The life of any successful policy is not indefinite and inflation targeting is not an exception. Therefore, it is necessary to discuss alternative policies and targets that will not only provide price stability, but also contribute to economic growth.

Thanks to the measures taken by the CBRT, the BRSA and other public institutions, the Turkish economy stood firm against the Global Financial Crisis (GFC), which shook the global economy in 2008. The CBRT used various mechanisms to support the liquidity of the financial system and revive credit markets, including lower interest rates. The CBRT has used macro-prudential policies instead of micro-prudential ones; the former have helped to immunize the side effects of the GFC.

Turkey has made important advances in its financial and monetary markets. However, there are certain areas that create vulnerabilities for the Turkish economy. As discussed above, the CBRT has adopted inflation targeting regime since 2002. At the beginning of the 2000s, Turkey’s first priority was to maintain macroeconomic stability. Reducing inflation was one of the key aspects towards achieving this. Therefore, the inflation targeting regime, which was popular across the world, was crucial in reducing inflation in a stable manner. Inflation targeting was in the forefront of the policies proposed by the neoliberal paradigm.

However, inflation targeting’s shortcomings appeared over time. Many economists, including Joseph Stiglitz and Jeffery Frankel, emphasize the failure of inflation targeting after the GFC. Although central banks have tools, such as increasing policy interest rates, to reduce demand-pull inflation, this is not the case with cost-push inflation. Central banks have limited power to affect inflation when increasing oil and/or food prices are the main reasons for soaring inflation. But, even in the case of cost-push inflation, many central banks increase their policy interest rate to achieve inflation targets. This policy not only fails to reduce inflation, but also reduces economic growth and increases unemployment.

Unfortunately, the CBRT could not achieve its inflation targets in recent years mainly due to supply shocks and to other factors that were beyond its control. The CRBT, however, continues to maintain its high interest rate policy despite the fact that it fails to keep inflation down. Although one of the main reasons for keeping interest rate very high is to prevent the excessive depreciation of the Turkish lira, the CBRT has been criticized frequently in recent times for its policy.

The life of any successful policy is not indefinite and inflation targeting is not an exception. Therefore, it is necessary to discuss alternative policies and targets that will not only provide price stability, but also contribute to economic growth.

The global economy is experiencing one of its most tumultuous periods in history. Turkey needs to move beyond this period with the minimum deviation from its medium and long-term economic goals. If Turkey can achieve this, it will be faster in catching up with developed countries. Otherwise, Turkey will have to wait longer to join the so-called “convergence club”. Of course, monetary policy alone cannot promote economic growth. Yet, we need to take economic growth into account when implementing the former.

We live in very different times now: there is intense debate about the “new normal” of global economy and the central banks of developed countries under the “extraordinary measures in extraordinary times” slogan are using unconventional monetary policies that nobody would have dared to propose ten years ago.

We live in very different times now: there is intense debate about the “new normal” of global economy and the central banks of developed countries under the “extraordinary measures in extraordinary times” slogan are using unconventional monetary policies that nobody would have dared to propose ten years ago. Perhaps it would be better for the CBRT to adopt a new monetary policy framework in which it will pursue complementary objectives like price stability and strong economic growth.

A dual mandate and nominal GDP targeting are two alternative options that are more growth-friendly. In the dual mandate, the CBRT will not only target inflation, but also unemployment rate. Since unemployment rate is an important indicator of economic activity, it gives us important signals about the economic growth.  If this option were to be followed, the CBRT should take into account both inflation and unemployment rate when it decides its policy interest rate and when it makes use of other monetary policy instruments. When the domestic or global economy face challenges, the CBRT will prioritize growth by rigidly reaching its unemployment target; when the economy overheats, the CBRT will focus more on inflation.

The Federal Reserve System (Fed), the central bank of the United States, is a good example of a dual mandate. First, the Fed has an inflation target of 2%. Second, it has a maximum employment target, which is not constant but changes according to economic projections. Nowadays, the Fed tries to keep unemployment around 4.8%.

The second policy option is nominal GDP targeting. Under this option, the CBRT will respond to shocks by taking into account both inflation and the level of GDP. When there is a supply-shock such as a sudden increase in oil and food prices or a natural disaster, the central bank will not increase policy interest rate as this will not reduce cost-push inflation, but will reduce GDP. Therefore, the central bank will not increase interest rate in order to achieve the nominal GDP target. The situation is the same when there is an adverse trade shock.

It is clear that Turkey needs a new central banking framework. Current policies under inflation targeting do not respond to Turkey’s needs.

