that. So when it comes time for him to try to control inflation, when he's faced with this inflation crisis that's brewing in his country, he can't just imprison it. You can't just lock away price increases. You can try all these different things, price caps, whatever. They don't work. Typically, what economists say is you need to raise interest rates. And he so far has been unwilling to do that, again, because he believes that raising interest rates will just cause more inflation. So, Jim, we have an increasingly authoritarian leader who thinks he can bully the politics

in his country and even the economics. He's borrowing lots of money to fulfill his populist mission. Where does this all lead? Well, if you borrow money based on artificially low interest rates for too long and keep growth going for too long, there could be a moment, and this seems to have happened to Turkey, where investors wake up and say, we're just not sure about this anymore. And they just overnight flip on you. And that really appears to be what has happened. And by flipping on Turkey, what does that actually mean? What are they doing? They're selling lira. They are getting their money out of the country. And that is a flight of financing and of investment that just absolutely can devastate an economy.

And lower the value of currency. Right, absolutely. What happens is if a bunch of international bankers own a bunch of assets in lira, or just own a bunch of lira, and they sell them all at once, that dramatically reduces the price of lira. But more importantly, it sends a signal to future investors like, hey, this is something to be worried about. This is a thing to be panicked about. And you get to a place where, like we saw in recent days,

the president, Erdogan, has to stand up on TV and essentially beg his people. If there is anyone who has dollars, euros, or gold under their pillows, they should go exchange it for Turkish liras at our banks. To exchange their dollars or gold or whatever for lira to try to prop up the value of the nation's currency. And to counteract the sale of lira by foreign investors. Yes. Okay. Now, that sounds like a very bad Turkish problem. What does it start to mean, if anything,

for the rest of the global economy? Well, there's a bunch of ways that it can hurt the global economy. For one, it definitely messes with global trade markets in a weird way. So Turkish buyers now can't buy nearly as much from exporters in the developed world,

for example. Because their money isn't worth as much. Right. So the United States, for example, sells about $500 million worth of cotton

every year to Turkey. But now, Turkey's going to be able to buy a lot less than that at this exchange rate because they just don't have the buying power that they used to.

At the same time, the United States actually should be able to import a lot more of Turkish goods for cheaper. We import like $300 million worth of Turkish rugs every year. And the prices on that relatively are going to come down because the buying power of the dollar is much higher in regards to Turkish rugs. In other words, Turkey is on sale. Turkey is on sale. Turkey is on sale.

Absolutely. And then it gets weird when you think about sometimes the United States and Turkey compete with each other in trade as sellers. So I'm from Oregon. We sell a lot of hazelnuts from Oregon. We grow a lot of hazelnuts. We sell them on a global market.

China ends up buying, at the end of the day, a lot of those hazelnuts. Well, they also buy a lot of Turkish hazelnuts. And now the Turkish hazelnuts are on sale. And the Oregon hazelnuts, by the way, because of the United States and China's trade dispute at the moment, are on, I don't know, price markup, whatever you call the opposite of being on sale. And so the effect for Oregon farmers could be very bad. That's fascinating. So the effect for Oregon farmers could be very bad.

That's fascinating. So this is the way in which one country's decision to not do something about inflation spreads around the globe and begins to hurt other economies. The other way is that banks in other countries have loans out to businesses in Turkey or they are bondholders for the Turkish government or whatever. And there is then fear of, well, if the Turkish government decides to massively inflate away its debts, or they default on debts or whatever, then those fears can ripple through to the balance sheets of those banks, which can affect those countries. Like if you're worried about a Spanish banking bailout possibility because of exposure to Turkey, this is another way that financial crises spread. And all this is the result of Erdogan essentially going on a building spree, a borrowing spree, and a spree of not raising the interest rate, as you suggested he should. Right, absolutely. And it's not just me. It's basically every economist in the world.

And there are all these columns coming out just saying, Turkey has a very easy solution to this problem. It just needs to raise interest rates and deal with a little economic pain for a while. This is what America did in the 1980s when inflation got very bad. Paul Volcker, then the head of the Fed, raised interest rates. And voila, it produced a mild recession for a little bit. And then the American economy recovered. And we have not really had an inflation problem since. Prices go up about 2% a year.

