What Motivated Turkey's President To Decrease Interest Rates

Turkey's economic policy under President Recep Tayyip Erdo?an has been marked by a series of unconventional approaches, particularly the persistent push to lower interest rates despite prevailing economic wisdom. Understanding the motivations behind this policy requires a multifaceted examination of Erdo?an's economic ideology, political considerations, and the specific context of Turkey's economic challenges.

The Core of Erdo?an's Economic Ideology

At the heart of Erdo?an's approach is a deep-seated belief that high interest rates are the "mother of all evil." This conviction stems from a unique blend of economic and religious considerations.

• Religious Beliefs: Erdo?an's views are influenced by Islamic finance principles, which generally prohibit riba (interest). While modern Islamic finance has developed sophisticated instruments to navigate interest-bearing transactions, Erdo?an's rhetoric often reflects a more literal interpretation, viewing interest as inherently exploitative and detrimental to economic prosperity.
• Heterodox Economics: Erdo?an subscribes to a heterodox economic theory, diverging from mainstream consensus. He posits that lower interest rates lead to lower inflation, a concept that contradicts conventional economic models, which typically argue that reducing interest rates in an inflationary environment fuels further price increases. This unorthodox view is not widely supported by economists but remains a cornerstone of his economic policy.
• Growth-Oriented Strategy: Erdo?an's policies are heavily geared toward achieving rapid economic growth. He believes that high interest rates stifle investment and production, hindering economic expansion. By lowering interest rates, he aims to stimulate borrowing, encourage investment, boost production, and ultimately drive economic growth and create jobs.

Political Motivations

Beyond economic ideology, political factors play a significant role in shaping Erdo?an's monetary policy decisions.

• Maintaining Popular Support: Erdo?an's political success has been built on delivering economic prosperity and improving living standards for a large segment of the Turkish population. Lowering interest rates can create a short-term boost to economic activity, which can translate into increased public approval, particularly among constituencies that benefit from increased lending and investment.
• Consolidating Power: Erdo?an's leadership style is characterized by a desire to centralize control and reduce the influence of independent institutions. By exerting control over the central bank and pushing for lower interest rates, he can directly influence economic outcomes and demonstrate his authority, reinforcing his position as the dominant force in Turkish politics.
• Patronage and Cronyism: Critics argue that the low-interest rate policy benefits a select group of businesses and individuals with close ties to the government. By providing access to cheap credit, the government can reward loyal supporters, strengthen its political base, and facilitate the accumulation of wealth among its allies. This creates a system of patronage that reinforces Erdo?an's political power.
• Challenging Established Economic Orthodoxy: Erdo?an often frames his economic policies as a challenge to the established economic order and the influence of international financial institutions. By defying conventional wisdom and pursuing unconventional policies, he positions himself as a leader who is willing to stand up against external pressures and defend Turkey's interests. This narrative resonates with nationalist sentiments and strengthens his support among certain segments of the population.

Context of Turkey's Economic Challenges

Turkey's economic vulnerabilities and specific challenges have also influenced Erdo?an's approach to interest rates.

• High Inflation: Turkey has struggled with persistently high inflation for many years. While conventional economic theory suggests raising interest rates to combat inflation, Erdo?an believes that lowering rates will address the root causes of inflation by stimulating production and reducing borrowing costs for businesses. This view is largely unsupported by empirical evidence and economic analysis.
• Current Account Deficit: Turkey has a long history of running a current account deficit, meaning that it imports more goods and services than it exports. Erdo?an believes that lowering interest rates will boost exports by making Turkish goods more competitive and reduce imports by making foreign goods more expensive. However, this strategy has not been successful in significantly reducing the current account deficit.
• Dependence on Foreign Capital: Turkey relies heavily on foreign capital to finance its economic growth. High interest rates can attract foreign investment, but Erdo?an fears that they also make the economy more vulnerable to capital flight. By lowering interest rates, he hopes to reduce the country's dependence on foreign capital and promote domestic investment.
• Weakening Lira: The Turkish lira has experienced significant depreciation in recent years, driven by a combination of factors including high inflation, political instability, and concerns about the central bank's independence. Erdo?an believes that lowering interest rates will not necessarily weaken the lira and may even strengthen it by stimulating economic growth and improving investor confidence. However, the opposite has often occurred, with interest rate cuts leading to further lira depreciation.

The Consequences of Lowering Interest Rates

Erdo?an's persistent push to lower interest rates has had a number of significant consequences for the Turkish economy.

