02 May 2015

The Global Crisis in 2015 and the Turkish Economy – Ümit Akçay

Approaches seeking the causes of the 2008 crisis in certain structural dynamics are mostly sought out within the scope of the Marxist tradition. Accordingly, the crisis resulting from the downward trend in profits by 1970s triggered significant amendments both in state-society relations and political economy paradigm. The political package that began to be called neoliberalism was designed to restore profitability of companies. The package basically aimed at undermining the economic, political and social power of the labor movement and trade unions. Flexibility and internationalization of the organization of production accompanied this program aspiring to weaken the labor movement and narrowing down its organizational capacities. The transformation of the state and the rise of a new right-wing politics marked the political direction of the era.

During the implementation phase of the neoliberal package, two tendencies developed in central countries: financialization and deindustrialization. Financialization referred to rapid boom in profits of companies in the finance sector, first in the USA and then in other central countries when compared to companies in industry sector. In fact, it could be seen that such companies were present in both the finance and production sectors instead of tending to be in a single sector. Nevertheless, the share of finance in overall profit of companies active in both sectors gradually increased.2

The second critical development was the intensification of competition among traditional production bases.3 Japanese and German companies aggressively entered sectors like automotive and electronics that had thus far been under unquestionable dominance of the USA. As a result of the increasing international competition, companies based in the USA started to shift their production to countries with cheap labor costs and strong infrastructure so as to reduce costs. Therefore, increasing competition and financialization, alongside with deindustrialization turned into an advancing dynamic for central countries.

It is possible to see the effects of these changes at both in the structural and institutional level. The most significant development at the institutional level was the world-wide liberalization of capital movements and the gradual removal of existing financial regulations. This institutional transformation was buttressed by the belief that once intervention by external elements like trade unions and states ceased, the markets would automatically reach a balance and stabilize themselves within a steadily growing economy.4

This belief In the fact that automatically operating markets would yield the best results for the entire society was strongest in the USA. The financial sector in the country, which was the strongest and the most powerful around the world, and the support towards consumption based on credit expansion (indebtedness) were also significant factors in the propagation of this belief. Credit expansion became a state policy because it not only triggered economic expansion but because it could also easily be converted into political support leading to the gradual removal of regulations limiting its expansion. Deregulation moves gradually implemented in the 1980s and 1990s were crowned with the removal of Glass-Steagall law in 1999.5 The New Financial Architecture (NFA) constituted by the end of 1990s was based on this.

Essentially, NFA aimed at including the poor within the financial system.6 This financial incorporation was predominantly realized through the housing sector. Financial innovation and securitization mechanisms also had a significant role in the formation of the NFA. Debts with different terms and magnitudes were collected in a single pool and redistributed through these mechanisms, while corresponding new securities were launched. This process was accelerated through the establishment of a shadow banking system alongside the official banking system and functioning outside the regulations binding the first. One of the significant components of the NFA was credit evaluation institutions. What led asset-backed securities to be purchased by major actors, especially pension funds and institutional investors, was the assurance that they were to be trusted. The last column of the NFA was insurance companies. Insurance companies developed new derivative products to function as assurance in case assets evaluated by credit evaluation institutions went bankrupt. Thusly, a system developed in which it was practically believed that there was no risk of bankruptcy.

The NFA was based on newly developed risk management techniques; alongside with financial innovation and securitization.7 Accordingly, fragmenting risks pertaining to a single financial institution so as to make each piece purchasable by other elements in the financial sector became an important application of new risk management technics. However, this was also the basis of the “systemic risk” laying the grounds for the demise of NFA itself.  Lastly, another feature making the establishment of the NFA possible was the interest rate that had been kept low in the 2000s until the eruption of the crisis. At the beginning of 2000s, when FED rapidly dropped the interest rates to overcome a recession and get over the economic tremor caused by September 11, the ground was laid for the NFA, which had been formed in the 1990s, to blossom.

It did not take too long for the original US crisis to reach Europe, as the NFA had already gained international propagation in 1990s. However, with the increasing international financial integration, a problem occurring at one point in the system easily spread to other points. Firstly, European banks having invested in the USA and European companies directing institutional investments as pension funds were affected by the deflating financial system. Nevertheless, states intervened to prevent these companies trigger an overall deflation of the financial system and their debts were undertaken by the states as public debts. When the crisis reached Europe, its scale expanded and company bankruptcies started to give way to state bankruptcies. Iceland was first, but Greece was the one to take the lead in the European crisis.


