Photo Source: the NYT
Written by Hadin Sayed
One of the most rudimentary principles taught about monetary policy is that inflation rises when interest rates are low because people can spend more, causing the economy and thus inflation to grow. Going against conventional wisdom, Turkish President Erdogan has taken the hardline approach of keeping interest rates low and cutting interest rates in the face of astronomical inflation rates, a practice that has been dubbed “Erdoganomics”. While Erdogan promises his eccentric policy choice will pay dividends for the Turkish people, his country has already faced disastrous effects. Erdogan will have to reckon with the reality he created or face the political repercussions.
Even before the pandemic, Turkey was trying to stave off a recession rooted in extreme debt, a Turkish Lira that was drastically losing value, and rising inflation.1 As inflation has recently become a worldwide issue stemming from a global pandemic, high energy prices, supply-chain problems, and a war in Ukraine, central banks across the globe have been raising interest rates to combat this.2 Erdogan has taken the antithetical approach to Turkey’s economic woes. Erodgan has remained adamant that interest rates remain low no matter how high inflation gets. This has created a situation where yearly inflation has hit 61% by the beginning of April.3 As inflation reached a 20 year high, interest rates have remained stagnant at 5% after months of policies cutting rates.3
Erdogan has been so persistent on low-interest rates that he continually fires central bank officials who are at odds with Erdogan’s interest rate cuts.4 When Erdogan fires these officials, he leaves his intentions no room for ambiguity. In March of 2021, Erdogan fired central bank Governor Naci Agbal immediately after she raised inflation.5 Erdogan named Sahep Kavcioglu as Agbal’s successor, someone known to share the same unorthodox views on inflation as Erdogan.5 Erdogan’s decisions with the central bank have led to the erosion of the bank’s autonomy, an autonomy presupposed in democracies.
In 2018, when Erdogan first took control of Turkey’s central bank, his advisors justified his take on inflation by citing the profound economist Irving Fisher.6 The Fisher equation established that the real interest rate is the nominal interest rate minus inflation. With fixed real interest rates, this equation theorizes that higher nominal rates lead to higher inflation. Although virtually no one argues with the relationship Fisher describes, its application to Turkey’s situation quickly becomes futile. When a country cuts interest rates, it reduces the return of investing in said country’s assets.7 As Turkey is heavily reliant on foreign capital, the Lira becomes incredibly weak as foreigners put their money in other countries markets.7
Interestingly enough, Erdogan himself has never cited Fisher or economic theory as the driving force behind his policy.6 Instead, religion is the driving force behind Erdogan’s eccentric policies. In a televised speech last December, Erdogan said, “They complain we keep decreasing the interest rate. Don’t expect anything else from me. As a Muslim, I will continue doing what our religion tells us. This is the command”.8 Erdogan is referring to Islamic teachings that ban paying interest. However, most Muslim countries have applied these financial laws to modern times. Presently, the vast majority of Islamic scholars and the Islamic world have interpreted the Quran as allowing for reasonable interest payments while banning usurious rates. While the world progresses, Erdogan is steadfast in keeping Turkey on an archaic timeline with the tradeoff being his citizens’ well-being.
While the reasoning behind Ergdoan’s hyperinflation is somewhat mystifying, insight into the daily lives of Turkish people allows us to understand the unambiguous results. For Bilal, a factory worker, that means not being able to afford meat for an entire year and cutting back on using a gas heater and cooking oil.9 Cooking oil used to be 49 lira, but it was 170 lira in December.9 While consumers have faced much of the burden caused by Erdogan, food suppliers are also facing the effects. As inflation has spiraled out of control, the chamber of bakeries, a trade association, forces grocery stores to a price ceiling for bread.10 While the government can trumpet low bread prices, the ludicrous prices of yeast, flour, sesame seeds, electricity, and gas have driven grocery stores to the verge of bankruptcy.10 Grocery stores around Turkey are in a constant state of pessimism and understand that those with smaller profit margins won’t be able to survive this crisis.
The inflation crisis goes far beyond the food industry. As a result of Turkey’s economic situation, doctors’ salaries have been close to par with minimum wage.11 This has left doctors with no choice but to leave in masses for better opportunities abroad. In fact, just last year, 1,400 doctors left the country to pursue better opportunities.11 The majority of these doctors have no intention of returning to Turkey due to their pessimism about the direction of their homeland, leaving a permanent strain on the medical field in Turkey.
