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As I understand it, fixing inflation has never had much priority for the Erdogan government. They don't raise interest rates because raising them would slow dow

As I understand it, fixing inflation has never had much priority for the Erdogan government. They don't raise interest rates because raising them would slow down their internal economy. Downside is the devaluation of the Lira, but this also has an upside; Turkish exports become more competitive.

ulfw 3y ago
Turkey imports way more than it exports. This hurts more than it helps, if at all.
H8crilA 3y ago
This is my read as well. Claiming that high rates cause inflation, or that high rates are not Islamic, is just BS that sells his actual policy. Though I think the neo-ottoman himself was surprised how bad it actually turned out.
throwaway2037 3y ago
Turkish exports become more competitive This is neither automatic, nor blanket. "Turkish exports" are a result of internal production of inputs, plus imports of inputs, followed by a "value add" phase, followed by exports. In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains. Also, the naïve view that currency deval is always beneficial to exports is simply untrue. It always complex and multifactor for each scenario and each country... and even each good. A better general rule: A modest, consistent devaluation of currency is good for your exports, as it allows enough time for your value add staged to find internally produced substitute inputs. If deval is very fast, few businesses can adapt fast enough. If deval is very slow, it is hard to notice the effect.
- misja111 3y ago
  > In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains. Can you explain how it can exceed the export gain? Say there is some Turkish export product, to keep it simple let's say it's a car which needs some metal as an input, that has to be imported. If the Lira goes down, this means the metal becomes more expensive in terms of Lira's. So this has to be accounted for in the price of the exported cars. However, that accounted price increase is the same as the rise in import price. What is left is the added value within Turkey, which has become cheaper because of the Lira drop. So even though export price drops are slower than the drop of the Lira, they still drop.
  - scott_w 3y ago
    Not necessarily. In fact, the importer will probably have to buy raw materials in USD/EUR then sell back in USD/EUR, they're probably not getting any of that competitiveness at all. Add in the inefficiency of having to translate some of that into an unstable lira, I don't see how they're going to maintain a more competitive price on the lira.
  - WOTERMEON 3y ago
    Import prices in Türkiye are expressed in Eur almost always
  - stefan_ 3y ago
    Imports aren't priced perfectly. If the worth of your currency is wildly variable you end up paying a lot of money on top to hedge the currency risk.
  - nirimda 3y ago
    > What is left is the added value within Turkey, which has become cheaper because of the Lira drop. Does this follow necessarily? If wage-earners have a fair degree of bargaining power or if wages are indexed, then the decrease in value of the lira will result in an increase in nominal wages. And in a condition of steady but substantial inflation, currency can be reduced to a medium of exchange rather than serving as a store of value - or in the case of contract negotiations, as an indication of the future value. Chances are, wage earners and others contracting for future delivery will just naturally take inflation into account when arranging the contract. Their payments might be in lira, but they way they set their prices is derived from the lira/euro exchange. This is all basically what anti-inflation hawks mean when they say "we have to prevent inflation expectations hardening" etc. They want people to believe that a dollar today will have about the same value as a dollar next year. So if you have a generally stable currency that depreciates and finds a new level, it might make the economy more competitive. If you have a currency that regularly varies, sometimes up, sometimes down, a depreciation might not mean much to its competitiveness (because an investor expects that the depreciation today has no relation to its value next year). And if you have a currency that is steadily declining, well, everyone has already accounted for that possibility so relative prices quickly adjust to return to the previous levels.