Intensification of the global crisis and the turning point in 2014

By 2014, with the countries defined as “rising markets” having fallen into the grip of the crisis, the geographical expansion period of the crisis that had debuted in 2008 was finalized. 2014 was also the year when signals towards the intensification of the global crisis were also amplified. The most significant indicator of the intensification of the global crisis was the slowdown of the economic expansion trend in significant world-wide production bases. The economic growth of China that had continued since 2010 was slowing down and it was clear by 2014 that his slowdown would continue. Similarly, economic growth in Germany, another significant production base, has been continually decreasing since 2010.8 2014 saw economic growth in Europe and Japan almost reach the level of recession. In addition, the economic growth rate declined in developing countries. Apart from the decline in the growth rate, two more developments marked 2014. The first is the finalization of the quantitative expansion policy of FED going hand in hand with the moderate recovery in the USA, while the second is the acute drop in oil prices.


FED decisions

With the moderate recovery of the US economy and unemployment returning to pre-crisis rates, the FED took steps towards gradually finalizing the quantitative expansion programs during 2014. One of the main features of the recovery of the US markets was the further flexibilization of labor markets, which were already very flexible. Consequently, wealthy people benefited from the economic revitalization attained, while workers could not compensate for real salary losses. The decline of the unemployment rate was among the most important indicators of the growing economic activity. Nevertheless, this decline was accompanied by the drop of participation in the labor market.

The most significant feature of the growth in the USA is the fact that it is based on an increase in credit. Similar to the beginning of the 2000s, low interest rates were warning signs for the NFA , which has become even stronger in overcoming the crisis; credit expansion, meaning increased indebtedness, became the main feature of the economic recovery in the USA. However, further flexibilization of labor markets or growth based on indebtedness does not mean anything for indicators such as the unemployment rate or economic growth calculating qualitative trends. Having operated according to such indicators, the FED gradually finalized its quantitative expansion program as of 2008 and announced that it could initiate an interest rate hike in 2015.

Developments after the FED announcement in January 2014 can shed light on the second half of 2015, when the FED Is expected to implement an interest rate hike. The FED had announced that it would start declining its asset purchases realized within the scope of quantitative expansion strategy by 10 million dollars as of January 2014. As a result of this announcement, a significant amount of money flowed from countries like Turkey, Brazil, India and the Republic of South Africa and international funds entered US markets. Although this process played out differently in each country, the common trend was the simultaneous rise in inflation and interest rates, resulting in a major blow to economic growth.


Oil prices

The second important event that has marked the turn of the global crisis in 2014 is the abrupt fall in oil prices. Oil prices declined by around 50 percent from July to August 2014. The IMF announced that this decline in oil prices could contribute to global economic growth by 0.3 to 0.7 and claimed that it was “good news” that might accelerate the overall economic revitalization of world markets.9 However, this fall in oil prices, if it is an indicator of the deterioration of the global crisis, can only be read as “bad news,” contrary to what the IMF claims. Additionally, although the decline in oil prices is positive for countries importing oil, this might have other implications. For instance, as in the case of the USA, when the loss of energy companies become so great as to complicate the financial system, an unexpected panic could be set off. These signals have already started to be seen at the beginning of January 2015.10

What is more intriguing about oil prices is that there is no decline in demand parallel to this decline in demand. To be more precise, we can see deepening global crisis refelected in the decreased demand for oil. OPEC countries were expected to reduce their oil production in response to shrinking demand. Nevertheless, contrary to expectations, no decision was taken in the meeting held last October regarding a possible reduction in oil supply. Oil production in Russia and Iraq even reached historical levels.11

In line with the above data, we need to see the decline in oil prices as not merely an economic activity, but a result of different strategies adopted by various actors. When it comes to the strategies of the actors, the first thing that comes to mind and that which is mostly discussed is that the USA lowers oil prices as part of an initiative developed to penalize countries it sees as a threat.12 Although this approach seems to be appropriate when we consider its possible consequences, it is difficult to assume that the policies adopted by the USA alone would cause such a significant movement. The fact that Saudi Arabia, one of the significant actors of the process, is in a position to sustain its profits even with significantly lower prices shows that the decline in oil prices would not have the same impact for all oil producing countries.


Local crises of 2014

Lastly, it is noteworthy to indicate that economies in four countries had tremors with various dimensions in 2014. By the end of June 2014, panic erupted with the bankruptcy of the fourth biggest bank in the Bulgarian financial system, which could only be stopped by 2.3 billion Euros of support from the European Commission. Although the technocrats in Brussels claimed that the situation in Bulgaria was an “isolated” event, concerns about a possible crisis were raised due to the fundamental structure of the financial system.13 At a time when the tremor in Bulgaria was still reverberating, stock exchange operations of the biggest bank in Portugal were halted and the central bank was obliged to intervene. What is odd in this situation is that the banking system and the economy in general in Portugal have been de facto under the control of IMF programs since 2011. The crisis in Portugal clearly reveals the fact that austerity policies implemented around Europe had failed by 2014.14

