A report published by the SETA Foundation draws a roadmap towards a new economy under the new presidential system in Turkey.

The report, “New System New Economy: A Detailed Roadmap” concentrates on the fields of industrial, agricultural, fiscal, and monetary policies and on institutional systems and the bureaucracy in accelerating the developments in Turkey’s economy. While the key points emphasized in the report are nativity and the efficient collaboration between various institutions, the authors also encourage long-term development and progress.

Although there has been concrete development in the Turkish economy, the report suggests that if the new system is established in the right way, Turkey is likely to reach its true potential – and even surpass it – in a short period of time. Effective and inclusive economic reforms are required in order to achieve this success.

The suggestions made in the report, covering the five different areas, are listed below.

Industrial policy

The report suggests for there to be set performance goals in the industry sector and for incentives to be given to companies in this field. The amount of incentives that companies will receive should be determined according to some specific performance criteria, such as the nativity rate of production, the amount of exports, and the number of patents applied.

If the performance targets cannot be met, the precautions that can be taken within the lines of the market economy must be predetermined and feasible. In addition, public procurement should be used more effectively, contributing to the development of domestic technology.

One further suggestion in this field is to put in place patient capital-style financial models, ready to take risks and avoid high financial returns if necessary, in order to enable companies to introduce breakthrough technologies and/or create new markets where they will be able to provide long-term funding on the terms appropriate to them.

Agricultural policy

Despite the fact that the proportion of support and incentives in the agricultural sector have increased during the AK Party governments, there are still significant structural problems in the sector.

Suggestions are made as to how to develop policies that aim to balance the import-export equation in the agricultural sector. Among these are the establishment of more functional agricultural banks, the utilization of technological developments, follow up of R&D and innovation activities in order to increase agricultural efficiency.

The report states that these efforts ought to be supported in an integrated manner with social infrastructure and rural development projects. In a country where the average age of farmers is increasing, young entrepreneurs should be encouraged and motivated so to keep them in this sector.

Fiscal policy

According to the report, Turkey’s budgetary discipline since 2002 has contributed to the national economy in various dimensions. Within IMF listings, Turkey is among the countries with the least public debt in the world.

Reducing the indirect tax burden on energy will seriously benefit Turkey, since energy prices on economic development issues are of great importance.

The report also states how Turkey’s expenditure on social protection has been increasing since 2002. It is emphasized that this increase should be maintained in order to increase social protection expenditures and to expand welfare state implementations in accordance with state facilities.

Money politics

According to the report, monetary policy should be removed from being a topic only within the context of the Central Bank of Turkey (CBRT). All institutions and organizations on financial markets (Banking Regulation and Supervision Agency, Saving Deposit Insurance Fund, Capital Market Boards…) should have a more active and constructive role in supporting monetary policy.

Public banks should aim for “value-added maximization,” and not for “profit maximization,” and should also support Turkey’s development in this field.

More, the CBRT should abandon its understanding that it has no other role to play other than stabilizing prices in the course of economic development. Rather, it should take into consideration the fact that the strict monetary policy applied has long-term damage to the real economy and economic development.

Institutions and bureaucracy

For more efficient ministries and committees, Turkey needs to direct experienced individuals to work in the field of bureaucracy.

The line management of newly established boards should not only consist of those from the field of bureaucracy and academia but also with individuals who have experience in the private sector.

In order to facilitate the daily life of citizens and companies, the report suggests to remove all unnecessary bureaucratic stationery operations as soon as possible, and suggests to develop a balanced reward-punishment mechanism in order to increase the job motivation and satisfaction of bureaucrats.

*Written by Suna Nur Sarihan.

The world economy has been witnessing a rapid transformation for the last four decades together with staggeringly growing influence of financial industry under the current economic and financial system, a.k.a. neoliberalism, which will definitely give way to another system sooner or later.

One should note that the previous system, namely Bretton Woods, had lasted only three decades, and the neoliberal system still lingers on, though showing real signs of strains. For example, the current system needs constantly growing economies, however the 2008-09 global financial crisis pointed out that this would be more and more difficult for the world economy to achieve under the “current” economic and financial system, or paradigm.

However, we live in the here and now and have to cope with all the “intricacies” of neoliberalism. First and foremost, with the rapid financialization of the world economy, countries around the world have become much more susceptible to the caprices of global finance. We witnessed hundreds of financial crises in the last four decades, unlike the Bretton Woods era, in which only a few of them occurred. Moreover, most countries in the world have seen their ability to pursue an independent monetary policy and fiscal policy to erode significantly.

