I'm writing as an economist from Turkey. Your claim that Turkey was doing fine like Poland is fundamentally wrong. Turkish economic model based on spend, spend, and spend. Investment mostly go to housing construction or government projects. Besides, there is massive amount of informal economy in which the government does not enforce to collect taxes from tax evaders. Lots of zombie firms stay in the market due to this approach. So, new investment is made mostly in low return industries and low value products. Exports seem to have grown substantially but this is also misleading since Turkey has a massive industry incentive program. In other words, exports are artificially high.
When it comes to Erdoğan, he is an irrational, idiot, and Islamist megalomaniac. He thinks low interest rates will always keep the economy hot and lively. Especially, from his perspective, construction will maintain growth. Besides, he think that interest is forbidden in Islam and by cutting interest to possibly zero make it not a sin.
Keep in mind this part, a massive devaluation is coming after 28 of May. The government by supplying hot money from abroad especially from the countries such as Saudi, UAE, Qatar, and Russia kept the Lira stable enough to win the election. That will have to end at some point. In the end, balance of payments crisis looms.
Turkey is not Poland or Malaysia. Turkey is Argentina of the Middle East and heading towards to be Venezuela unfortunately since she has a dictator like the one in that country.
Your first line reads: "Turkish President Recep Tayyip Erdogan is headed to a May 2028 runoff against challenger Kemal Kilicdaroglu after an extremely tight election."
May 2028?
Executive thought: My afternoon nap must have been *really* long.
I think people underestimate the role of Qatar in the Turkish economy. Qatar has relatively little oil, its strength is natural gas and this requires the right infrastructure for export. So Qatar arrived at great wealth relatively late for the Gulf region. Once it acquired this wealth it set about using it to become politically important by propping up the Muslim Brotherhood, in particular its Gaza branch known as Hamas, and propping up Turkey. The Turkish economic numbers for the last 20 years only make sense if you attribute a hidden subsidy from Qatar, one they can afford now due to the boom in exports of liquified natural gas.
This issue is obviously politicized and people will praise or try to undermine the Turkish economic success based on their political viewpoint. I think the rational approach is they have done well by the standards of the countries they are compared to, but have also been receiving a subsidy from Qatar in exchange for influence. I also think Turkey benefited from the Syrian Civil War by moving contraband Syrian oil, this economic boon is now gone(I hope).
Its well known that Erdogan set up a new banking sector for the ostensible purpose of giving Turkish citizens an Islamically compliant banking option, a reasonable goal. This new banking sector was also used to provide a vast Keynesian stimulus to the economy. This has to be part of the discussion to get the full picture. But in the end if you just look at the numbers, the trade numbers, the debt numbers, the GDP growth, you can't reconcile all of these numbers without assuming Qatar is injecting money into the economy in an undocumented way in exchange for political influence. I don't see any other way to reconcile all the macroeconomic numbers for Turkey over the last 20 years.
"this could result in epic catastrophe — the kind of thing that has caused Venezuela to experience utter economic collapse"
Wasn't the economic collapse of Venezuela more a result of the political reaction to inflation rather than inflation itself, e.g. price limits that made indigenous manufacturing unprofitable, that led to the collapse?
If inflations stabilize at a high but not insane level, e.g. 50% p.a., as they currently seem to do, isn't that something suboptimal but endurable?
In any case, lets hope the Turkish success story continues.
Good article and analysis. Agree also with the recommendations. However I think it is not given that the interest rate increase required to stop the inflation will only have limited impact on the economy. If they manage to reduce inflation fast - yes, it will only have limited effect. But if the inflation turn out to be more sticky (due to strong inflation expectations which is difficult to change) then it can cause significant economic damage.
While the neo-Fischerites are wacky and more widely discredited, the Keynesian theory of 'supply-side inflation' has become the favourite refrain even among more mainstream economists and central banks these days. This pretends that inflation is often caused by supply side factors that cannot be controlled by monetary policy. Or, that increasing interest rates will actually make it worse by reducing capex in building capacity. Ergo, interest rates must actually be reduced!
This was the kind of thinking that kept interest rates in most OECD and emerging countries low in 2021. We all saw what that led to in 2022, when finally the Milton Friedman theory was applied and interest rates were jacked up real quick.