In August 2014, when the debt restructuring negotiations of the Argentinian government with hedge fund managers yielded no tangible results, the government declared that it could not pay a part of its debt.15 Lastly, capital movements resulting in a sharp drop in the value of the Russian ruble in December 2014 were signs that the Russian economy was in great distress. For a country covering half of its public expenditure and one-third of its exports through oil and gas sales, the biggest cause of the economic turmoil was undoubtedly the fall in oil prices. Investments on the side of the Western world due to the distress in Ukraine had already started to pressure Russia. However, in an atmosphere when the economic growth substantially slowed down, the decline in oil prices contributed to expectations towards a shrinking economy and capital outflows further deteriorated the situation.16


Problems to be resolved in 2015

Considering the estimates of international institutions regarding 2015, it can be foreseen that the main trends visible at the turn of 2014 will continue–meaning that the adverse impacts of the deepening global crisis will continue. Despite the statement of the Central Bank of the EU that all available means would be mobilized to resolve the crisis,17 2015 does not look very promising for European markets that are already at the edge of deflation and recession. Moreover, the victory of Syriza, the radical leftist party with anti-austerity policies, might cause a new rupture in the course of the crisis in Europe.18

In addition to European markets being at the edge of economic recession due to austerity policies formulated by the ruling parties led by the German capital, news from China also reveal the fact that 2015 will not be that brilliant. China, whose steady growth came to a halt in 2007 and which entered a gradual decline in 2010, expects around 7 percent economic growth in 2015.19 Estimates regarding Japan are similar to those of Europe. Lastly, contrary to other geographies, the USA is expected to sustain its economic growth. However, this does not mean that adverse impacts of 2008 crisis have been completely resolved. As pointed above, the biggest risk for the US economy is whether the NFA operating through low interest rates would adapt to increasing interest rates.

A gradual slowdown in the economic growth of countries has been obliged to increase interest rates following international outflow of funds marked in 2014. Hence, what has happened in January 2014 indicates what might be the results of a possible decision on the side of the FED to increase interest rates in 2015. The most significant impact is that funds seeking high income to increase their global value will start to return to the USA and the economic growth will thusly further decline in countries witnessing cash outflow. Consequently, events that have taken place in 2014 point towards areas that will be particularly affected by the crisis, especially towards the second half of 2015.

It remains to be seen in 2015 whether China would consider repeating its recovery package offer to Russia to other countries as well.20 This offer was indeed not a simple foreign exchange swap; it was a move capable of substituting the functions of IMF, which is the ultimate lending authority in the world.21 China had a similar arrangement with countries like Argentina and Venezuela. In the case that Russia, a country rich in energy resources, overcomes its economic distress with the help of China, the share of world economy not governed by the dollar would expand, while at the same, the tokens of an alternative financial system to Bretton Woods established as of 1945 under the leadership of the USA would gain more ground.22 It is not realistic to anticipate that the US hegemony will recede in 2015, but signals from China show that the cracks in the US hegemony will be slightly enlarged.


Turkish economy in 2015: AKP still fortunate!

Following the record-breaking growth figures in the Turkish economy due to foreign capital flow in the aftermath of 2008 crisis, the growth trend started to stall as of 2012. The program adopted after the crisis was based on the construction and energy sectors aiming at making more expansive use of the opportunities of the inner market. The macro-economic framework making this program possible was based on cutting interest rates. Credit expansion achieved through declining interest rates was the motor of economic expansion after the crisis.

Nevertheless, this policy was dogged by two problems. It was possible to reduce interest rates in times of abundant capital flow due to the expansion policy of the FED adopted to resolve the crisis, but the increasing credit expansion caused by low interest rates threatened the financial stability in return. Macro-prudential measures were implemented to overcome this risk, aspiring to take retarding measures in regard to cash flow so as to restrain the increasing current deficit and shrink credit expansion. However, the indirect result of macro-prudential measures was the slowdown of economic expansion.

The second fundamental problem is that declining interest rates are substantially dependent on the fall of borrowing costs in the international finance system, i.e. FED’s quantitative expansion policy. Therefore, as of May 2013 witnessing a change in FED policy, it has become exceedingly difficult for the CBT to keep interests low. Indeed, the necessary intervention of the CBT in January 2014 showed that insisting on keeping the interest rates low in times of capital outflows would cause a rapid appreciation of foreign currency. By September 2014, the January decisions of the CBT regarding foreign exchange rate were underwhelmed, followed by a lower growth and higher unemployment rate.