It is clear that Turkey needs a new central banking framework. Current policies under inflation targeting do not respond to Turkey’s needs. Academics, politicians, bureaucrats and representatives of the financial sector should discuss potential options that will further support Turkey’s efforts to reach the upper steps of the economic development ladder. If one of the aforementioned options seems more suitable for the Turkish economy, the government should think about changing the law defining the central bank’s responsibilities. But, we should also keep in mind that monetary policy is not a panacea.

Monetary policies implemented by developed countries after the GFC couldn’t restore insipid economic growth. A monetary policy will be helpful in smoothing out fluctuations in prices and economic activity, but it cannot bring about long-term growth. Structural reforms, smart industrial policies and a sound fiscal policy are necessary for long-term economic growth. A well-founded monetary policy can only play a supporting role.

The global institutional framework created by the Bretton Woods regime substantially facilitated the consolidation of a mentality of “strategic planning” by allowing national policy makers to promote growth and employment through proactive macroeconomic policies and financial regimes characterized by various national controls.

From another angle, the global institutional framework created by the Bretton Woods regime substantially facilitated the consolidation of a mentality of “strategic planning” by allowing national policy makers to promote growth and employment through proactive macroeconomic policies and financial regimes characterized by various national controls. In this context, structural restrictions on international capital movements were tolerated to enable national authorities to determine domestic interest rates, fix the exchange rates and pursue national developmental objectives through appropriate taxation and public spending policies in relative isolation from international pressures. Thus, strategic economic planning to coordinate developmental efforts quickly became conventional wisdom both in Western Europe (i.e. France, Scandinavia) and the bulk of the developing world (i.e. Japan, South Korea, India) striving to realize structural transformation projects through import-substitution-industrialization. The taken-for-granted presuppositions of development economics as it evolved over the course of the post-war era under these conditions were: “the goal of development is economic growth; the agent of development is the state, and the chief means of development are macroeconomic policy instruments” (Leys 1996: 7).

In this context, Albert Hirschman made a crucial contribution to the literature on proactive planning by suggesting that “the perception of investment opportunities” and their transformation into actual investments, rather than the actual scarcity of capital, have been the missing ingredients of industrialization in the ‘late late’ developers of the Third World. He argued that the state was perfectly placed to provide private capital with ‘disequilibrating’ incentives that would alter prevalent balances in the markets and encourage induced decision-making in line with long-term developmental objectives (1958: 42).

Likewise, Alexander Gerschenkron (1962) formulated an elaborate analytical framework of late industrialization which focused on the critical role of strategically-coordinated industrial finance in the speedy creation of modern production technologies in late developing countries. By referring to fierce competition with the industrialized world and the widespread inability of local entrepreneurs to sponsor massive catching-up projects, he depicted the state as a potential “investment banker” that could provide incentives and financial resources for productive investments, and closely monitor their employment for industrial transformation.

Over the course of the 1960s and the 1970s the protagonists of the structuralist approach to macroeconomic management who were prevalent around World Bank circles maintained that economic structures and markets in less developed societies were “less perfect” than their counterparts in the industrialized north (Chenery, 1974; Myrdal, 1957; Rosenstein-Rodan 1943, 1957; Prebisch, 1950; Singer, 1950; Tinbergen, 1958). Accordingly, since these markets were not efficient enough in allocating goods and services; strong, rational and interventionist state apparatuses were required to help, support, and “stand in” for the market to promote higher economic growth and more equitable distribution (Colclough 2000: 2). Although these approaches principally focused on non-western contexts in their policy prescriptions, the interventionist zeal in their fundamental prognoses contributed to the maintenance of the theme of pro-activism and strategic planning in macroeconomic management in the Western world.

A parallel reflection of the dialectical history of paradigmatic shifts in macroeconomic policy making depicted above that Ilene Grabel called “productive incoherence” (2013: 563) could also be discerned in the historical trajectory of central banking. Following the global instability in the aftermath of the First World War I and fluctuations created by the Great Depression, there were intense debates concerning the main parameters of policy making and the proper function of central banking in macroeconomic policy.

Meanwhile, the liberal financial orthodoxy in Europe and the US was pushing for the restoration of the Gold Standard at par with prewar rates, while Keynes and accompanying experts warned about the potentially destructive consequences of such an approach. Instead, they stressed the need for an alternative macroeconomic paradigm based upon more intensive public guidance and coordination of investment decisions. In this new paradigm, central banks were to focus more on the objectives of increasing aggregate demand and employment with a developmental mentality by utilizing strategic capital controls, rather than focusing on the protection of the national gold stocks and stability of domestic prices.

This vision represented an alternative paradigm on the management of macroeconomic policy and within that the proper roles of the central banks and fiscal authorities as the chief governing institutions of the financial realm. It was a paradigm which assigned a much stronger developmental role to the financial institutions, including the central banks, as crucial investment bankers holding the pulse of national investment decisions, compared to the rather limited laissez-faire vision associated with the control of inflation and preservation of price stability. (Kindleberger, 1986).