I think a major reason for all of this is the natural consequence of the fact that inflation is a second or third order consequence of changing interest rates. Essentially, you are trying to change the fraction of the money supply being actively used in the economy to match the change in the production rate of goods and services. As you can imagine, there are a whole host of other considerations to make eg personal spending power, savings rates, willingness to spend, profitability for producers etc. This means that if anyone wanted direct control over inflation the only reliable way would be direct interventions such as helicopter money/price controls/tax rate changes with the associated political baggage that they come with.
Erdogan should do this, Erdogan should do that. Maybe we should hope that Kemal Kilicdaroglu wins the election, preventing Erdogan from becoming dictator-for-life? The opposition has a plan for economic recovery, Erdogan only for holding on to power for as long as possible. Don't give Erdogan ideas, he should be relogated to the dustbin of history.
Thanks for this one Noah. I have been to Turkey several times and have loved that country for many reasons. The people are the among the warmest and most hospitable I have met. I will look forward to your commentary on the election runoff.
Once I was meeting my twenty-something daughter in Istanbul; she arrived a few days before I did. she was walking around and a Turkish man was following her and would not leave her alone. A policeman came up and asked her if that man was her friend. When she said no, the policeman yelled at the man and he ran off. In contrast, I recently visited a country where I, a solo woman traveler, had a border guard take my luggage and demand a "tip" before he returned it to me.
Noah, I just had another thought about your beautiful bunny. Until I saw Cinnamon's face, I didn't know that a rabbit could have a facial expression. But I see in her face curiosity, innocence, and obvious thoughtfulness. Clearly, she was a tremendous companion (unlike my dog who has a cat-like disdain for me).
In terms of growth, to me, not nearly as strange a country as Brazil (where I grew up). Turkey's GDP per capita PPP grew by 300% from 1990 to 2022, while Brazil's grew by 140%.
Quite inexplicable for a country that, comparatively speaking, for well over a century, hasn't suffered from the internal and external troubles that have assailed Turkey.
I'm writing as an economist from Turkey. Your claim that Turkey was doing fine like Poland is fundamentally wrong. Turkish economic model based on spend, spend, and spend. Investment mostly go to housing construction or government projects. Besides, there is massive amount of informal economy in which the government does not enforce to collect taxes from tax evaders. Lots of zombie firms stay in the market due to this approach. So, new investment is made mostly in low return industries and low value products. Exports seem to have grown substantially but this is also misleading since Turkey has a massive industry incentive program. In other words, exports are artificially high.
When it comes to Erdoğan, he is an irrational, idiot, and Islamist megalomaniac. He thinks low interest rates will always keep the economy hot and lively. Especially, from his perspective, construction will maintain growth. Besides, he think that interest is forbidden in Islam and by cutting interest to possibly zero make it not a sin.
Keep in mind this part, a massive devaluation is coming after 28 of May. The government by supplying hot money from abroad especially from the countries such as Saudi, UAE, Qatar, and Russia kept the Lira stable enough to win the election. That will have to end at some point. In the end, balance of payments crisis looms.
Turkey is not Poland or Malaysia. Turkey is Argentina of the Middle East and heading towards to be Venezuela unfortunately since she has a dictator like the one in that country.
Your first line reads: "Turkish President Recep Tayyip Erdogan is headed to a May 2028 runoff against challenger Kemal Kilicdaroglu after an extremely tight election."
May 2028?
Executive thought: My afternoon nap must have been *really* long.
I think people underestimate the role of Qatar in the Turkish economy. Qatar has relatively little oil, its strength is natural gas and this requires the right infrastructure for export. So Qatar arrived at great wealth relatively late for the Gulf region. Once it acquired this wealth it set about using it to become politically important by propping up the Muslim Brotherhood, in particular its Gaza branch known as Hamas, and propping up Turkey. The Turkish economic numbers for the last 20 years only make sense if you attribute a hidden subsidy from Qatar, one they can afford now due to the boom in exports of liquified natural gas.
This issue is obviously politicized and people will praise or try to undermine the Turkish economic success based on their political viewpoint. I think the rational approach is they have done well by the standards of the countries they are compared to, but have also been receiving a subsidy from Qatar in exchange for influence. I also think Turkey benefited from the Syrian Civil War by moving contraband Syrian oil, this economic boon is now gone(I hope).
