Not your standard economy
Turkey’s economy does not conform to Western economic theories: Ege Cansen explains
Economist Ege Cansen talked about 2018 expectations in his first interview of the year with daily DUNYA. He believes Turkey’s problems should framed by the fact that it is a double curency economy. According to him, inflation appears to be on the horizon in 2018.
2017, extraord nary ncent ves played a key role n spurr ng h gh growth. What can be sa d for 2018?
There are two instruments supporting growth. One is money; the other is fiscal policy. If you tighten one then you have to loosen the other. If we look at the money side, the thing that Turkish economists do not understand is Turkey is an economy with two currencies. Monetary theories taught at Western universities have developed in single currency countries like Germany, England and the USA. But the driving force of the economy in Turkey is not only the lira, it is more foreign exchange. Foreign exchange has a direct bear- ing on determining the destiny of the economy. Money has four functions: it is a buying tool, saving tool, unit of measure and debt relief tool. In the Turkish economy, the lira barely achieves three of these functions. The remaining gap is covered with foreign exchange. The transistor of the Turkish economy is foreign currency.
what ways does fore gn exchange affect the Turk sh economy and econom c pol cy?
The amount of foreign exchange that enters Turkey directly influences what happens to the lira. If the inflow is reduced, then the lira should be raised. But if it is raised too much, then it triggers inflation, prompting the tightening of monetary policy, which itself precipitates the loosening of fiscal policy. I see tight monetary policy on the horizon, but if fiscal policy is not loosened the economy will enter recession. Prompted by the tightening of monetary policy globally, the government slightly loosened fiscal policy in 2017, which it had the power to do. This is what happenned with the Credit Guarantee Fund and other incentives. But such a policy would not be necessary if the economy was bolstered by a strong inflow of hot money.
►You say that loose f scal pol cy w ll cont nue n 2018?
The question is whether an additional $40-50 billion, 4-5 percent of the GDP, will enter Turkey. If so, then there is no need for loose fiscal policy. If we go back to how the Turkish economy works, tight monetary policy means applying high interest rates. When the interest rates are raised in Turkey, foreign exchange enters and the money supply increases. Increasing the same interest rate in the US results in tight monetary policy. The system is a triad in Turkey, not a dyad. Increasing interest will not tighten monetary policy.
►What’s on the hor zon n 2018?
Inflation seems to be on the horizon. The struggle with inflation should be taken seriously. There is an interesting situation in Turkey: Our inflation is different from the West. Devaluation works as inflation. For example, inflation did not explode in Germany when the dollar became expensive. Nor is there any inflation expectation in the US due to the increase in the Euro. I do not say standard economic thinking is wrong; it explains the relationship in a certain context. The dynamics of inflation in Turkey is more devaluation. Every one percent devaluation causes 0.15 percent inflation. There is a devaluation-inflation spiral in Turkey. So the struggle with inflation means putting the brakes on devaluation. If the foreign exchange supply increases, devaluation stops. Increasing the supply of foreign exchange leads to high interest rates, which prevents inflation in Turkey. If you increase the interest rate, investment decreases and inflation decreases because the economy enters a recession. Both the economy and inflation grow at the same time in Turkey. You can also put the brakes on inflation if you slow the influx of foreign exchange. We need to raise interest rates to lower inflation.
►What s your expectat on n terms of f nanc al stab l ty?
There are two forms of stabilization. One is price stability, which happens with low inflation. We need to look at whether we are destabilizing financial stability while ensuring price stability. Financial instability in the West is the price bubble, especially in securities and real estate. We, on the other hand, look at the budget and current account deficits at times of financial instability. What will the government do? We need to raise interest rates to lower inflation. That’s right. But this damages another side and causes a current account deficit. The financial and price instabilities need to be optimized. Issue number one of 2018 is, again, inflation. High inflation needs special measures and designs. Turkey is a country where price stability conflicts with financial stability. It’s going to be in the double-digits. The Central Bank will not want to use the interest rate tool. It also wants to reduce its balance sheets but at the same time, the government wants to give incentives.
►Growth reflects a good performance n nat onal ncome f gures. Is there a dev l n deta ls?
The chain index in national income does not make much difference if fluctuations are low. There is a 1.5 to two percent increase in net exports in today’s national income accounts. If income rises 7 percent, five percent is generated domestically and two percent from exports. The current account deficit must then fall. How can you make a plus with export income while the current account deficit increases? What they do is multiply imports and exports with last year’s prices. Let’s talk about figures with or without gold and stick with that from now on. As the current account deficit increases, the external net revenues should be minus 2, not plus 2. Let’s look at foreign trade without gold. Then maybe the figures will line up properly.