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The Connection Between The Turkish Economic Decline and the Gezi Park Protests

Posted by on August 8, 2013

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Turkey’s economy has come a long way since the AKP (Justice and Development Party) took power in 2002. As one of the world’s fastest growing economies, Turkey is currently the sixteenth largest in the world and from 2002 until last year, had growth rates close to 9%. Despite this growth, the still-developing Turkish market poses some concerns for current-day investors. For example, money that flows into the country comes in too quickly and artificially boosts the value of the Turkish lira (“Turkish bond yields reach record lows on credit rating upgrade”). This is one of the many reasons why the lucrative Turkish market sharply declined coincidentally during the Gezi Park protests in May 2013. The general public perception, as in opinions of the shop owners of Taksim Square and mainstream international media, believes that the Gezi Park protests caused this crash. This oversimplifies the issue. Rather, it can be said that the market started to decline May 23rd, almost a week before the protests, when the Chairman of the Federal Reserve Ben Bernanke announced that the American Federal Reserve (FED) would end asset purchases in 2014 and raise U.S interest rates which would inevitably affect all developing markets. This caused competition in the global market where investors were pulling out their funds. And for a country that relies heavily on foreign direct investment, this meant that the only way to compete was to raise interest rates. In order to mediate this crisis, the Central Bank Governor, Erdem Basci, announced that the Central Bank would interfere with the current market situation by “widening the interest-rate corridor” from 3.5% to 6.5%. This would keep investors in Turkey but it would also mean that the Turkish Lira would be further devalued. For the first time in two years, the Turkish Central Bank’s Monetary Policy Committee raised its overnight lending rate to 7.25% on July 23. The Bank also decided not to hold foreign exchange auctions and to only allow lending to primary dealers at 7.25 percent during periods of additional tightening. Then on June 8th, the Central Bank used $2.25 billion in an attempt to stabilize the Turkish currency by raising the value of the lira against the U.S dollar. However, the Turkish lira never recovered from the crisis and the exchange rate still lies at 1.92 on August 4th .

 

Despite all this financial jargon, the lesson Turkey should learn from the Gezi Park protests is that the country is not immune to social movements, which has been true for other markets such as the U.S. Dr. Erus, a professor I had interviewed, accounts the significant impact of the protest in Turkey to the Prime Minister’s underestimation of the “power of the people.” Both domestic and international occurrences have also proved that Turkey needs a more stable economic infrastructure that can support such volatility. Moving forward, the future of the Turkish economy is hard to predict. Many economists, including the two professors at the University of Boğaziçi, believe that the market now is in the hands of the government. While the protests have calmed and the government has halted its plans of developing the Gezi area, it is prospected that things will change with the local elections in March 2014.

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