Salvation won’t be easy

– What kind of days are waiting for the citizens and the economy according to the result of the ballot box? Is a bitter recipe waiting for us?

The country has gone through an interesting election process. However, the emerging political structure also eliminated the possibility of having an economic management as mentioned above. In the short term, Turkey will need fast resources. The upcoming tourism period may provide some of these resources. However, it is necessary to expect that the need for resources will become more visible as of autumn. During this period, it should not be difficult to predict that the pressure on exchange rates will not be maintained as tightly as it was in the pre-election period. Therefore, the probability of encountering inflation rates above the current levels has increased.

We will see how ready the Turkish society is to give up its prosperity. Because Turkey, which has entered into an economic deadlock, will eventually have to put a stop to this trend and bear the many costs that will arise.

Inflation will remain high

– The main agenda of the citizens for the last 2 years has been cost and high inflation. How do you see the picture here, how long does high inflation last?

I think inflation will occupy the country’s agenda for a while. Getting rid of him won’t be easy. However, it may be possible to control the negative effects on different segments during this period. Inflation continues to occupy an important place in the world. What is happening at the global level, the impression is that inflation will show a “sticky” character all over the world for a while.

On top of all these, our country has its own problems regarding inflation. But the most important problem is the lack of a policy that is implemented decisively in the economy management regarding the fight against inflation. Therefore, “non-politics” is one of the problems.

The second issue is the problems related to measurement. Although this problem is present in almost all economic data, inflation has another importance compared to others, as it is important for many segments of the society and forms a reference for income bargaining. Unfortunately, no one believes the official figures announced by TUIK today. Therefore, at the beginning of such a struggle, it is necessary to quickly build confidence in the institution that will make the measurement.

After these, the institution that will fight against inflation should be highlighted and the credibility gap that the Bank has been exposed to for so long should be eliminated immediately. The addressee of this struggle is the CBRT. The policy independence that will be granted to him in this fight will be the most important step to be taken in the fight against inflation. It is difficult to know to what extent the current political understanding will allow this. But if it is not done, inflation will be permanent in our lives for a long time.

At the same time as the elections held on May 14, I have the idea that an extremely sincere administration will come to power to show the will to fight inflation. However, the election process we live in and the expenditures made by the government have made the existing deterioration in the economy even more severe. This led to the need to put the brakes on expenditures in the post-election period. In the fight against inflation, the control of public expenditures is one of the important criteria. Therefore, re-establishing the priorities of the budget expenditures after the election and spending the existing resources according to these new priorities are among the first things to be done.

Nation alliance was optimistic about reducing inflation

However, the constituents of the Nation Alliance were optimistic about the fight against inflation. According to Bilge Yılmaz, who claims that he will be especially responsible for the treasury, he says that inflation can be controlled and reduced within two years. They wrote in detail what they would do about this issue, both in the IEP election manifesto and in the Six Table Consensus. The government, on the other hand, does not have any consistent policy in this regard. Instead, it implements a policy to control the effect of exchange rate pass-through on inflation. By not increasing the interest rates, it tries to control the exchange rate in an extremely costly way and to minimize its effect on inflation, by selling only foreign currency. It is doubtful how long this will last. As a result of this policy, the country’s foreign exchange reserves were depleted. Even the gold reserves have been melting recently. Presumably, the government will return from this policy in the new period.

However, I am a little pessimistic about inflation. Inflation is not just a technical issue. It is also political. The cost of political instability appears to a large extent as inflation. There are important local elections in the upcoming period. These elections will have a binding effect on the policy options that the government will implement to reduce inflation. In addition, high inflation around the world will continue to be a problem for a while. I find it hard to believe that inflation can be reduced rapidly in such an environment. Actually, I don’t want to be unfair. The government has no publicly announced intention to reduce inflation so quickly. The expectations of the economic bottleneck, which will be entered after the May 14 elections, make our expectations on this issue pessimistic enough. While it is technically possible to reduce inflation, its political costs need to be considered.

Although inflation seems to be an economic problem, its link with politics has become even more evident these days. Even if inflation cannot be lowered, it must be kept under control. This makes it necessary to put the costs on someone’s shoulders. Which part of the society will consent to bear these costs is a political choice. Considering the economic policies implemented by the AKP for so long, it is highly likely that these costs will be borne by the low-income and the poor. Of course, if the AKP government believes that the policies it has been following all this time are wrong and makes a radical turn from them and decides to put the resulting costs on the backs of high income groups, that is different.

