35 Comments

Hi Noah, this is excellent analysis. Big ask but I'll definitely love to read one on Nigeria which I fear is toeing a similarly destructive path via high external borrowing made worse by its flailing manufacturing sector and poor revenue inflows. If you do ever get to do that piece I'm certain it would go very viral as Nigeria is approaching election season. Do consider this please.

Love,

Stephen

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Can you do this again, but for Brexit? Bad choices turn out to be bad..

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Well your explanation of how Turkey did well and where it went wrong is all quite correct. To what went well you should add that Erdogan began his leadership career almost 20 years ago surrounding himself with non-nonsense economists and making a concerted and successful effort to tame the high inflation that was the scourge of his predecessors (and helped bring him to power). And to what went wrong you should add that the construction sector (together with the banking business financing it) became not only his and his family's pot of corruption, it became also the dominant patronage platform through which he corrupted the country's business elite and built a de facto one-party state (outside Istanbul). I dropped into Istanbul for mostly macro meetings a few times five to ten years ago, and basically everything the local finance guys were fretting at the time would go wrong has. It's very sad.

Could the inflation get worse? Yes, but it's not likely to get nearly as much worse as you're saying. I will give you that one of the most common preconditions for hyperinflation is in place: a single person in total control of both fiscal and monetary policy. Hyperinflation could in theory occur: it's completely up to Erdogan whether or not he wants to have it. All he has to do is decide to very quickly ramp up nominal public spending using central bank financing. But generally dictators only do that in the midst of a very severe economic crisis. It's essentially a despot's act of desperation, an attempt to seize as much as possible of a rapidly shrinking pie. I suppose it might be barely possible to generate hyperinflation through construction lending on an uber-astronomical scale, but that of course has never happened. A really bad case of unanchored expectations certainly can give you more than 50% inflation per year. It will not give you more than 50% inflation per month.

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Great article! I would definitely love to read both books!

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"50% inflation is definitely in the hyperinflationary range"

No. No, it is not.

Hyperinflation is typically defined as 50% or more *within a month*.

Okay now I'll read the rest.

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I'd make the same comment I made about Noah's Jamaica piece: you want to look at services exports as well as goods exports, because these are highly tourism-dependent economies. (I just spent a couple of months in Turkey and if Noah thinks it was cheap a few years ago... wow, it's really cheap now. If not for COVID this might even be one of the benefits of debasing the currency.)

On an unrelated point: I'm not sure Erdogan is facing as much extraparliamentary political risk as Noah suggests. The ruling party has been very successful at breaking the autonomous power of the armed forces, and a lot of people think the "failed coup" of 2016 was really a false-flag operation intended to finish the job. Even before that, many army officers and others have been convicted in unfair trials on very doubtful charges of plotting to overthrow the government.

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Yes, Erdogan is to blame for much of the problem but to not mention the disaster in Syria feels like a big omission. The millions of refugees have definitely led to economic imbalances in Turkey and Lebanon (which went through the same debt driven hyperinflation). Western countries should be sending far more aid to these two countries given their culpability in the total collapse of Syria and its roots in the Iraq war.

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I'm surprised there's no mention of https://www.bloomberg.com/news/articles/2021-12-21/how-erdogan-s-new-tool-of-fx-linked-deposits-works -- is the thinking that this doesn't come into play here? / that it hasn't been active long enough to become significant yet? / that it's big enough to be worth its own post?

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This is an astute analysis. What I have to add is in the spirit of extending the analysis. 1 If my memory serves me well, there was a surplus of liquidity floating around on international markets after OPEC ramped up crude as prices. I believe it lad to currency crises in Latin America, notably Argentina, 2 The post-1990 period ushered in not only the collapse of Communist central planning largely worldwide, but also catch-up growth in a host of less developed nations. It would be useful to look at a data set that includes all of the “potential growers”, sorting out winners from losers. Turkey would lie in the middle of the spectrum Imwould think. One approach would be to take as a classifying variable the growth in the share of global world trade income. One suspects the correlation between sustained per capita income and the trade success variable would be high. That would be a useful starting point for a serious aggregate economic analysis.

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What specifically caused the dramatic uptick in growth in the early 2000s? I’d imagine most of the groundwork for your Chang-Studwell model had already been laid much earlier.

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Great analysis! Thanks for your wonderful articles, I learn so much

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This is a bit unfair to Neo-Fisherism, which makes a much, much narrower claim: a widely-anticipated, slow and steady interest rate increase, with stable and neutral fiscal policy, will over time lead to a rise in the inflation rate. All known (or, at least, widely known) macroeconomic models that are long-run stable -- that is, where small monetary policy misses don't lead to inflationary or deflationary spirals -- have Neo-Fisher properties. And that's basically the only thing Neo-Fisherians we're pointing out, as part of a program to further explore all the properties of models in an ongoing effort to improve them.

John Cochrane has a good, if extremely technical, explanation of the dynamics in response to Lars Svensson's paper on Sweden, in which Lars argues that Neo-Fisher effects don't seem to hold. https://johnhcochrane.blogspot.com/2020/11/a-neo-fisherian-challenge-and.html

But no one serious in that group of people (they I know of) actually advocates using short-term nominal interest rate decreases to reduce inflation. Actually I don't think many of them advocate any policy at all, it is a pretty academic program. I guess you can blame them for that, but not everyone can be working on policy all the time, some people need to work on the nuts and bolts of these things.

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Excellent piece. A return to orthodoxy however would entail a wrenching economic adjustment which might topple Erdogan absurd regime. Don’t expect him to initiate it.

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[offtopic] A while back you posted some responses to typical lazy econ critiques, and pointing to the supposedly 'ideologically charged' nature of economics you said that it was a problem but that could be overcome and that practitioners should try to be non-ideological. You pointed out that to that response there was this: "But dude, being anti-ideological is an ideology too!". And you followed that with: "Mmm, an insightful and trenchant observation. Now go take another bong hit and leave me alone.". I was wondering what was your personal opinions on similar positions held by serious names in the philosophy of economics. For example, Julian Reiss author of a 'textbook' introduction to the philosophy of economics and editor of the Routledge handbook of the philosophy of econ has defended in "Fact-value entanglement in positive economics" and elsewhere that economics is value-laden in important ways. Do you think the thesis is wrong, or irrelevant? I would be cool to know what a person completely embedded in econ culture has to say about that, thanks for the blog, it is a pleasure to read.

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