Its well known that Erdogan set up a new banking sector for the ostensible purpose of giving Turkish citizens an Islamically compliant banking option, a reasonable goal. This new banking sector was also used to provide a vast Keynesian stimulus to the economy. This has to be part of the discussion to get the full picture. But in the end if you just look at the numbers, the trade numbers, the debt numbers, the GDP growth, you can't reconcile all of these numbers without assuming Qatar is injecting money into the economy in an undocumented way in exchange for political influence. I don't see any other way to reconcile all the macroeconomic numbers for Turkey over the last 20 years.
I’m curious. When you first published this, did anyone from Erdogan’s office take up your offer of the books?
Why do you recommend How Asia Works to Erdoğan, if Turkey is already past initial development stage?
Its a sin in Islam to charge interest, for some inexplicable, non-sense reason.
Erdogan is an Islamist who promised to keep low interest rate.
You do the math.
"this could result in epic catastrophe — the kind of thing that has caused Venezuela to experience utter economic collapse"
Wasn't the economic collapse of Venezuela more a result of the political reaction to inflation rather than inflation itself, e.g. price limits that made indigenous manufacturing unprofitable, that led to the collapse?
If inflations stabilize at a high but not insane level, e.g. 50% p.a., as they currently seem to do, isn't that something suboptimal but endurable?
In any case, lets hope the Turkish success story continues.
Surely the earthquake is a major reason erdogan is struggling right?
Erdoğan and not Erdogan
Good article and analysis. Agree also with the recommendations. However I think it is not given that the interest rate increase required to stop the inflation will only have limited impact on the economy. If they manage to reduce inflation fast - yes, it will only have limited effect. But if the inflation turn out to be more sticky (due to strong inflation expectations which is difficult to change) then it can cause significant economic damage.
While the neo-Fischerites are wacky and more widely discredited, the Keynesian theory of 'supply-side inflation' has become the favourite refrain even among more mainstream economists and central banks these days. This pretends that inflation is often caused by supply side factors that cannot be controlled by monetary policy. Or, that increasing interest rates will actually make it worse by reducing capex in building capacity. Ergo, interest rates must actually be reduced!
This was the kind of thinking that kept interest rates in most OECD and emerging countries low in 2021. We all saw what that led to in 2022, when finally the Milton Friedman theory was applied and interest rates were jacked up real quick.
I think a major reason for all of this is the natural consequence of the fact that inflation is a second or third order consequence of changing interest rates. Essentially, you are trying to change the fraction of the money supply being actively used in the economy to match the change in the production rate of goods and services. As you can imagine, there are a whole host of other considerations to make eg personal spending power, savings rates, willingness to spend, profitability for producers etc. This means that if anyone wanted direct control over inflation the only reliable way would be direct interventions such as helicopter money/price controls/tax rate changes with the associated political baggage that they come with.
Erdogan should do this, Erdogan should do that. Maybe we should hope that Kemal Kilicdaroglu wins the election, preventing Erdogan from becoming dictator-for-life? The opposition has a plan for economic recovery, Erdogan only for holding on to power for as long as possible. Don't give Erdogan ideas, he should be relogated to the dustbin of history.
Thanks for this one Noah. I have been to Turkey several times and have loved that country for many reasons. The people are the among the warmest and most hospitable I have met. I will look forward to your commentary on the election runoff.
Once I was meeting my twenty-something daughter in Istanbul; she arrived a few days before I did. she was walking around and a Turkish man was following her and would not leave her alone. A policeman came up and asked her if that man was her friend. When she said no, the policeman yelled at the man and he ran off. In contrast, I recently visited a country where I, a solo woman traveler, had a border guard take my luggage and demand a "tip" before he returned it to me.
Noah, I just had another thought about your beautiful bunny. Until I saw Cinnamon's face, I didn't know that a rabbit could have a facial expression. But I see in her face curiosity, innocence, and obvious thoughtfulness. Clearly, she was a tremendous companion (unlike my dog who has a cat-like disdain for me).
In terms of growth, to me, not nearly as strange a country as Brazil (where I grew up). Turkey's GDP per capita PPP grew by 300% from 1990 to 2022, while Brazil's grew by 140%.
Quite inexplicable for a country that, comparatively speaking, for well over a century, hasn't suffered from the internal and external troubles that have assailed Turkey.