Understanding a Chronic Crisis: Last 50 Years of Türkiye's Economy
Türkiye has faced persistent inflationary pressures throughout its economic history, with average inflation levels remaining high. This analysis aims to understand the factors contributing to inflation, why hyperinflation has not occurred, and the implications for the country's economic stability.
Hyper Inflation That Never Occurs
When examining Türkiye's inflation, it is important to consider different time periods. The pre-1960 era experienced temporary inflationary episodes, which were quickly resolved due to the country's unique economic structure. However, post-1980 provides more relevant data for analysis, with a significant focus on the post-2001 period.
One of the questions that arise is why Türkiye has not experienced hyperinflation similar to some other countries. While the average inflation rate remains high, hyperinflation has been avoided. Several factors can help explain this phenomenon.
The consensus among economists points to the lack of an inflation-targeting regime as a contributing factor. Türkiye has not had a clear focus on inflation control as a primary goal. The country has experienced volatile exchange rates and limited convertibility, which can undermine the credibility of the central bank. Additionally, fiscal pressures and financial instability have imposed limitations on the government's ability to address inflation effectively.
Politics over Economics
Politicians bear responsibility for Türkiye's inflation situation. Their priority often lies in promoting high economic growth and reducing unemployment rather than focusing on inflation control. Structural problems related to the rule of law, education, and democracy also contribute to the challenges in managing inflation effectively.
The perception of inflation among the general public plays a crucial role as well. Unlike countries such as Germany, where high inflation has led to severe punishments and public outcry, Türkiye has not witnessed similar consequences for inflation. The absence of historical examples of strong punishment for high inflation might contribute to indifference among the public. Factors such as low-wage labor, limited savings, dollarization after 1989, and a mindset that favors individual solutions rather than collective action may also contribute to public indifference toward inflation.
Military Rule to IMF support
Significant changes occurred in 1980 when Türkiye faced a staggering inflation rate of 95%. This period coincided with the military coup on September 12, 1980, which prompted the implementation of a stability program supported by the International Monetary Fund (IMF). The program included a robust disinflation package, resulting in a significant decrease in inflation to 31.4% by 1983. The military government managed to bring prices under control during this period. However, it remained challenging to reduce inflation to single-digit levels due to either the populist nature of subsequent regimes or technical deficiencies in policy implementation.
During the 1990s, Türkiye continued to grapple with high inflation. Factors contributing to this persistent inflation include the convertibility law of 1989, which created fear of foreign exchange shortages, and the populist policies pursued by Prime Minister Turgut Özal. A currency crisis in 1994 resulted in Türkiye seeking assistance from the IMF. While subsequent years witnessed sustainable growth and external balance, high inflation persisted
Crawling Peg
The absence of a nominal anchor and the fear of foreign exchange shortages contributed to a cycle of devaluation as inflation (crawling peg). This vicious cycle further reinforced the trend of increasing dollarization in an open market economy like Türkiye, managing demand-related inflation becomes more complex. The relative nature of foreign exchange rates and the dominance of a single production sector add to the intricacies of addressing inflationary pressures.
One way to tackle inflation is through high-interest rates, which can attract capital flows and strengthen the value of the Turkish lira (TL). As TL gains value, imported goods become more affordable, potentially reducing inflationary pressures. However, increasing prices of foreign exchange can pose a challenge in this regard.
To address Türkiye's inflation challenges comprehensively, it is crucial to examine the dynamics between tradable and nontradable sectors. The external deficit, often attributed to a high current account deficit, is essentially the difference between tradable production and tradable demand. Türkiye's industrial sector's share in production is lower than its share in demand, while the tertiary sector's share in production is higher than that of the industrial sector.
In the struggle against inflation, Türkiye has relied on various strategies, including tight monetary policy, fiscal measures, and structural reforms. However, sustained and significant progress in reducing inflation to single-digit levels has remained elusive.
Final Status
Particularly in the past two years, Türkiye has faced significant economic challenges, with key indicators reaching critical levels. The inflation rate has surged to over 80%, placing immense pressure on the economy and eroding purchasing power. Additionally, the country has experienced its largest current account deficit in the last 20 years, amounting to approximately $50 billion. These figures indicate a complex and difficult situation for Türkiye, highlighting the urgent need for comprehensive measures to address inflation, stabilize the currency, and address the external imbalance. The government and policymakers face an arduous task ahead in navigating these economic challenges and restoring stability to Türkiye's economy.
Türkiye now facing significant economic challenges, including a currency crisis centered around the depreciation of the Turkish lira against the U.S. dollar. This currency crisis has resulted in increased inflationary pressures and a higher cost of imports, impacting the overall economic stability of the country. To address these issues, the Turkish government has implemented various measures to stabilize the currency and stimulate economic growth.
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"Türkiye'nin Bitmeyen Enflasyon Macerası" - Prof. Dr. Asaf Savaş Akat