Prices will remain high

– What steps should be taken for a permanent decrease in inflation, is it possible to end the melting purchasing power of the people?

Inflation is closely related to politics. Especially when it is controlled, political consequences inevitably emerge.

However, it can be said that inflation in our country has many technical sources. For example, the exchange rate pass-through is very high in inflation in our country. Because our production is highly dependent on imports. In order to reduce this, the dependence of the country’s production on imports should be reduced to a large extent. This cannot be achieved in the short term. This will have the effect of reducing both the “exchange rate pass-through” and the effect of “imported inflation”.

First of all, I must state that price stability does not mean that prices fall. Prices, which have already risen, will largely maintain their current nominal levels. At least, this can be expected in the short term. Therefore, the only way to restore the decline in purchasing power will be through incomes and by constructing a new “incomes policy”.

Sometimes, the economic administrations, which are faced with a shortage of resources, see these decreases in purchasing power as an opportunity, accept the new level in the consumption levels of the households and want to keep the incomes at that level. In a way, they want to include the income increases that will occur with stability, not to the households, but to include them in the savings of the country. This is one of the general aims of economic stability policies. Since the savings gap is an important problem in countries like ours, it is desirable to direct the “forced” savings, which this will provide, to the areas needed in the economy, while the ready purchasing power has also decreased.

Of course, when making such a decision, it is a decision that will be determined by politicians as to which “areas needed” are. In other words, the politician will decide which of the resources that can be saved in the short term will be directed to meet the needs of the society. And this depends on the relationship of that political understanding with the demands of the base. The choice to be made by the politician is about whether the available resources will be used to compensate for the decrease in purchasing power or whether these resources will be used to direct them to other segments. This is a critical choice, and as the public opinion, we will carefully monitor this choice that the government will make in a very short time.

The Nation Alliance has been saying that it will implement policies to compensate for the erosion in the purchasing power of low-income people all this time. They have already included this in the text of the memorandum that they announced to the public. Apart from this, Mr. Kılıçdaroğlu also published some videos for the public and repeated similar promises. However, judging by the results obtained in the 14 May elections, it was understood that the public did not have such a concern. In this regard, it is useful to carefully monitor the policies and steps to be taken by the government in the new period. It will be important for economists like us to be able to observe the effects of these policies on the public and to be able to see the demands of the people.

However, it is worth noting that. Even the official statistics of the state show that the income balance between labor and capital has deteriorated significantly in recent years. As seen in the latest income distribution statistics, it was observed that social transfers decreased by 3.7 percent in 2021, while wage incomes decreased by 0.9 percent in the same period. It is highly probable that this deterioration will continue in 2022. Unfortunately, we will see this effect next year due to the nature of these data.

On the other hand, the income distribution of the country has deteriorated significantly compared to the previous year. While the Gini coefficient of income distribution measurement was 0.405 in 2020, it is seen that this coefficient increased to 0.415 in 2021. According to TurkStat, which is also our data source, households in the lowest income group can receive only 6 percent of the total income, while the 20 percent group in the high income group receives 48 percent. This is an indicator of extraordinary inequality. All these negativities point to the urgent necessity of an income policy. It has become an obligation for the government to compensate for the decrease in the income and purchasing power of the citizens. What needs to be done is to work out a new incomes policy that is compatible with the current level of prices. Can this be done in today’s political conjuncture?

However, I would like to draw attention to an issue that should be taken into account in this regard. The recommendations we are talking about here are short-term policy implementations. In order to compensate for the erosion in purchasing power and to prevent the income policies implemented for this purpose from creating inflationary effects, it is beneficial to take measures to strengthen the production capacity of the economy simultaneously in the medium and long term. If this is not done, the continuity of the said incomes policies will be endangered and it will be difficult to provide the politically intended level of welfare for large segments of the society.

After these statements, I would like to draw attention to the conditions necessary for the fight against inflation in the upcoming period. Depending on whom and how much the fight against inflation will cost, it will be necessary to direct this struggle. The general expectation of the public is that restricting direct demand through interest rate increases, which is one of the classical means of struggle, will at least be sufficient to control demand inflation. So, can this be done with the current political understanding?