• Increased Inflation: Contrary to Erdo?an's expectations, lowering interest rates has generally led to higher inflation. As borrowing costs decrease, demand for goods and services increases, pushing prices up. This has eroded purchasing power and created significant economic hardship for many Turkish citizens.
• Lira Depreciation: Lower interest rates have contributed to the depreciation of the Turkish lira. As the value of the currency declines, imports become more expensive, further fueling inflation. Lira depreciation also makes it more difficult for Turkish companies to repay foreign currency debt.
• Erosion of Central Bank Independence: Erdo?an's interference in monetary policy has undermined the credibility and independence of the central bank. Investors have lost confidence in the central bank's ability to manage inflation and maintain price stability. This has led to increased volatility in financial markets and higher borrowing costs for the government and businesses.
• Capital Flight: Concerns about the direction of economic policy have led to capital flight, as investors move their money out of Turkey. This has put further pressure on the lira and made it more difficult for the government to finance its debt.
• Increased Economic Instability: Erdo?an's unconventional economic policies have created a climate of uncertainty and instability. Businesses are hesitant to invest, and consumers are reluctant to spend, leading to slower economic growth and increased unemployment.

A Deeper Dive into the Motivations

To fully grasp the motivations behind Erdo?an's interest rate policy, it's essential to consider several interwoven aspects:

1. Neo-Ottomanism and Economic Sovereignty

Erdo?an's political ideology is deeply intertwined with a neo-Ottomanist vision, aiming to reassert Turkey's influence in the region and beyond. This ambition extends to the economic sphere, where he seeks to reduce reliance on Western financial institutions and establish Turkey as an independent economic power. Lowering interest rates, in this context, is seen as a way to break free from the constraints imposed by international financial norms and assert economic sovereignty. This resonates with a segment of the population that is critical of Western influence and seeks a stronger, more independent Turkey.

2. Construction-Led Growth Model

For much of Erdo?an's time in power, Turkey's economic growth has been fueled by a construction boom. This model relies heavily on cheap credit to finance large-scale infrastructure projects and real estate development. Lowering interest rates directly supports this model by making borrowing more affordable for construction companies and homebuyers. However, this approach has also created vulnerabilities, including over-reliance on a single sector, increased debt levels, and potential for asset bubbles.

3. Personal Beliefs and Confirmation Bias

Erdo?an's strong personal beliefs about interest rates appear to be resistant to evidence and expert opinion. This can be attributed to confirmation bias, a psychological phenomenon where individuals tend to seek out and interpret information that confirms their existing beliefs, while ignoring or downplaying contradictory evidence. This bias may lead Erdo?an to selectively focus on data that supports his view that lower interest rates are beneficial, while dismissing the overwhelming evidence to the contrary.

4. Distrust of Elites and Experts

Erdo?an's political rhetoric often portrays a struggle against elites and experts who are seen as out of touch with the needs of ordinary people. This distrust extends to economists and financial professionals who advocate for higher interest rates. By rejecting their advice, Erdo?an can position himself as a populist leader who is fighting for the interests of the common person against the establishment.

5. The Role of Advisors and Internal Dissent

While Erdo?an ultimately makes the decisions, the influence of his advisors and the extent of internal dissent within the government are important factors to consider. It is possible that some advisors have expressed concerns about the low-interest rate policy, but their voices have been drowned out by those who support Erdo?an's views. Understanding the dynamics within the Turkish government and the level of intellectual diversity among Erdo?an's advisors is crucial for a complete understanding of the policy-making process.

The Future of Turkey's Economic Policy

The future of Turkey's economic policy remains uncertain. Erdo?an has shown little sign of changing his views on interest rates, despite the mounting evidence of the negative consequences. However, the economic pressures facing Turkey may eventually force a change in course. A potential trigger for a shift in policy could be a full-blown economic crisis, a significant loss of political support, or a change in leadership.

• Potential Scenarios: Several scenarios are possible for the future of Turkey's economic policy. One possibility is that Erdo?an will continue to pursue his unconventional policies, leading to further economic instability and hardship. Another possibility is that he will eventually be forced to raise interest rates and adopt more orthodox economic policies, potentially under pressure from international financial institutions or domestic political opposition. A third possibility is that Turkey will experience a period of prolonged economic stagnation, with neither a complete collapse nor a return to rapid growth.
• Impact on Turkey's Relations with the World: Turkey's economic policies have implications for its relations with other countries and international organizations. The country's unorthodox approach has strained its relationships with Western allies and made it more difficult to attract foreign investment. A shift towards more conventional economic policies could improve Turkey's standing in the international community and pave the way for greater economic cooperation.

Conclusion

The motivations behind Turkey's persistent push to lower interest rates are complex and multifaceted. They stem from a unique blend of economic ideology, political considerations, and the specific context of Turkey's economic challenges. While Erdo?an's policies may be driven by a desire to stimulate economic growth, maintain popular support, and assert economic sovereignty, they have had a number of negative consequences, including increased inflation, lira depreciation, and erosion of central bank independence. The future of Turkey's economic policy remains uncertain, but the country faces significant challenges that will require difficult choices and potentially a shift in course. Understanding the underlying motivations driving these policies is crucial for comprehending Turkey's economic trajectory and its role in the global economy. The long-term effects of these policies will continue to shape Turkey's economic and political landscape for years to come.