Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is Schreiber Family Professor of Economics at Brown University
On March 23, Istanbul mayor Ekrem İmamoğlu — who has twice defeated President Recep Tayyip Erdoğan’s ruling party in municipal elections — was formally arrested on charges of bribery and abuse of office. Just days earlier, he had been widely expected to announce his candidacy for Turkey’s 2028 presidential election. The timing and nature of the charges are broadly perceived as politically motivated. Unsurprisingly, protests erupted almost immediately.
Markets responded with equal urgency. The sharp sell-off in the lira and Turkish assets echoed the dynamics of the 2010 Eurozone crisis, when Greek debt spreads widened dramatically, triggering existential fears about the future of Europe’s common currency. Mario Draghi, then head of the European Central Bank, was forced to vow to do “whatever it takes” to preserve the euro.
Turkey has reached the same inflection point. “Whatever it takes” is exactly what finance minister Mehmet Şimşek told investors last week. Along with central bank governor Fatih Karahan, he appears to have succeeded in calming markets. Their policy credibility — built through a disciplined, anti-inflationary policy stance over the past year, resulting in disinflation, a more stable lira, and renewed capital inflows — has allowed them to contain financial panic.
This raises a deeper question: how do markets price risk over the long term when political volatility looms large? In the short run, investors appear to place faith in Turkey’s competent technocrats. But expectations become harder to anchor when political institutions erode.
Episodes of political instability and perceived authoritarian over-reach significantly increase a country’s risk premium. This raises the cost of capital, dampens investment and lowers long-term growth potential. Technocratic credibility can stabilise the situation in the short term — but only democratic integrity can sustain investor confidence over the long run.
Check the current data and this dynamic is obvious. Turkey’s one-year credit default swaps spreads (a measure of sovereign debt default risk) and the uncovered interest parity premium (a proxy for expected lira depreciation) spiked following İmamoğlu’s arrest, according to Bloomberg data.
The message is clear: investors are pricing in greater depreciation risk, which will feed back to inflation, and a more persistent rise in default risk, which inflates borrowing costs and suppresses investment.
While expectations of currency depreciation and future inflation have moderated, thanks to official reassurances from a capable economic team, one-year CDS swap levels are still elevated. This suggests that longer-term concerns for Turkey’s future are deeply rooted.
All of this leads to an uncomfortable question: why would any leader deliberately undermine their own country’s economic prospects for political gain?
A compelling answer comes from the recent Nobel laureate in economics, Daron Acemoglu, and his co-laureate James Robinson. In their joint book Why Nations Fail, they argue that leaders often adopt extractive policies by design — intentionally sacrificing economic growth to maintain personal power or enrich a narrow elite.
Their research offers sobering historical evidence that political incentives often outweigh economic rationality when institutions are weak. Examples include Sierra Leone, whose political elite used state institutions to centralise power, leading to economic ruination, and Zimbabwe, where Robert Mugabe clung to power by undermining private property rights, leading to the destruction of the agricultural sector and massive unemployment.
Looking further back, the Republic of Venice offers a mirror for all modern democracies. There the commercial elite evolved into an oligarchy, passing laws to exclude others from political and economic opportunities, which led to economic stagnation and collapse in 1797.
For the sake of Turkey’s future economic prosperity, let us hope it avoids becoming another case study in this long and tragic tradition. To be clear, Turkey is far more open than the Venetian Republic. But the warning still resonates — even prosperous societies with strong institutions can backslide.
Economic strength is not self-sustaining, it needs strong institutions and democratic integrity. And those must be defended — especially when they seem most entrenched. It is the only way to sustain investor confidence and reduce the frequency of “whatever it takes” moments.