If the idea that economic activity propelled by low rate of interest can offset the problem caused by high inflation becomes successful in one economically developed country then this may become popular worldwide and may prove to be death-knell for the ‘orthodox’ capitalism, opinesDr WAQUAR ANWAR.
The monetary policy of Recep Tayyip Erdoğan is dubbed unorthodox by the Western media. The expression ‘unorthodox’ is being used as a derogatory remark, like the word ‘fundamentalist’ a decade ago for anyone treading a path other than that approved by the West and its media. They are citing the example of marked decline in the value of lira, the Turkish currency, in the international monetary market since Erdoğan came to power, 20 and odd years ago, and steep increase in inflation in Türkiye. It is suggested that the economic policy adopted in Türkiye is suicidal. A serious study may confirm the contention, with the difference that it is suicidal not for Türkiye but for the economic policies adopted by the world today, in the aegis of the West. Success of the Türkiye model may demonstrate a new light at the end of the tunnel.
There is no doubt that the price of Turkish lira vi-a-vis US dollar is fast slipping down. It is also a fact that inflation has risen to unprecedented levels. In the year 2022 it had reached the level of 85% and in the current year it has come down to 44%. It is also correct that the ‘orthodox’ logic of economics as practised today in the West and, under its tutelage, elsewhere is to increase rate of interest in similar conditions.
The ‘orthodox’ theory is that rate of interest and inflation are inversely proportional to each other. Increase in one will decrease the other. Higher rate of interest means that consumers, including producers, will borrow less, decreasing the propensity to consume and increasing the propensity to save, resulting in lower supply of money in the market, lowering price levels of goods and services.
Erdoğan insists that he will, contrary to the above-described theory, go on decreasing rates of interest, making higher level of supply of money in the market at lower cost so that more borrowings are done. This will lead to increased production activities. The lower cost of capital will bring down cost of production and the commodities so produced will result in buoyancy in domestic economic activity and increase in quantum of goods and services exported. In order to counter the ill-effect of rise in prices,Türkiye, under the stewardship of Erdoğan, has increased minimum level of wages. Thus, higher income in the hands of purchasers may offset the effect of higher prices.
The economy of Türkiye is strong. It is 19th-largest in the world by nominal GDP, and the 11th-largest by PPP. Erdoğan era in Türkiye, spanning two decades till now, witnessed worthwhile economic developments, including increase in employment, robust economic activity, higher exports and better infrastructure, increase in minimum level of wages and average income. In addition to the advantage of lower cost in exports, the income from tourism has also witnessed upward trend owing to cheap currency. Türkiye’s economy performed well despite abnormal conditions caused by Covid-19, Russian invasion of Ukraine and finally the earthquake.
The moot question that should be understood is why the international finance and Western nations are irked by the political establishment of Erdoğan on its economic front? It is evident. The philosophy of growth based on lower cost of capital does not suit the international investors, whose incentive lies in higher rates of interest. If the idea that economic activity propelled by low rate of interest can offset the problem caused by high inflation becomes successful in one economically developed country then this may become popular worldwide and may prove to be death-knell for the ‘orthodox’ capitalism. The theory behind the Turkish economic model is simple and it may be understood by the common man. Higher interest leads to higher cost. Cost of capital is a significant portion of total cost. Lower cost would lead to lower prices and higher production activity.
Theoretically speaking, the Erdoğan model of economics is akin to the monetarist approach of controlling the market through supply of money as against the fiscal approach of government intervention to manipulate demand for goods and services by adjusting rates of interest and government spending. The monetarist approach owes its development to economists like Irving Fisher and Milton Friedman while the fiscal approach is linked to Keynesian and neo-Keynesian economics. Governments today are applying a mixture of both the approaches and that does suit the international money. But Erdoğan has opted for disregarding the fiscal route and it is the main cause of the hue and cry raised. It may be the beginning of the end of the dismal role of the flow of capital in international market.
May the international media call Irvin Fisher and Milton Friedman ‘unorthodox’ as against ‘orthodox’ John Maynard Keynes!