Turkey’s Misery Index and the shy rate cut
Remember the old Misery Index of Arthur Okun and Robert Barro from the past? It is simply the sum total of the unemployment and inflation rates. When it was first invented in the 1970s, the problem of in developed economies was stagflation: High inflation together with low growth and high unemployment. Later, it was used in the U.S. to compare the performances of different presidents. High unemployment signifies a lack of jobs and high inflation is about the rise in the cost of living. That is misery for you. Have you ever looked at the misery index for Turkey? My colleagues at TEPAV have just prepared a series for me to look at. Let me make three points regarding the trends in the Turkey’s Misery Index.
Firstly, a quick comparison of the periods before and during the current Justice and Development Party (AKP) rule goes a great way to explaining the party’s election victories. The index has declined from around 120 in the early 1990s to lower than 20 at the start of 2003. This improvement is basically due to the decline in the inflation rate from more than 80 percent to around 8 percent. Remember when the New Turkish Lira was freed of its last six zeros, in 2005? That happened thanks to the Kemal Derviş reforms and the IMF program that was followed to the letter by the new AKP government. So it is a decline in misery that characterizes the AKP’s first period in office.
Let me come to the second issue. In 2012, the misery index figure for Turkey was around 18.09. Is that actually a low level of misery when compared to other countries? No, it is not. For example, the figures for South Korea are much lower. Their 2012 index is 5.40 to Turkey’s 18.09. Initially, Turkey’s current figure seemed high to me, but then I took a look at the figures for the previous years when Okun created the index. During Gerald Ford’s presidency between 1974 to 1977, the index peaked at 19.9 in the U.S. That was considered one major reason for his defeat in the elections. During the Jimmy Carter years (1977-1981) the index reached its historic high of 21.98, making Carter yet another one-term president. The most recent reading for the U.S. was around 8.
Thirdly, Turkey’s 18.09 should be considered a rather high level of misery when compared to normal countries. The almost horizontal line around the index figure of 20, which starts in 2004, means that the Turkish government has been doing nothing to combat misery since the Kemal Derviş reforms.
This reminder about the AKP’s policy experience and the misery index is to give you perspective on the rather shy recent interest rate cut by the Turkish Central Bank. Does it mean that our government finally has a sound macro policy framework? I wish.