Why currency crises cost politicians
Rapid losses in a currency’s external value — also known as “currency crises” — have been common historically. Currency crises are especially likely when countries’ economies are overheating, inflation is high, and the current account (a broad measure of the trade balance) is in deficit. And Turkey has exhibited each of these vulnerabilities and more.
International factors, including U.S. monetary and trade policy, have contributed to currency depreciation in Turkey and other emerging markets. But, because of the economy’s poor fundamentals and the government’s lackluster response to the crisis thus far, most outside observers largely blame Turkish President Recep Tayyip Erdogan and his Justice and Development Party (AKP) for the crisis.
Turkey’s currency troubles have had negative repercussions on some other emerging markets and contributed to the recent decline in the U.S. stock market. But Turkish citizens will be the main victims in this crisis. Currency depreciations of this magnitude are associated with large drops in gross domestic product, higher inflation and bank failures.
Currency crises are also bad news for incumbent politicians. They contributed to the downfall of authoritarian regimes in Argentina and Uruguay in the 1980s and in Indonesia in 1998. Research by Jeffrey Frankel shows that national leaders are 70 percent more likely to lose power in the six months after a currency crisis.
Most Turks dislike depreciation
This new survey was conducted last month by Frekans Research. The survey randomly samples subregions within the 12 major regions of the country, and then randomly samples individuals within that region. In total, 2000 Turkish adults were interviewed face-to-face.
The survey found that the vast majority of Turks have negative views of the currency depreciation: 84 percent of survey respondents said the depreciation of the lira is bad for them personally and bad for the Turkish economy. A mere 5 percent said that depreciation is good for themselves and their country.
Negative opinions about currency depreciation have reduced the government’s popularity. This survey asked people how much they approve of the current government’s performance, on a scale ranging from zero for “strongly disapprove” to 10 for “strongly approve.” The government does very well among people who say that depreciation is good for the country and for themselves. The average approval among this small slice of the population is 7.7. By contrast, the average approval score was just 5.2 among people who say depreciation is bad for them and for their country.
A look at how approval changed over time within the two-week timespan of the survey tells a similar story. During the first week of surveying (July 2-8), when the exchange rate was relatively strong, the average approval score was 5.7.
Then, the lira depreciated 6.5 percent between July 9 and 11 — the currency’s largest three-day drop since 2010. Those surveyed during the final six days of data collection (July 12-17) were much less impressed with the government’s performance. The average approval rating was a dismal 3.1 in that period.
This relationship must be interpreted with some caution because different regions of the country were sampled at different times. Nonetheless, the pattern is striking. The precipitous drop in government approval after the lira’s depreciation suggests that the currency crisis is undermining support for the ruling party.
But most Turks do not blame the government
Most important, the Turkish public does not believe that its government is responsible for this crisis. When asked who is most responsible for the depreciation of the lira, only 36 percent said it was the AKP government.
That is despite the fact that there are very good reasons to place most of the responsibility on Erdogan’s shoulders. Remarkably, more Turks said that foreign governments were mostly responsible for depreciation — 42 percent held that view.
Erdogan’s ability to deflect blame for this crisis is extraordinary. The president has repeatedly claimed that the crisis is caused by an “economic war” that is being waged against Turkey by “foreign adversaries.” A key reason the public has accepted those arguments is their lack of access to contrary arguments — a function of the government’s near-complete control over the media. However, the minority of Turks who get most of their news from the Internet and social media, and who therefore hear alternative views on the matter, were considerably more likely to blame the government for the depreciation (47 percent) than they were to blame foreign governments (34 percent).
The government’s ability to deflect blame for the economic crisis has helped prop up its popularity. People who say that foreign governments are to blame for the depreciation have the strongest approval of the AKP government, with an average score of 7.4 on the zero-to-10 scale. By contrast, average approval is a pitiful 2.4 for those who blame the government. Erdogan’s future political prospects depend in no small part on his ability to continue convincing the Turkish public that depreciation is not his fault.
In the end, widespread dislike of currency depreciation is likely to put a dent in Erdogan’s popularity. But, compared with most currency crises, this one poses relatively little threat to the government, because it has proved exceptionally skilled at deflecting blame for a crisis of its own making.