The Turkish Economy’s Problem Isn’t Interest Rates, It’s Erdogan

A new central bank governor and finance minister won’t mean anything as long as the president is enforcing his destructive policies

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Turkey's President Recep Erdogan speaks during a meeting, in Ankara, Turkey, September 1, 2020.
Turkey's President Recep Erdogan speaks during a meeting, in Ankara, Turkey, September 1, 2020.Credit: ,AP
David Rosenberg
David Rosenberg

The soon-to-be-former president of the United States isn’t the only world leader who is enamored of “alternative facts.” For quite some time now Turkish President Recep Tayyip Erdogan has conducted economic policy on the basis that high interest rates lead to high inflation, the exact opposite of what textbook economics holds.

Alas, alternative facts don’t lead to alternative results. Erdogan forced Turkey’s nominally independent central bank to practice what he preached and the result has not only been double-digit inflation but a crashing lira and no less than $128 billion gone down the drain as the Central Bank of Turkey tried desperately to prop up the currency without raising interest rates.

One alternative fact, however, is holding up well for now: Erdogan himself is apparently taking no blame for any of this, even though he has a lock hold over economic policymaking. After another miserable drop in the value of the lira, he fired the governor of the central bank, Murat Uysal, over the weekend – just 18 months after he had fired his predecessor. A day later Finance Minister and presidential son-in-law Berat Albayrak, apparently resigned – “apparently,” because he announced it the same way a teenager might inform his friends he’s broken up with his girlfriend, over Instagram. His aides knew nothing about it and his father-in-law hasn’t acknowledged the resignation.

Given the state of the Turkish economy under Uysal’s and Albayrak’s watches, which more or less coincided, their departures are naturally being welcomed. Even though the new central bank chief, Naci Agbal, has done nothing more than say a few calming words, and no one knows who will be the next finance minister (or, for that matter, if there will be a next finance minister), the Turkish lira rallied Monday. That already says a lot about how much the pair will be missed.

Before the coronavirus pandemic, Turkey was enjoying strong economic growth under Uysal and Albayrak. It had recovered quickly from a 2018 financial crisis not too dissimilar to the one it is experiencing now. But the growth was artificially generated by the two men’s putting Erdogan’s alternate facts into action: Interest rates were cut aggressively, banks were encouraged to lend money and the government’s budget deficit ballooned. The result was that construction companies built like mad and consumers spent like mad. It was Erdogan’s kind of economy.

Ah, but those pesky nonalternative facts: Just as conventional economics posits, low interest rates spurred inflation and the lira’s value has dropped more than 50% in the past year, adding more inflationary pressures.

Turkish Treasury and Finance Minister Berat Albayrak attends a news conference in Istanbul, Turkey, April 10 2019. Credit: Umit Bektas/REUTERS

Raising interest rates would stem the depreciation and cool an overheated economy, but Erdogan would have none of that. Instead, the central bank, with Albayak’s backing, spent tens of billions of dollars supporting the lira in the currency market, to no avail.

Given this sorry history and the fact that the president now has some scapegoats, this would be a good time for Turkey to pivot toward more conventional economics. But it says something about the state of governance in Turkey that even after a shake-up of the country’s economic leadership, no one really knows if it means anything.

In Turkey, finance ministers and central bank governors are presidential sock puppets, not policymakers. It all depends on Erdogan and I, for one, wouldn’t be too optimistic.

That’s because another alternative fact that helps form the president’s economic worldview is that Turkey is beset by enemies set on frustrating its inevitable rise to power. One way they do that is by preventing it from claiming other countries’ maritime waters; another is by wrecking the economy.

The real facts are that Erdogan has made Turkey so unattractive – not only by his bizarre economic theories but also by a scorched-earth diplomacy that has left it friendless and vulnerable to sanctions – that foreign investment has all but disappeared. Economic policy since 2018 has even been designed to exclude them.

That hasn’t stopped Erdogan from dealing in economic conspiracy theories. “Our response to those who work to besiege our country in the economic sphere is a new war of economic liberation,” he told supporters last week. The government, he explained, is carrying out a “grand structural change” tantamount in importance as the abolishment of concessions granted by the Ottoman Empire to Western imperialists.

Erdogan might give a reluctant nod to a rate hike (the key date will be November 19 although, given how desperate the situation is, it might come earlier), but it will take more than that to turn Turkey around.

The economy is desperately in need of structural reforms that have been ignored in favor of steroid-induced growth. It would also be helped immensely by breaking Erdogan’s monopoly on political power and be given no small boost by the president’s backing away from his diplomatic scuffles and aggressive moves in the Mediterranean, Libya and Azerbaijan. They’re not only costly adventures, they have helped undermine the lira.

Bringing in the International Monetary Fund to help supervise all this would help, too.

But, hey, that’s no more Erdogan’s style than losing a presidential election is Donald Trump’s.

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