Erdogan claims Turkey will grow out of its financial problems. He promises eventually, low-interest rates will drive down the national currency in order to balance out Turkey’s current account deficits to make Turkish productives more lucrative in the export market.12 However, most economists say a crash is more likely. Even if Erdogan is right on the long-term outlook on his country, the Turkish population has already faced so much hardship that can be directly linked to Erdogan’s policies. Erdogan’s ignorance towards basic economic principles has given his political opponents the perfect opportunity to offer hope to a desperate nation. As purchasing power continues to plummet, citizens of Turkey have taken it upon themselves to protest.12 With Turkish Presidential elections coming up in 2023, Erdogan’s uncompromising stance is setting up seamlessly to be his demise.
1. Cohen, Patricia. “How Did Turkey’s Economy Go so Wrong?” The New York Times, The New York Times, 14 Dec. 2021, www.nytimes.com/2021/12/14/business/economy/turkey-inflation-economy-lira.html?action=click&module=RelatedLinks&pgtype=Article.
2. Person, and Marc Jones. “World May Be on Cusp of New Inflationary Era, BIS Central Bank Group Says.” Reuters, Thomson Reuters, 5 Apr. 2022, www.reuters.com/business/finance/world-may-be-cusp-new-inflationary-era-bis-central-bank-group-says-2022-04-05/.
3. ABC News, ABC News Network, abcnews.go.com/International/wireStory/turkeys-inflation-hits-61-climbing-20-year-high-83858160.
4. Al Jazeera. “Turkey: Erdogan Central Bank Firing Clears Way for More Rate Cuts.” Banks News | Al Jazeera, Al Jazeera, 14 Oct. 2021, www.aljazeera.com/economy/2021/10/14/turkey-erdogan-central-bank-firing-clears-way-for-more-rate-cuts.
5. Coskun, Orhan, and Jonathan Spicer. “’The Last Straw’: Why an Irked Erdogan Fired Turkey’s Central Bank Chief.” Reuters, Thomson Reuters, 31 Mar. 2021, www.reuters.com/article/us-turkey-cenbank/the-last-straw-why-an-irked-erdogan-fired-turkeys-central-bank-chief-idUSKBN2BN1I1.
6. “Is Recep Tayyip Erdogan’s Monetary Policy as Mad as It Seems?” The Economist, The Economist Newspaper, www.economist.com/the-economist-explains/2022/01/27/is-recep-tayyip-erdogans-monetary-policy-as-mad-as-it-seems.
7. Ant, Onur. “How Erdogan’s Unorthodox Views Rattle Turkish Markets.” BloombergQuint, 21 Dec. 2021, www.bloombergquint.com/quicktakes/behind-erdogan-s-strange-ideas-about-interest-rates-quicktake.
8. Bloomberg.com, Bloomberg, www.bloomberg.com/news/articles/2021-12-19/turkey-s-erdogan-says-islam-demands-lower-rates-and-so-does-he.
9. Gall, Carlotta. “Cashing in Grandma’s Gold Coins, a Turkish Family Struggles to Get By.” The New York Times, The New York Times, 21 Dec. 2021, www.nytimes.com/2021/12/21/world/europe/turkey-inflation-rising-prices.html?action=click&pgtype=Article&state=default&module=styln-turkey-economy&variant=show®ion=MAIN_CONTENT_3&block=storyline_levelup_swipe_recirc.
10. Gall, Carlotta. “Many Turks Can’t Afford Bread, and Bakers Can’t Afford to Make It.” The New York Times, The New York Times, 15 Dec. 2021, www.nytimes.com/2021/12/15/world/europe/turkey-bread-prices.html?action=click&pgtype=Article&state=default&module=styln-turkey-economy&variant=show®ion=MAIN_CONTENT_3&block=storyline_levelup_swipe_recirc.
11. Gall, Carlotta. “Turkey’s Doctors Are Leaving, the Latest Casualty of Spiraling Inflation.” The New York Times, The New York Times, 7 Feb. 2022, www.nytimes.com/2022/02/07/world/asia/turkey-inflation-doctors.html.
12. Gall, Carlotta. “Turkey’s President Follows His Own Advice Even as Economy Slips.” The New York Times, The New York Times, 10 Dec. 2021, www.nytimes.com/2021/12/10/world/middleeast/erdogan-economy-lira-turkey.html?action=click&pgtype=Article&state=default&module=styln-turkey-economy&variant=show®ion=MAIN_CONTENT_3&block=storyline_levelup_swipe_recirc.