- martinald 3y ago
  Keep in mind though that Turkey has a very large tourism sector (that has doubled in size as a % of GDP), which is an export with little external inputs and is mostly all 'value add'.
  - throwaway2037 3y ago
    This is an excellent addition to my post. Thank you to share. I never thought about tourism this way. Hat tip! WTO says: Tourism is an export sector. It is a source of foreign exchange earnings; it grows a countryʻs national output; it is subject to the rigours of the international marketplace. You wrote: "that has doubled in size as a % of GDP" To clarify this phrase: Do you mean: Tourism, as a share of GDP, has _recently_ doubled? Google tells me: 2014: 4.7% -> 2019: 11% (LGTM) Or do you mean something else? (I promise: I am not nitpicking.)
pzs 3y ago
Inflation in Hungary has been very high for the past 1-2 years. Apparently, the government is entertaining the thought of raising the inflation target. (Which should be the central bank's mandate, but that's a different story.) I have just heard a local economist likening this to historical examples of some South American countries. His point was that this is the easiest short-term solution to the inflation problem, i.e., stimulating exports through a weaker currency, but it tends to end in a lot of pain on the long term.
- Kathula 3y ago
  Hungary isn't gonna be the only country that raises the inflation target. In fact all central banks will probably follow through. After all there's no rationale why the current target is 2% and why this is the case for all central banks, it might as well be 1 or 3/4/5. But once someone raises everybody will get on board with the new paradigm and follow through, because otherwise it would be obvious that there's nothing special about 2% and whatever the new arbitrarily-picked number will be. And of course this gives the people in charge leeway too, if the inflation is 10% and the inflation goal is 5% instead of 2%, it doesn't look that awful anymore.
  - slv77 3y ago
    Inflation rate targets can’t be higher than the storage cost of commodities. If the inflation target starts to exceed those costs people will transfer savings into commodities. As people start to hoard commodities prices begin to rise which drives more inflation and more people to hoard commodities and eventually the economy stops functioning. At some point it makes more sense for commodity producers to leave the oil or copper in the ground because the commodity in the ground is more valuable than what can be earned digging it up, converting it to cash and the losses of holding the cash relative to inflation and taxes. When things reach that point nations typically have enforced capital controls, fixed exchange rates, and then will nationalize commodity producers and will attempt to implement some form of commodity price controls. Production drops to nothing and the end result is usually a concentration of wealth and power in a small percentage of well connected individuals who strip the country of wealth. This leads to entrenched strong men and oligarchs (Russia, Venezula, Zimbabwe). The best part is that initially the middle class cheers inflation with rising property values and wages. As the inevitable enshittification and looting of the economy ensues it isn’t obvious that a choice was made and who is to blame. The misery is blamed on foreign powers, the political opposition, and the poor while power and wealth end up in the hands of a few.
agapon 3y ago
I think that the elections were the main reason for that financial / economic policy.