You pay $1 for a can of soup this year, and it's $1.02 next year. Well, in Turkey, inflation is about 16% right now. So that's a much, much faster rate at which prices are going up. And if you are a consumer in the Turkish economy, you experience that as, wow, every day that I wake up, the money in my wallet buys a little bit less than it bought yesterday. Why would Erdogan be so resistant to something that seems so simple and foolproof as raising the price of borrowing, raising the interest rate inside Turkey? the price of borrowing, raising the interest rate inside Turkey? Well, two reasons. One, populist policies are called populist for a reason,

because they are meant to be popular. Raising interest rates does not usually vary popular. Because it makes borrowing more expensive. Think about it. If suddenly everyone who went out to buy a home or a car, a new piece of business equipment in the United States had to pay triple the interest rate that they had to pay yesterday. And we were all being told that was to ease inflation. You'd have a lot of people who've been saving up their money for a long time on a down payment really angry about, hey, I can't borrow money. Also, it tends to push your economy into recession if you have to raise interest rates very abruptly. It contracts economic activity. Many economists see that as the price you pay

to stop inflation and to get your economy back on the right footing. But again, compounding all this is the fact that Erdogan does not agree with most economists. And he, by all accounts, appears to have surrounded himself with advisors who think the way that he does, or at least tell him that they think the way that he does. So in a sense, all this we're talking about

is the kind of logical economic consequence of an authoritarian regime, right? It seems like we spend so much time talking about, quite naturally and rightly, the consequences of authoritarianism when it comes to people's rights and to democracy. But here we're talking about the economic cost of authoritarianism.

And is that essentially what we're looking at? I think so. I think what we are seeing here is, in particular, the cost of an authoritarian government that wants to consolidate all of the levers of economic power into the hands of essentially one man who is not cognizant of when to poll and when not to poll them. Political goals are always to some degree wrapped up with the economy.

But when you run the economy to benefit a ruling party, first and foremost, in the short term, you set yourself up for dramatic longer term or even medium term consequences. And the thing is, the medium term does arrive. The long run eventually becomes the short run. And there is a day when you have to pay the consequences of doing a bunch of things just to make yourself look good in the moment. yourself look good in the moment. Jim, thank you very much.

It is my pleasure. Thank you for having me. In a speech on Tuesday, President Erdogan encouraged Turkish citizens to restore the value of the lira by buying domestically made products rather than foreign imports. During the speech, he proposed boycotting U.S. technology, including the iPhone. We will stand against the dollar, currency rates, inflation, interest rates, he said. I believe in my nation. We'll be right back. Here's what else you need to know today. Moments ago, an 884-page report issued unanimously by the 40th Statewide Investigative Grand Jury.

The largest, most comprehensive report into child sexual abuse within the Catholic Church ever produced in the United States was released. On Tuesday, a grand jury released a sweeping report about sexual abuse by the Catholic Church in Pennsylvania, identifying more than 300 accused members of the clergy, 1,000 victims, and a systematic 70-year campaign to cover it up. Dozens of witnesses testified before the grand jury, detailing acts of sexual abuse by priests and how senior church officials covered up their criminal conduct, prioritizing their institution over the safety and welfare of these young boys and girls. over the safety and welfare of these young boys and girls. According to the report, church leaders persuaded victims to remain silent about the abuse and police officers not to investigate.

The revelations are unlikely to lead to criminal charges, given the statute of limitations in Pennsylvania. But abuse survivors and advocates are pushing state lawmakers to change those laws, a move the Catholic Church has opposed. As the members of the grand jury wrote in their report, we need you to hear this. There have been other reports about child sex abuse within the Catholic Church, but never on this scale. For many of us, those earlier stories happened someplace else. Now we know the truth. It happened everywhere.

And... On Tuesday, Puerto Rico restored electricity to some of the last residential customers on the island after a rebuilding process that took nearly a year and cost more than $3 billion. My name is Frances Robles. I'm a journalist for The New York Times. I wanted to visit the last one in Puerto Rico that doesn't have electricity. My colleague Frances Robles spoke with one of the final residents to regain power, Francis Robles spoke with one of the final residents to regain power,

Jasmin Mendez, a 44-year-old mother of three, who has spent 11 months without light or a working refrigerator. The Times reports that up to 25% of the work done to restore electricity in Puerto Rico may have to be redone. And that despite massive investments, the electric system there is in no better shape today than it was before Hurricane Maria. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.