State-owned banks in Turkey engage in strategic lending practices in the lead up to local elections when compared to private banks, a new study from the London School of Economics and Political Science (LSE) has shown.
The article, published in The Economic Journal, finds that state banks in Turkey increase lending in provinces where the incumbent mayor is affiliated with the ruling party (the AKP) and faces strong political competition. In contrast, these banks were found to decrease lending in the run-up to local elections in other competitive provinces with an incumbent mayor from an opposition group.
The authors found these lending cycles are particularly striking with corporate loans (as opposed to consumer loans – which were not impacted) and arise before local elections, peaking during the election quarter or the quarter before and dissipating after polling day.
The researchers argue these patterns are in line with theories of tactical distribution and support the idea that the Turkish government uses state-owned banks as a strategic tool to secure the re-election of their mayoral candidates.
They note that local politicians are usually judged on local economic performance. Therefore, strategically redistributing credit in the run-up to elections can create jobs and investment opportunities at a crucial time, positively impacting the electoral chances of the incumbent ruling-party candidate.
Similarly, decreasing credit in areas where an incumbent mayor is from an opposition party can lead to a reduction in employment, assets and sales in the province, damaging the mayor’s re-election prospects.
The authors argue these findings have important implications for the role of state-owned banks, especially in emerging democracies such as Turkey where tactical lending practices can have a significant impact on the democratic process.
Commenting on the findings, paper co-author Dr Orkun Saka from the Systemic Risk Centre at LSE said: “This is the first study to provide evidence that national governments can manipulate state-bank lending in a way that can be punitive for opposition regions. This is in comparison to previous studies which emphasise the ‘boom’ impact of elections on state-bank lending.
“In the paper, we illustrate a financial mechanism through which a government, which is increasingly powerful in national elections (such as AKP in Turkey), can consolidate its strength in local politics thus potentially disrupting the political competition and the quality of a country’s democracy in the long-term.”
To investigate the impact of state bank lending cycles on political outcomes in Turkey, the researchers studied a period covering three local election years – 2004, 2009 and 2014. They used quarterly economic and administrative data to identify the exact timing of lending by state banks to local provinces and quantify how politically-induced lending could lead to local productivity losses associated with capital and labour misallocation.
For a copy of the paper, please visit: https://academic.oup.com/ej/advance-article-abstract/doi/10.1093/ej/ueab020/6174018?redirectedFrom=fulltext