Ironically, this is the same era in which the rhetoric that central banks around the world gained their “independence” has become widespread. What happened actually was central banks have become dependent on the financial industry, as they were dependent on states in the Bretton Woods era. There is nothing as real independence and it is very clear that for central banks being dependent on the state is much more democratic than the other way around. However, one has to take into account the sheer power of global finance and the “rules” of the current system when talking about monetary policy. A country can freely and happily pursue looser monetary policy than other countries when international capital flows are restricted. For example, this was what France did for a long time in the Bretton Woods era, when her neighbor West Germany had been implementing stricter monetary policy.

Moreover, fiscal policy in the current system is much more critical than in the previous system. A country who is pursuing a somewhat loose fiscal policy could be punished intensely and with a mind-boggling rapidity by “financial markets.” Even a rumor that this country will spend beyond her means and that “there is now a possibility” that the financial situation of the country will deteriorate could trigger some kind of a “panic” in the financial markets. So, in the new system not only central banks, but also most countries have been “tamed” to a great extent.

It should be underscored that for a government being fiscally responsible is a good trait. However, the line between being fiscally disciplined and profligate is significantly blurred and apparently it is “up to” the financial markets to decide which country falls which side of that line through various and numerous “country reports” of credit rating agencies, IMF and the like.

All in all, we need to understand clearly what neoliberalism has to offer and dictate us, and what choices we have in the current system. One should note that “good” governance does not mean being as much fiscally prudent or monetarily strict as possible, i.e. to the extent that financial markets are totally satisfied with the “governance” of the country. In the end, one should remember that the nature of the relationship between financial industry and real industry/households is conflict of interests. This is a redistribution game afterall.

In my previous column, I touched upon how neoliberalism and the financialization of the globe have rendered countries around the world susceptible to the caprices of the financial industry. Because of the pervasive influence of the financial industry, many developing countries including Turkey have found themselves in the last two to four decades unable to pursue a growth – and development – conducive monetary policy regime, which features a low policy interest rate and an undervalued exchange rate.

Two main developments, namely global liquidity abundance and unnecessarily strict monetary policy on the part of the Turkish Central Bank (TCMB), have accentuated wrong type of monetary policy in Turkey, which features a high policy interest rate and overvalued exchange rate regime in the 2000s. Between 2002 and 2008, the real interest rate hovered well above a staggering 10 percent for the most part. Only with the onset of the global financial crisis, TCMB lowered policy interest rate, albeit very slowly, and hence eased its monetary policy stance. However, the nature of the monetary policy regime did not change and once Turkey recovered from the crisis amid fears of the overheating of the Turkish economy in the 2010-2011 period, TCMB tightened its monetary policy stance too fast and too much, though resulting in not as pronounced a tight monetary policy as before the crisis, one should note.

Since then, TCMB has pursued a (somewhat) strict monetary policy as before purportedly with a view to decreasing the inflation rate, which has already been in moderate levels, but to no avail. This should not come as a surprise, because the Turkish inflation rate experience between 2004-2018 has shown that policy interest rate and real interest rate have had no (negative) discernable effect on the inflation rate. For example, when the real interest rate was 11.8 percent on average between May 2006 and November 2008, the inflation rate averaged out 9.75 percent, surpassing the long-term inflation rate in the 2000s significantly. On the other hand, between 2011 and 2013, real interest rates were well below 10 percent and the average inflation rate was around 7.6 percent, somewhat below long-term average.

Unlike “official monetary policy understanding in the world” and as Post-Keynesian economists advocate, inflation results mostly from cost-push factors, not demand-pull ones, and the Turkish experience in the 2000s attests that clearly as shown in an empirical paper in a refereed-journal by TCMB itself. According to the study, half of the inflation in the period of 2006-2016 in Turkey cannot be explained at all, and more than 90 percent of the other half has not been demand-driven, but cost-driven, which is agonizingly at odds with the “weak” theoretical fundamentals on which TCMB constructs its “strict” monetary policy stance.