The main problem of economic administration in 2015 is that the borrowing cost in international markets will not be as cheap as in previous years. However, this problem is not unique to Turkey. The meaning of the FED’s crisis resolution strategy for countries like Turkey is, in the worst scenario, a transfer of the crisis to these countries and, in the best scenario, the onset of a low growth period. Circles close to the government are planning to balance this adverse pressure via the decline in oil prices and quantitative expansion announced by the European Central Bank.

With respect to the general elections to be held in June 2015, it can be predicted that the economic administration is easing off until the elections due to various reasons. First, the closest OPEC meeting to resolve the excess supply obviously contributing to the fall in oil prices is in June 2015. Second, signals pointing to the face that the FED will not rush to increase interest rates are getting stronger. Contrary to the last meeting, it is expected in the June OPEC meeting that oil production will be reduced. If the estimates are well grounded, this might coincide with the FED decision to increase interest rates. In that case, it might be more difficult to sustain economic growth for oil importing countries like Brazil, Turkey or South African Republic. However, it is noteworthy to keep in mind that these two developments will occur in the second half 2015, after the general elections in June.

Another advantage of the economy administration in terms of the general elections is the expectation of a possible fall in inflation in the first half of 2015 due to both oil prices and base effect. This might give the government a chance to reduce the interest rate before the elections. This will in return rapidly trigger credit expansion and the growth in the construction sector and prevent economy from becoming a problematic area for the government.

Nevertheless, what is common to all these aforementioned factors that might ease the hand of the economy administration until the elections is that neither of them is under the control of the government. To be more precise, the fact that the economy seems to be manageable in the first six months is not the result of a successful economic policy. It is only made possible through external factors as oil prices, FED decisions, quantitative expansion in Europe and base effect. Hence, the government might be fortunate once more, at least in terms of economic administration, in the forthcoming elections. However, it would not be a surprise to see that the Turkish economy will once more be economically troubled as of the second half of 2015.



1. For the details of these three leveled analysis see: Ümit Akçay and Ali Rıza Güngen, Finansallaşma, Borç Krizi ve Çöküş: Küresel Kapitalizmin Geleceği, 2014, Ankara: Notabene Publishing House.

  1. Özgür Orhangazi, Financialization and the US Economy, 2008, Cheltenham, UK ve Northampton, US: Edward Elgar.
  2. Robert Brenner, Economics of Global Turbulence, 2006, London ve New York: Verso.
  3. Alan Greenspan, The Age of Turbulence, 2007, London ve New York: The Penguin Press.
  4. Leo Panitch and Sam Gindin, The Making of Global Capitalism, 2012, London and New York: Verso.
  5. Akçay and Güngen, Finansallaşma Borç Krizi ve Çöküş, s. 73.
  6. Dick Bryan and Michael Rafferty, Capitalism with Derivatives, 2006, New York: Palgrave Macmillan.
  7. OECD, “OECD Composite Leading Indicators”, 8 October 2014, Paris. Accessed on: http://t.co/Qy8pYFizLt
  8. Rabah Azeki and Oliverclanchard, “Seven Questions about the Recent Oil Prce Slump”, IMF, 22 December 2014, Accessed on: http://goo.gl/CmNriz
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  12. Ümit Akçay, “Kriz Sürüyor, Bu Sefer Bulgaristan”, Kriz Notları, 1 July 2015,  Accessed on: http://goo.gl/cXszC5
  13. Ümit Akçay, “Sıradaki Kriz Gelsin: Bu sefer Portekiz”, Kriz Notları, 10 July 2015, Accessed on: http://goo.gl/XtMqrE
  14. Ümit Akçay, “Arjantin Akbabalara Karşı”, Kriz Notları, 2 August 2015, Accessed on: http://goo.gl/BN20f4
  15. Ümit Akçay, “Küresel Kriz ‘Derinleşirken’: Rusya Ekonomisi Çöktü!”, Kriz Notları, 17 December 2014, Accessed on: http://goo.gl/BXZPPZ
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  18. Sharon Chen, “Slow China Growth, Uneven Global Recovery Hampers Singapore’s Economy”, Bloomberg, 1 January, 2015, Accessed on: http://goo.gl/nu9A1j
  19. William Pesek, “China Steps In as World’s New Bank”, Bloomberg, 25 December 2014, Accessed on: http://goo.gl/ey3a0m
  20. Mark Adomanis, “The Ruble Crisis, Russia, And China”, Forbes, 23 December 2014, Accessed on: http://goo.gl/phe8J9
  21. Ye Xie, “Ruble Swap Shows China Challenging IMF as Emergency Lender”, Bloomberg, 22 December 2014, Accessed on: http://goo.gl/7MYzW7 

This article previously appeared at Perspectives, Issue: 11, pp. 9-15, Link: http://tr.boell.org/de/node/2207