Turkey has seen failure of conventional thinking, will change standpoint

  • 19 Eylül 2018 Çarşamba

With the Medium Term Program (MTP) to be announced this week, Turkey will discuss the basic macroeconomic targets for the upcoming years. Here, the problem is that the MTP has unfortunately been studied in an environment where the impacts of an unprecedented shock triggered by exchange rate increases for many years have prevailed. All the current and leading indicators, from inflation to unemployment, are based on the data sets largely determined by this shock. This being the case, all the measure sets and programs announced, including the MTP, must first be based on a rational basis that will bring a solution to the existing troubled situation and then include basic policy framework that will turn this negative situation into a historic opportunity.

There are a number of examples of this in recent history. For instance, South Korea evaluated the 1997 crisis this way, enabling many South Korean companies to emerge as global players. Of course, the economic dynamics and history of South Korea are very different from those of Turkey. In fact, it is up to governments to turn subversive dynamics in such historical periods into a way of renewal. I am sure that Turkey will achieve this by using the advantages of the presidential system.

In this entire process, we have seen the fact that the basic economic problems of Turkey are not solely about the stability of financial markets. On the contrary, structural problems on the production side, especially inflation-based instability, create financial market instability.

President Recep Tayyip Erdoğan’s argument that inflation is the result of high production costs and should include a change in the approach and standpoint toward inflation, while looking at structural problems on the production side. Reiterated by Erdoğan for years, this argument has led to indignation and objection among “dominant” economic circles.

It is no secret to detective novel enthusiasts that when things are in a deadlock in very complicated and unsolvable murders, experienced police chiefs will tell the inexperienced ones to change their perspective, approach the incident in a different way, dismiss what has been told to them so far, think differently and use different instruments as the current ones will not solve the murder.

Of course, it is a pearl of wisdom for those who seek to solve the murder. However, it is codswallop for those who ignore the murder and even try to be a party to it. That is why Erdoğan has been saying: “You have tried it many times. Has it happened? No. Then, change your perspective.”

Well, how do we explain this situation with the current economic jargon? For me, the dominant economic literature in the world today accepts the consensus known as the Neoclassical Keynesian Synthesis and the Taylor Rule as the basic rule of this consensus. The Taylor Rule argues that in an open economy, the central bank can only cope with the economic problems by changing the policy rate alone. In order to do this, there is need for assumptions such as the presence of perfect competition in all markets, the perfect functioning of the price system, regional developmental equality within the country, the equitable distribution of income and the presence of all kinds of equality of opportunity in education. Moreover, there is the recognition that long-term growth follows the Solow Model, meaning that it is not possible for the government to enter a faster development process by implementing any policy. Then, why do the crises occur? They occur because of the mistakes of elected politicians. What must be done? It is necessary to leave the economy to the technocrats and to consent to the role the imperialist order casts for you.

These assumptions are invalid in the real world. It is not possible for Turkey to accept the ideology argued for. The current system advocates the use of interest as a policy element. This causes the exchange rate to deviate from the equilibrium value in the short-term in inverse proportion to the policy rate. In other words, you cannot take advantage of the floating exchange rate system.

On the other hand, if the elected government’s development policies – regardless of whether they are right or wrong – deviate from the line drawn by global sovereigns, e.g. multinational monopolistic corporations and global money lenders, this monetary system takes on a leverage task to bring national governments into line. On top of that, inflation targeting weakens the central bank’s control over money supply, removing the control over inflation.

At this point, I will not discuss to what extent Turkey has fulfilled the requirements of the floating exchange rate regime since 2001 or whether those who consider the Taylor Rule as a creed know the assumptions behind this rule. How true is it that the elected governments are completely sidelined and that the administration is defined as the whole of foreign-dependent technical rules and that the economy can get out of difficulties only if these are provided?

Turkey already did this with the International Monetary Fund (IMF) throughout a historical period. Well, was the result not the same repeated crises?

Following the 1929 crisis, the U.S. economy got out of difficulties with New Deal practices that started in the Hoover period and continued in the Roosevelt period. The New Deal is one of the most interesting periods in U.S. history. It is the period in which widespread dogmas of relations between the state and business circles in the U.S. began to change, bringing a new interpretation of the state. In other words, the U.S. no longer sought solutions for the problem with economic decisions alone, it made major political regulations as well.

Here is a more recent example: How did the South Korean government treat large enterprises in the country both before and after the crisis in the 1990s? It assisted them, however, it also implicitly directed their management. Why did the U.S. Treasury transfer billions of dollars to banks during the 2008 crisis? We know all these historical facts. Well, why do we not accept the things that must obviously be done in Turkey’s current situation? The truth of the day is that if the economy wants a radical change, you have to do it with politics.

Turkey has changed its political system which is the first radical step toward a major political and increasingly social change. After taking this radical step, you cannot continue as a bad copy of the old in the economy. Turkey has to make deep structural reforms on the side of both financial markets and a high value-added export economy consisting of production and technology. Certainly, the MTP is an exit program that must be based on rational realizable goals and aim for fighting inflation and current account deficit. In addition to the MTP, we must soon introduce radical reforms.

To get out of this siege, the economic administration is making major regulations and decisions. With the visibility provided by the MTP, decisions supporting the real sector will be more prominent and will be the first clues to a holistic exit and development program. Beyond this, it will be more important than anything else for Turkey to carry out the pending production-oriented reforms in this period. The economic administration has a high level of awareness of the issue.