All in all, the TCMB purportedly has long been trying to contain the inflation rate by a strict monetary policy regime in Turkey, only to no avail on the part of inflation rate, and – unfortunately to the detriment of the Turkish economy and “common people.” The whole “strict” monetary policy stance in the 2000s has debilitated the real economy in favor of the financial industry, hence the deindustrialization of Turkey. Of course, not to mention the aggravated income inequality emanated from this monetary policy regime. One should add that the same deindustrialization process happened in developing countries such as Brazil in the 2000s. Then, time is more than ripe for the TCMB to reconsider its monetary policy stance and take into account real factors such as employment, economic growth, income inequality and, last but not least, the development process of the country when constructing monetary policy function. After all, central banks are for the people, right?

There are two main types of monetary policy regimes particularly for developing countries: high policy interest rate – overvalued exchange rate and low policy interest rate – undervalued exchange rate. While there are certain pros and cons for each of these monetary policy regimes, the right one for developing countries is certainly the latter one. However, a majority of developing countries have increasingly found themselves – for the most part inadvertently and/or unwillingly – in a position of embracing the former regime since the advent of neoliberalism together with the financialization of the world.

For a relatively closed economy, pursuing monetary policy conducive to the needs of the country is relatively easy. This was the case for developing countries before neoliberalism, which had been implementing import-substitution industrialization (ISI) roughly up until to the 1980s. During the ISI period, the government had controlled the financial system outright or to a great extent. Even in a large number of developing countries, all or most banks had been owned by the state. Besides that, countries around the world had also controlled credit and deposit interest rates in that era. Further, central banks had directly been controlled by the state. These countries were also rather closed in terms of both foreign trade and international capital flows. Therefore, it was rather effortless for these countries to pursue a low policy interest rate – undervalued exchange rate regime in that period.

However, with the rise of neoliberalism, developing countries one-by-one dropped ISI and embraced an export-oriented industrialization (EOI) strategy. With this switch in economic policy, foreign trade has expanded tremendously and international capital movements increased dramatically. Moreover, the financial system was liberated and the caps on interest rates were removed totally. This era also witnessed the privatization of state banks, alongside other state firms, thanks to the privatization wave, which originated from the aura of the Washington Consensus. Hence, developing countries have become much more open both economically and financially. This transformation diminished the capacity of the state to pursue an independent monetary policy from abroad via her central bank.

Ironically, the emphasis on the independence of the central bank from the state in neoliberal ideology gained much ground at the same time. In the end, central banks did not become independent from everybody as generally assumed, but their subjugation and independence has changed its nature. In the ISI era, states were the masters of central banks and international markets were not important in that regard at all. On the other hand, in the EOI era, the international financial industry became the master of central banks in developing countries to a great extent, and the influence of the state over central banks dwindled tremendously. Note that states in the developing world also became much more susceptible to international influence both economically and financially within the neoliberal regime.

All in all, pursuing a low policy interest rate – undervalued exchange rate regime has become much harder in the neoliberal era. However, in order to complete industrialization processes, developing countries such as Turkey should adopt this regime. This regime is certainly not enough to the industrialization end, but is a must.

On the other hand, central banks in industrialised countries started to prioritise price stability, which was allegedly reached only by very low inflation rates through adjustments in the interest rates. This approach to the monetary policy was labelled inflation targeting (IT), and one central bank after another embraced and cherished this regime and started to implement it in the 1990s and 2000s. Industrialised countries led the way, and developing countries followed suit in this process. While New Zealand, Canada and the UK embraced the IT regime in the 1990-1993 period, developing countries such as Brazil, Mexico and Thailand did so in the 1999-2002 period. After the 2001 financial crisis, Turkey also switched to this regime implicitly in 2002 and explicitly in 2006.

It is now more than two decades as to the experience of the IT regime. Was it successful? The answer is, alas, no.

It is now more than two decades as to the experience of the IT regime. Was it successful? The answer is, alas, no. In the 1990s and the first half of the 2000s, when IT regime was still in its infancy, proponents praised the IT regime in that it resulted in low inflation rates and favorable economic outcomes. However, as time passed, it became clear that this was a hasty conclusion. First of all, while IT regimes did manage to decrease their inflation rates in the 1990s and 2000s, this was also case for non-IT regimes in the same period. The average global inflation rate was 12 percent in the beginning of the 1980s, decreasing to 7 percent in 1989, and to a mere 3 percent in 1999. This ratio was hovering around 2.5 percent as of 2014. The sweeping conclusion here is that the whole world (both non-IT and IT countries) was in a downward trend in terms of inflation in this period.