Today, one of the most important sources of inflation is “expectations” and the worsening of public expectations causes them to behave more conservatively in the economic decisions they make today. They try to protect their purchasing power in pursuit of guaranteed earnings. They turn to financial instruments other than TL, the demand for TL decreases. This is something a central bank would not wish to see. They try to create the confidence that will increase the TL demand in order not to fall into this situation.

If the citizen does not trust the economy management and therefore starts to run away from the TL, the sphere of influence of the monetary policy will narrow. Today, more than 50 percent of the deposits in our banking system are in foreign currency. This is not something any central bank would wish for. In order to ensure economic stability, first of all, the sphere of influence of monetary policy should be expanded. For this, the demand for TL in the economy should increase. For this reason, interest rates are considered as a tool to increase the attractiveness of TL in an environment where confidence is extremely low. The increase in TL interest rates will make TL more attractive than foreign currency and demand will increase. This, in turn, will expand the sphere of influence of the monetary policy implemented by the central bank.

However, today, the attractiveness of TL can be increased by managing expectations, without increasing the interest rates (or by increasing them below the desired amount). For this, trust in the management of the economy and the political framework that this administration depends on is essential. It can even be ensured that economic individuals turn to TL even without the need for an implementation such as the establishment of such confidence and an increase in interest rates that will impose a cost on especially low-income segments of the society. With extremely low political costs.

Costly interest policy has some conditions to manage the expectations of economic individuals in order to stabilize the economy and create a favorable environment for fighting inflation. The first of these is the creation of some anchors to which you will attach the expectations. For this purpose, Turkey needs an anchor that will stabilize the expectations of domestic and foreign investors in three areas.

We are facing very serious problems.

– Can you open these anchors a little bit?

The first anchor is political stability. This is the condition we most need in order to ensure macroeconomic stability in the short term. It will be beneficial if the decisions to be taken in the field of economy are taken as a result of the discussions that will not have much impact on the public in the new structure to be formed in the Parliament. This is an occasion for a serious determination for a government that is determined to fight inflation seriously. The message that the political will is behind the economic policy should be conveyed without any doubt. However, is there any intention in the new management on this issue? I’m not so sure. It should not be forgotten that one of the reasons for the failure of the anti-inflation policies implemented before 2001 is the loss of harmony between the coalition partners of that day. The problems faced by Turkey today are much more serious than in those days and such a harmony is needed more than in those days. The execution of this anchor will also depend on the leadership of the new president to be elected, rather than the economic administration itself.

Our second anchor is consistent and stable international relations with our international partners. The most important short-term need of the Turkish economy is to overcome the lack of foreign capital. Whether it is “hot” or “cold”, the country needs all kinds of foreign capital. I think the most important problem that the Turkish economy will face in the upcoming period is the capital constraint. The only center where this capital can come within the framework of international norms is the West. The implementation of a foreign policy that minimizes risks at the international level is important in terms of anchoring the expectations of foreign capital.

Of course, one of the most important conditions for foreign investors to bring their capital to Turkey is, of course, having an economic management in the country, which is more known economically and with which they are much more familiar. In order to minimize their own risks, besides an impersonal economic management where they will not have any trouble interpreting their actions, the relations of Turkey with their own countries will also be important for this capital. It has been understood that such a structure will not exist in our country for a long time.

In addition to this, what kind of value and supply chain Turkey takes place in the international community is an important issue. Because the position of countries in international relations cannot be established only on military security priorities. At the same time, it is necessary to establish stable and constructive relations with the countries in the supply and value chains that will ensure the security of the countries in the economic sense. In this respect, Turkey’s foreign relations should be established in a way that will not only serve its military security needs, but also cover its economic claims with the countries where it can realize its economic claims. For example, Türkiye-EU relations in the post-2001 period constituted the best example of this. There is no such anchor today.

Our third anchor is a technical anchor, rather an anchor to be determined independently by the CBRT.

This will have a role in facilitating the monetary policy that the CBRT will determine and carry out independently of politics, and will increase the effectiveness of the implementation. In this regard, it is possible to talk about many anchors that have been applied before. However, the anchor, which was implemented after 2001 and has been useful in reducing inflation successfully, has been inflation targeting. The important thing here is to ensure the credibility of the target declared by the Central Bank. The way to this is a more transparent, more accountable monetary policy management that is free from political interests. Ultimately, the Central Bank will determine this anchor technically, not politically. However, I do not think that such an anchor can be created within the political structure formed after the last elections in our country.

