TURKISH PRESIDENT'S STATISM SHOWS

C O N F I D E N T I A L ANKARA 005849

SIPDIS

SIPDIS

TREASURY FOR JONATHAN ROSE
NSC FOR MATT PALMER

E.O. 12958: DECL: 10/06/2016
TAGS: EFIN PGOV PINR TU
SUBJECT: TURKISH PRESIDENT'S STATISM SHOWS

REF: A. ANKARA 5723


B. ANKARA 5735

Classified By: ECON/C TOM GOLDBERGER. REASONS 1.4 (B) AND (D).


1. (C) Summary: In addition to venting inflammatory
rhetoric on social and political issues (refs),Turkish
President Sezer used his October 1 opening speech to
Parliament to reiterate the statist economic philosophy he
shares with Turkey's opposition parties and other elements of
the "deep state" that have seen their economic and political
control and prerogatives undermined by four years of
AKP-engineered free market reforms. The unprecedented
reforms the AKP government has pushed through thanks to its
control of parliament have brought Turkey its first period of
real economic stability and set the stage for its potential
economic catch-up with the rest of Europe. A return to
statism would be a disaster not only for Turkey and its EU
aspirations but for Turkey's ability to function as a
reliable ally that helps the U.S. meet its policy objectives
in the region. End Summary.

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Sezer (Again) Lays out his Statist Economic Vision
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2. (SBU) Deep in Sezer's hour-and-a-half speech to the
opening of Parliament, the Turkish President reiterated
deeply-held statist views on economic policy. Though he
attached importance to economic development, his main theme
was distrust of privatization and "foreignization" of the
economy, with comments like, "In the name of globalization,
international monopolist capital's effective control of the
domestic market through privatization ... will actually harm
the national economy." He criticized privatizing public
institutions "without any cost-benefit analysis," saying it
harmed the principle of the "social state" and rapidly turned
into "foreignization." Sezer referred to an alleged
increased incidence in other countries of "preventing the
sale of strategic establishments to foreigners" and called on
Turks to be more careful. As he did last spring in his
justification of his veto of the social security reform that
is a critical part of Turkey's IMF program and future
stability, Sezer emphasized the principle of the "social
state" which he claims is defined in the Constitution.


3. (C) Such comments are consistent with Sezer's actions on
economic policy over the years, which have been consistently
anti-market, anti-reform, anti-privatization, and
anti-foreign investment. Nor has Sezer used economic
arguments to buttress his vetoes or statements. For example,
he based the veto of the social security reform on the
"rights" of pensioners and on the principle of the social
state, without any consideration of how the social security
system would stop its fiscal hemorrhaging. Another example
was his veto of an AKP-sponsored bill allowing foreign
majority ownership of media groups, which contributed to the
continued domination of the media by a single entrenched
group.


4. (C) Sezer seems to see economics entirely through the
nationalistic, political, statist prism that has long
prevailed among Turkey's establishment of politicians,
military officers and judges with the exceptions of the Ozal
Government in the 1980's, the reforms immediately after the
2001 crisis, and four years of AK Party rule. All opposition
parties are strident in their criticism of privatization,
foreign investment, the IMF, fiscally-responsible reforms
(like social security) and advocate state intervention rather
than market-driven policies. The judiciary, from whose ranks
Sezer comes, as part of the secular Kemalist establishment,
is a bastion of statism and anti-foreign investment
sentiment: Turkish courts ) in particular, the
administrative review court (the Danistay) - have repeatedly
tried to derail privatizations on narrow technicalities. As
for the military )- in addition to commenting on broad
political issues )- they are not averse sharing their
economic opinions. In a recent speech Naval Commander
Karahanoglu's said the opposite of Kemalist nationalism is
"the religious nation, advocating Sharia, imperialism, and
global capitalism."

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Why AKP is Different
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5.(C) The contrast between old-line Kemalists and the AKP's
pro-reform track record is striking. By next year's
parliamentary elections, AKP will have provided five years of
stable, one-party government, with generally orthodox,
pro-reform policies that created a framework for post-crisis
stabilization, record growth, and a take-off in Foreign
Direct Investment.


6. (C) In a way, this pro-reform track record is
surprising, given the Islamist party origins of the AKP
leadership. In another way, however, the pro-reform track
record is understandable on domestic political grounds: after
decades building up a protected, statist economy, the
bureaucratic-judicial-military establishment had created a
network of controls and prerogatives that AKP was happy to
dismantle. AKP's constituents tend to be ordinary Turks,
often with Anatolian roots, and small businessmen and traders
who derived little benefit from the state companies' dominant
positions and only stand to gain from privatization and
foreign investment. In much the same way, AKP pushed through
social security reform, in part because the group whose
pensions would take the biggest hit were high-ranking civil
servants, hardly an AKP constituency. Whether in its efforts
to decentralize power to municipalities, or in its dilution
of the powers of the Financial Inspectors, AKP has used the
reform process break up the tight, centralized control of
what is commonly called "the deep state" to weaken the
establishment's administrative and economic power.


7. (SBU) Indeed, AKP's pro-market orientation has gone
beyond the minimum the IMF has required, particularly with
regard to courting foreign investors and privatizing flagship
state companies even after Turkey had largely recovered from
the crisis. PM Erdogan several times has pointedly stood up
for privatization and foreign investment even though their
unpopularity is used aggressively by the opposition as a
political club against AKP. Much as AKP has used the EU
accession process to dilute the military's pervasive
influence, Erdogan's pro-market policies strengthen his hand
against the state establishment.

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AKP Economic Policies and the U.S. Interest
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8. (C) This dynamic underlines the high-stakes of the
political game currently being played out as the old-line
bureaucratic-military-judicial establishment fights for its
life. Its last bastion has been the office of the
Presidency, which Sezer has used (many say abused) by
employing his limited veto powers to block market-oriented
reforms. Still the outcome of the game is far from certain
and the so-called "deep state" (made up of those who underpin
the hard-line Kemalists) has not yet used all the tools at
its disposal. This "political risk" hanging over the economy
goes a long way to explain the extraordinary premiums
investors demand in Turkey as real interest rates currently
approach 13-14%. If the November 2007 parliamentary
elections result in the end of single-party government,
backsliding on economic reform is to be expected. From best
to worst in terms of implications for economic policy, there
are roughly three scenarios: a single-party AKP government; a
coalition including AKP; and a coalition without AKP. Market
analysts are unanimous in their view that a coalition
government would be very bad for economic policy.
Historically, coalition governments in Turkey have been prone
to the kind of lowest-common-denominator, log-rolling
economic policy-making that made the 1990's a "lost decade"
for the Turkish economy and culminated in the 2001 crisis.

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WILSON