Authoritarianism drives inflation
I was one of the panelists at the conference on inflation dynamics in Turkey organized by Koç University’s Economic Research Forum and the Turkish Industry and Business Association (TÜSİAD) on April 10.
Sumru Altuğ from Koç argued that Turkish inflation was high because of structural factors, while Turkey Data Monitor’s Murat Üçer defended a more orthodox line, maintaining that fiscal and monetary policies had not been tight enough. In fact, he argued that Turkey needed a “Volcker moment,” referring to Fed chairman Paul Volcker, who brought down U.S. inflation in the 1980s; a central banker brave enough would need to drive inflation down once and for all.
I supported both approaches in my remarks. On one hand, I argued the Central Bank had claimed, back in 2010-2011, that the economy was not overheating, while there were red flashes all around. In fact, Mustafa Kılınç, head of the Bank’s Research and Monetary Policy Department, pointed out after the panel that their evaluations showed they had indeed been mistaken at the time.
Similarly, it is true that both the budget and primary balance, which excludes interest expenditures, improved significantly after 2010, but these measures are related to the strength of the economy. The International Monetary Fund looked at the cyclically-adjusted deficit and found out that fiscal policy was not particularly tight from 2010 to 2012.
However, I also noted that I would not expect inflation to fall to the Central Bank’s 5 percent target even if monetary and fiscal policies were very tight. For one thing, I feel that there are structural factors behind Turkey’s high and volatile food prices, which are still rising despite a deflationary global trend.
A similar point could be made for general prices, not just food. For example, wages and labor costs have risen much more than productivity since 2011, mainly because productivity has stalled. As a result, producers feel compelled to raise their prices if they can. Monetary or fiscal policy cannot address this problem; structural reforms can.
The Q&A session after the panel, on the other hand, made me aware of two completely different angles. Someone asked if inflation was a priority for Turkey, especially given the dismal growth outlook. Considering that Turkish inflation was in three-digit territory not too long ago, he would seem to be right.
But I feel that inflation’s hidden costs, which were summarized by TÜSİAD President Cansen Başaran-Symes in her opening speech, are still not well-understood. For example, the depreciation in the real exchange rate, which is a better gauge of competitiveness than nominal exchange rates, has been muted despite a weakening Turkish Lira because of the inflation differential between Turkey and other countries.
In that sense, if for nothing else, the conference was useful to remind everyone of these costs. Besides, even if inflation is not a danger to the Turkish economy anymore, that conclusion should be reached by a healthy discussion. Unfortunately, as columnist Uğur Gürses pointed out, such a discourse cannot take place when President Recep Tayyip Erdoğan and his cronies call anyone critical a traitor.
Slamming Başaran-Symes over her warnings about the economy the next day, at yet another unconstitutional “election rally” in the province of Sakarya, Erdoğan confirmed Gürses’ remarks. So maybe, Turkish inflation is driven more by authoritarianism than anything else, after all.