When we evaluate all these together, it is possible to say that the political conditions that can provide only one of at least three important anchors we need are formed in our country. It is doubtful how economically the first one will be used.

It is necessary to create a new understanding of law

– What are the main problems that the Turkish economy is currently experiencing, and what steps can be taken to solve them?

This question deserves an extremely comprehensive answer. However, governments are expected to direct the country’s economy according to the requirements of the age and to create the necessary legal, political and economic infrastructure conditions in this direction. For example, the establishment of a fair legal system is one of these conditions. For this, it is necessary to create a “new understanding of law” in our country. It seems that the present is not working very well, nor will it be useful in the future.

In addition to this, I must state that it is essential to transition to an impersonal management approach. Aside from all the negative effects this has caused to the economic and political performance, our current style is not a living style for a country like Turkey, a country that has been in search of democracy for nearly two centuries. It is not possible for an economy with a gross domestic national product approaching one trillion dollars to progress with a personal economic management.

In addition, increasing the efficiency of the institutions in our country in the decision processes and establishing the separation of powers in this context is essential for a high-performance management model. In this respect, it is necessary to move from highly personalized management practices to institutionalized management practices and to strengthen institutionalization in this context. The essential condition for such a model is to be transparent and accountable. In fact, a management model of this nature can be implemented based on the principle of separation of powers.

In the short term, it is necessary to make changes in these matters that will increase the effectiveness of the decisions taken in the country administration based on these basic principles.

After determining the management principles of the country’s government and strengthening the decision-making processes, there are many problems in the Turkish economy waiting to be solved. However, the solution to these problems is interrelated. For example, the income distribution problem has reached the worst levels in the AKP’s 21-year term. It is not possible to solve this with independent policies. Because, we see that at the root of the problem, there is an economy management that cannot spread the blessings of this growth to the base despite its growth. This is largely related to how that growth is achieved.

Likewise, inflation is another important problem that awaits an urgent solution today. Keeping inflation high for a long time and allowing it to become a chronic problem will cause the existing problems of income distribution and poverty to worsen.

It is possible to extend the list in this way. But I would like to draw attention to a point that should not be overlooked. It is necessary to make a sincere effort in the new period for the solution of the current account deficit problem in the Turkish economy, which cannot be solved. First of all, moving away from a growth model with service and construction traction is one of the things that needs to be done in this regard.

The second point is to engage in an industrialization aimed at increasing the export revenues of industrialization and the country. However, it would be appropriate to be selective in this regard and to follow a strategy that reduces the country’s dependence on imports. Unfortunately, today, there is not much to go on in this regard. Therefore, while an import-reducing industrialization may be preferred in order to maintain the current account balance, the main contribution is to realize production that increases added value in exports.

Finally, one thing that I have the pleasure of pointing out is to review our country’s energy policy and to reduce its dependence on foreign sources.

Türkiye has to attract capital from the West

– In the four months before the election, the Treasury gave a historical deficit of 417 billion TL, while the Central Bank reserves were mobilized with foreign exchange and gold sales through the back door. How can the Central Bank reserves and other deficits be compensated after the election?

In this new period, our expectation is that Turkey will integrate with foreign capital markets and attract capital. It is important that Turkey, which generally provides financial resources from centers such as the Middle East, Russia and partly China before the election, can attract resources from western capital markets. However, the expectations of both markets are different from each other. While the eastern capital is mostly mobilized under the control of the state, the western capital is mostly realized according to the market conditions and the expectations of the market participants.

Market expectations, on the other hand, rather require certain assurances that will not endanger the operability of the market mechanism. An impersonalized management practice is the most important expectation. Then, legal assurance and a management coordinated with the world in economic management are other expectations in this regard.

If these basic conditions are met, Turkey has the opportunity to attract capital from western centers. The acceleration of capital inflows will also provide a favorable environment for the CBRT to accumulate reserves, which we hope will not overvalue the Turkish lira. In the short term, there is no other option. However, if there is a bottleneck in these capital flows, our country may need the support of international financial institutions. The political structure that emerged after the latest elections seems to cause difficulties in obtaining the capital from western sources as much as we desire. It is certain that we, as a whole country, will follow the developments that will take place after this day with interest. However, the result of the lack of such a capital inflow may bring up the danger of a serious recession in our country. In particular, the policies implemented and the financing of the promises made during this election period also imposed a serious cost on the public and the economy in general. Turkey’s need for external capital, including their financing, was higher than expected.

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