Erdogan and Countervailing Institutions
The inflationary policies of Turkish president Recep Tayyip Erdogan confirm two standard economic predictions. First, increasing the money supply, other things being equal, causes inflation. Second, the weakening of independent countervailing institutions by a dictator or would-be dictator will lead to policies entirely focused on the latter’s self-interest.
Erdogan’s central bank has been buying assets with newly created money in order to push interest rates down. (Other policy instruments may also have been used.) Erdogan wants low interests because, like Trump, he believes that they boost the economy and, thus, his popularity with voters. He apparently also wants to signal his Islamic colors by following this religion’s prohibition of usury. Not surprisingly, annual inflation runs at between 21% and, according to Professor Steve Hanke of John Hopkins University, 83% per year (see Steve Hanke, “A Way for Turkey’s Erdogan to Have His Cake and Eat It Too,” National Review, December 1, 2021—I don’t like the title much as it obscures the fact that Erdogan is eating the people’s cake).
Another expected consequence has been a crash of the Turkish lira, which dropped 45% since the beginning of this year. Not only does a larger supply of a currency on the foreign exchange market push its value down (ceteris paribus), but investors will switch to other currencies and invest in countries with higher interest rates. Moreover, investors will fear continuing devaluation and dump more of the currency, accelerating the downward spiral. Many ordinary Turks are “rushing to trade their shrinking wages for dollars and gold,” tempting the government into imposing exchange controls. Many fear a bank run.
These expected consequences are apparently not expected by Mr. Erdogan, who is defending his own intuitive economic theories—much as Trump did, even if the latter was better restrained by American institutions. Erdogan believes that interest rates cause inflation. It is useful for a dictator to have some knowledge of economics or sufficient wisdom to hire or believe advisors and officials who do. Erdogan has been firing all those—including three central bank governors in less than years—and replaced them with blindly loyal and ignorant yes men. In the meantime, the standard of living of ordinary Turks is in free fall and discontent is mounting. The Wall Street Journal reports that
officials from Erdogan’s party have also called on Turks to eat less, sacrificing for the good of the country.
This leads us to the second lesson of Erdogan’s monetary policy. Precisely to prevent one man (including woman, of course) from running his own little self-interested policies on the back of common people, independent institutions have evolved and been tweaked to control the strongman’s power: notably a legislative branch, a state bureaucracy, an independent judiciary, a semi-independent central bank, not to mention strong private organizations. Mr. Erdogan has spent many years defanging these countervailing powers, to the point where his whims and obsessions meet little opposition.
Both with Mr. Trump (who said in 2019 he was a “big fan” of Erdogan, who had done “a fantastic job to [sic] the people of Turkey”) and with his successor in the White House thus far, Americans are lucky that countervailing powers are holding up—more or less.