Following the acute destruction of the Second World War and the urgency of post-war reconstruction, the developmental vision of both central banking and wider macroeconomic policy necessarily became the norm in both the developed and the developing world as suggested above. In this context, crucial success stories from the developing world such as South Korea, Taiwan, Brazil, India, and China all followed various forms of this proactive paradigm that gave the responsibility of “strategic planning” to public authorities and central banks.

 Following the global instability in the aftermath of the First World War I and fluctuations created by the Great Depression, there were intense debates concerning the main parameters of policy making and the proper function of central banking in macroeconomic policy.

However, along with the material shocks and changes in the balances of power in the world economy, the tide started to turn in the late 1970s against those approaches that endorsed various forms of state interventionism to induce structural transformation. So much so that the early 1980s witnessed a spectacular upsurge of the neoliberal paradigm in economics, political economy and development studies, principally advocating individualism, market liberalism and state contraction. The neoliberal counter-revolutionaries not only argued against specific interventionist strategies such as import-substitution industrialization and financial repression, but also strived to create an entirely new political economy the organizing principle of which was the notion that the state cannot play an effective developmental role except in the areas of law and order and physical infrastructure (Colclough and Manor, 2000; Preston, 2000).

The rise of neoliberalism and the Washington Consensus in development policy embodied by IMF / World Bank packages stimulated the ongoing turn against developmental central banking. Consequently, “inflation targeting” and “inflation targeting lite” gradually became the dominant priorities in central banking (Epstein and Yeldan, 2009) and there emerged a one-sided academic environment in which it became almost impossible to challenge this quasi-orthodoxy.

In more general terms, the pioneers of neoliberalism were radical and revisionist in terms of their diagnoses concerning the causes of development problems, as well as their proposed solutions which stressed the primacy of economic growth at the expense of employment creation, poverty alleviation and distributional measures among macro-economic policy objectives.

In policy terms, they identified pervasive and excessive government intervention as the main reason for slow economic progress. It was claimed that development was blocked across developing countries by inflated public sectors, distorting economic controls and overemphasis on capital formation (Bauer, 1984: 27). Therefore, the universal policy proposal was to pursue a systematic programme of decreasing state involvement in the economy through privatization, reduced public spending, elimination of exchange rate controls and the like, and letting the impersonal forces of the markets determine prices. Their weighing of the relative costs of economic interventionism (i.e. rent-seeking, price distortions) versus market imperfections (i.e. imperfect competition, monopolies, poor infrastructure) led to the conclusion that imperfect markets were preferable to imperfect states in settling matters of resource allocation (Lal 1983: 106).

In its policy implications, the neoliberal counter-revolution has reversed the priorities identified by Schumpeter (1970: 415, cited in Cammack, 2000: 163) with reference to the post-war political economy: state-managed stabilization policies to prevent economic recession were replaced by internationally managed policies of restructuring under the aegis of the IMF and the World Bank; redistributive taxation aimed at greater income equality was abandoned in favor of fiscal reform that rewards entrepreneurship and accentuates real inequality; all kinds of price regulations have been dropped; public control over financial and labour markets were systematically minimized and social security legislation has been restructured to promote rather than balance market forces.

Following the early shock of the neoliberal upsurge, a series of detailed interdisciplinary analyses regarding the development trajectories of the NICs paved the way for the formation of a modern comparative institutional stream in the study of macroeconomic management and development. Aiming to stand aside from the stereotypes and preconceived dichotomies which characterized some strands of both neoliberalism and its structuralist predecessor, the novelty of the contemporary comparative institutional genre stemmed from the significance assigned to local institutions and values in facilitating socioeconomic development and to the synergy of state and society in the realization of common developmental objectives.[1]

Accumulated experience gathered especially from a variety of developing country contexts confirmed that successful and sustainable socioeconomic transformation in the wake of economic globalization requires a fundamental “recomposition” of state capacity, rather than the indiscriminate contraction that the neoliberal policies impose. The main reason was that the new global competitive game required a high degree of “stateness” (Evans 1997) rather than an eclipse of national authority, because of the increasingly sophisticated role that the political authorities must play at the intersection of global forces and their domestic political economy.

Indeed, multidimensional processes of globalization create quantitative and qualitative changes in the organization of the global economy, and this necessitates a redefinition of the socio-economic roles and major policy priorities of state institutions involved in financial and macroeconomic management in a world of increasing complexity, interconnectedness and volatility.

In the midst of the complex web of constraints and opportunities presented by contemporary globalization, traditional developmental regimes based on state-led crash-industrialization programs are no longer viable. However, as Weiss (1998: 184) suggests, despite the constraining impact of international economic conditions, governments are by no means irrelevant or immobilized, because the internationalization of capital does not only restrict certain policy choices, but it expands others and creates brand new ones as well.