On the other hand, proponents of the IT regime defended it mostly on the grounds that it results in lower inflation and hence better economic outcomes. The logic here is that central banks should always try to reach very low inflation rates, and, no matter what a central bank does in its pursuit of this goal through interest rates policy, it cannot hurt the economy in the long run thanks to the neutrality of money. Therefore, tight monetary policy has almost no downsides on the real economy in the long run, and, once a low inflation level is attained as a result of the disinflationary process, nothing is lost, but much is gained in real economic terms, because whatever the short-run costs of the disinflationary process in the real economy, these effects will eventually fade away and die out and only price stability could have long-run (and positive) consequences.

One can hardly argue that there is a linear relationship between inflation rate and economic performance.

However, this approach cannot stand up to empirical evidence. First, there is no compelling reason to believe that the lower the inflation rate, the better. This could come as a shock to outsiders, but economics has neither inflation theory nor interest rate theory. It is as simple as this. All that economists say regarding inflation and (natural/real) interest rate do not stem from theoretical robustness, but actually reflect their ideology with regards to the workings of the economy. This is the point where empirical evidence should have an upper hand. It is hard to claim that very high inflation levels in the orders of 70-80 percent are not bad for the economy both in the short run and in the long run. However, this does not hold for one-digit or even somewhat higher inflation rates, especially for developing countries. While the gains of lowering the inflation rate from 70-80 percent to, let’s say, 7-8 percent almost certainly outweigh the costs, the costs of disinflationary process when the inflation rate is already in the one-digit range could greatly exceed the gains of achieving even lower inflation rates. On the other hand, it is very hard to decrease inflation rate when it is already in the one-digit range, compared to relative easiness of decreasing very high inflation rates, as Turkish case from 2001 onwards clearly shows.

Therefore, one can hardly argue that there is a linear relationship between inflation rate and economic performance. In the 2000s, a new strand of empirical literature in economics came into prominence. This threshold inflation rate studies assumed and then confirmed that, actually, there is a nonlinear relationship between inflation and economic growth, and, more importantly, there is a certain threshold above which inflation is harmful to the economy and below which inflation is conducive to economic growth. And, generally speaking, the threshold level for the developing countries was in the range of 15-30 percent, and for industrialized countries in the orders of 3-5 percent. The policy conclusion from this literature is that, when inflation is low, not decreasing but actually increasing, it could enhance growth.

The policy conclusion from this literature is that, when inflation is low, not decreasing but actually increasing it could enhance growth.

In addition, implementing tight monetary policy in the pursuit of even lower inflation rates could have very adverse economic consequences in the long run. Proponents of the neutrality of money assume no market imperfections and hysteresis effect, a borrowed term from physics that describes economic recessions and troubles as having long-term consequences such as lower growth potential and higher natural unemployment rates, insisting that tight monetary policy has nothing to do with the real economy in the long run. However, empirical evidence suggests that persistently higher-than-necessary interest rates—emanating from the overemphasis on price stability and inflation targeting—and disinflationary processes indeed culminate in lower economic growth, weaker investment performance and worse income distribution. For example, in IT countries, the share of wage earners, in general, declined right after the implementation of the IT regime. Ironically, the share of the wage earners in New Zealand, the poster boy and the first implementer of the IT regime, declined significantly from 50 percent (1980-1989) to only 43 percent (1990-2003).

Overall, the overemphasis of price stability and the assumption of the neutrality of money seem to hurt the world economy in general and the Turkish economy in particular in several ways. Former IMF chief economist Olivier Blanchard once argued that ‘the state of macro [economics] is good’. No, it is not. Especially after the 2008-9 global financial crisis, central banks around the world have been trying to implement unconventional monetary policies, given that the conventional one, which is the IT regime, apparently does not work. World-renowned economist Nouriel Roubini recently even suggested unconventional “unconventional” monetary policies, on the grounds that unconventional monetary policies also did not work and they ‘have themselves become conventional’. The time is now ripe for a thorough transformation of the monetary policy framework.

The world economy and the Turkish economy need not yet another version of IT regime, or unconventionalised monetary policy, but a monetary policy framework which understands the workings of the real economy and stands up to empirical evidence. Monetary policy could indeed affect the real economy and central banks should acknowledge this fact and act on accordingly. Having one mandate—price stability—is only one side of the coin; real economic variables such as economic growth, unemployment rate and income distribution, which all could be affected and are affected adversely by tight monetary policies and persistently higher than necessary interest rates, are the other side. Let us not pretend this is not the case.