Adoption of a mentality of strategic planning by state institutions dealing with macroeconomic management including the central banks and financial authorities is a crucial case in point. The key to fostering international competitiveness without making massive sacrifices in the form of human capital, physical environment and social justice is a strategic policy mentality on the part of the state that fine-tunes entrepreneurial activity in line with the logic of global competition and promote public-private cooperation.

Developmental Central Banking: The Post-Crisis Era

Many central banks in late industrializing economies played an important role in accommodating the development-oriented policies of their governments by keeping effective real interest rates very low, and even negative. Central banks also coordinated strategic capital controls that relatively insulated domestic markets from the vagaries of international financial markets by restricting hot money flows that could lead to overvalued exchange rates and financial crises.

As the ‘dialectical history’ of macroeconomic policy making and development displays, major economic crises and systemic shocks occasionally trigger adoption of various developmental finance methods to confront imminent investment challenges. But the strong political backing that neoliberalism enjoys among corporate and policy making circles ensures that neoliberal policy prescriptions assigning minimal role for state agencies and in the meantime, for central banks, are quickly restored.

A quick glance to the evolution of macroeconomic policy paradigm over the course of the twentieth century reveals that assigning extensive developmental roles to central banks and related financial institutions have been the dominant approach. In that respect, the neoliberal interregnum in the last decades pretty that restricts the role of central banking to the control of inflation and price stability represents an exception rather than the rule.

Indeed, in her seminal book, The Rise of ‘the Rest’, Alice Amsden suggested that medium and long-term investment financing, often supported by central banking mechanisms, were key in stimulating the newly industrializing developing countries in the second half of the twentieth century (Amsden, 2001). The mobilization and allocation of medium-term and long-term financial instruments for critical industrial and infrastructural investments was made possible by the strategic initiatives of public financial agencies. The bulk of the “developmental states” in East Asia and elsewhere employed a development bank as the public authorities’ main agent for financing investments aimed at industrial-technological upgrading.

In certain cases, the whole banking sectors were mobilized to channel direct long-term and concessionary credits to targeted industries, and thereby acting as a “surrogate development bank” (ibid., p. 129).  Many central banks in late industrializing economies played an important role in accommodating the development-oriented policies of their governments by keeping effective real interest rates very low, and even negative. Central banks also coordinated strategic capital controls that relatively insulated domestic markets from the vagaries of international financial markets by restricting hot money flows that could lead to overvalued exchange rates and financial crises.

In the first decade of the new millennium prior to the global financial crisis, the neoliberal approach to central banking had already become the dominant orthodoxy to central bank policy on a global scale. The prevailing neoliberal ideology invariably stressed that the only legitimate task for central banks is to control inflation, a priority which often contradicts with broader macroeconomic goals such as employment creation, financial stability or economic growth.

Bernanke et. al. (1999) described the major tenets of this approach as formal independence of the central banks; adoption of an agenda of inflation fighting (including ‘inflation targeting’) at the expense of other macroeconomic goals; and the use of indirect methods, such as short-term interest rates, as exclusive tools of monetary policy, as opposed to more direct methods such as credit allocation.

However, especially in the aftermath of the global economic crisis in 2007-08 it became crystal clear that national economies which displayed strong exit performances from the crisis such as Argentina, Bangladesh, China and India were equipped with central banks that were using a broad array of tools to manage their economies for developmental purposes. The cost of inflation-focused neoliberal monetary regimes in developing countries has been to divert the attention of some of the most highly trained economists and policymakers away from the main tasks that their predecessors in central banking used to focus on: fostering socio-economic development; facilitating employment creation; contributing to faster growth and improving productivity.

In this context, the post-crisis environment witnessed the realization of new experiments in central banking in many countries, including those sincerely dedicated to the old neoliberal orthodoxy, i.e., the European Central Bank, the Bank of England, and (the less orthodox) Federal Reserve. The rising mentality of “neo-planning” in the era of open economies and financial globalization is more focused on planning household consumption and savings, as well as strategic ways in which national savings could be directed towards more productive investments. Therefore, the central banks especially in developing countries should no longer follow the lead of the major central banks in the industrialized world and IMF without questioning, but they should rather explore ways of developmental policy making through careful experimentation.

The unorthodox tactics of central banking that surfaced in many emerging powers over the course of the global crisis should be recognized as experiments in more developmental policy making and shall be continously improved for long-term adoption. It would be a grave mistake to perceive attempts at “neo-planning in central banking” as exceptional aberrations from the neoliberal orthodoxy that should be abandoned at the first possible opportunity.