ulfw 3y ago

Turkey imports way more than it exports. This hurts more than it helps, if at all.

H8crilA 3y ago

This is my read as well. Claiming that high rates cause inflation, or that high rates are not Islamic, is just BS that sells his actual policy. Though I think the neo-ottoman himself was surprised how bad it actually turned out.

throwaway2037 3y ago

Turkish exports become more competitive This is neither automatic, nor blanket. "Turkish exports" are a result of internal production of inputs, plus imports of inputs, followed by a "value add" phase, followed by exports. In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains. Also, the naïve view that currency deval is always beneficial to exports is simply untrue. It always complex and multifactor for each scenario and each country... and even each good. A better general rule: A modest, consistent devaluation of currency is good for your exports, as it allows enough time for your value add staged to find internally produced substitute inputs. If deval is very fast, few businesses can adapt fast enough. If deval is very slow, it is hard to notice the effect.

misja111 3y ago
> In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains. Can you explain how it can exceed the export gain? Say there is some Turkish export product, to keep it simple let's say it's a car which needs some metal as an input, that has to be imported. If the Lira goes down, this means the metal becomes more expensive in terms of Lira's. So this has to be accounted for in the price of the exported cars. However, that accounted price increase is the same as the rise in import price. What is left is the added value within Turkey, which has become cheaper because of the Lira drop. So even though export price drops are slower than the drop of the Lira, they still drop.
- scott_w 3y ago
  Not necessarily. In fact, the importer will probably have to buy raw materials in USD/EUR then sell back in USD/EUR, they're probably not getting any of that competitiveness at all. Add in the inefficiency of having to translate some of that into an unstable lira, I don't see how they're going to maintain a more competitive price on the lira.
- WOTERMEON 3y ago
  Import prices in Türkiye are expressed in Eur almost always
- stefan_ 3y ago
  Imports aren't priced perfectly. If the worth of your currency is wildly variable you end up paying a lot of money on top to hedge the currency risk.
- nirimda 3y ago
  > What is left is the added value within Turkey, which has become cheaper because of the Lira drop. Does this follow necessarily? If wage-earners have a fair degree of bargaining power or if wages are indexed, then the decrease in value of the lira will result in an increase in nominal wages. And in a condition of steady but substantial inflation, currency can be reduced to a medium of exchange rather than serving as a store of value - or in the case of contract negotiations, as an indication of the future value. Chances are, wage earners and others contracting for future delivery will just naturally take inflation into account when arranging the contract. Their payments might be in lira, but they way they set their prices is derived from the lira/euro exchange. This is all basically what anti-inflation hawks mean when they say "we have to prevent inflation expectations hardening" etc. They want people to believe that a dollar today will have about the same value as a dollar next year. So if you have a generally stable currency that depreciates and finds a new level, it might make the economy more competitive. If you have a currency that regularly varies, sometimes up, sometimes down, a depreciation might not mean much to its competitiveness (because an investor expects that the depreciation today has no relation to its value next year). And if you have a currency that is steadily declining, well, everyone has already accounted for that possibility so relative prices quickly adjust to return to the previous levels.
martinald 3y ago
Keep in mind though that Turkey has a very large tourism sector (that has doubled in size as a % of GDP), which is an export with little external inputs and is mostly all 'value add'.
- throwaway2037 3y ago
  This is an excellent addition to my post. Thank you to share. I never thought about tourism this way. Hat tip! WTO says: Tourism is an export sector. It is a source of foreign exchange earnings; it grows a countryʻs national output; it is subject to the rigours of the international marketplace. You wrote: "that has doubled in size as a % of GDP" To clarify this phrase: Do you mean: Tourism, as a share of GDP, has _recently_ doubled? Google tells me: 2014: 4.7% -> 2019: 11% (LGTM) Or do you mean something else? (I promise: I am not nitpicking.)

pzs 3y ago

Inflation in Hungary has been very high for the past 1-2 years. Apparently, the government is entertaining the thought of raising the inflation target. (Which should be the central bank's mandate, but that's a different story.) I have just heard a local economist likening this to historical examples of some South American countries. His point was that this is the easiest short-term solution to the inflation problem, i.e., stimulating exports through a weaker currency, but it tends to end in a lot of pain on the long term.

Kathula 3y ago
Hungary isn't gonna be the only country that raises the inflation target. In fact all central banks will probably follow through. After all there's no rationale why the current target is 2% and why this is the case for all central banks, it might as well be 1 or 3/4/5. But once someone raises everybody will get on board with the new paradigm and follow through, because otherwise it would be obvious that there's nothing special about 2% and whatever the new arbitrarily-picked number will be. And of course this gives the people in charge leeway too, if the inflation is 10% and the inflation goal is 5% instead of 2%, it doesn't look that awful anymore.
- slv77 3y ago
  Inflation rate targets can’t be higher than the storage cost of commodities. If the inflation target starts to exceed those costs people will transfer savings into commodities. As people start to hoard commodities prices begin to rise which drives more inflation and more people to hoard commodities and eventually the economy stops functioning. At some point it makes more sense for commodity producers to leave the oil or copper in the ground because the commodity in the ground is more valuable than what can be earned digging it up, converting it to cash and the losses of holding the cash relative to inflation and taxes. When things reach that point nations typically have enforced capital controls, fixed exchange rates, and then will nationalize commodity producers and will attempt to implement some form of commodity price controls. Production drops to nothing and the end result is usually a concentration of wealth and power in a small percentage of well connected individuals who strip the country of wealth. This leads to entrenched strong men and oligarchs (Russia, Venezula, Zimbabwe). The best part is that initially the middle class cheers inflation with rising property values and wages. As the inevitable enshittification and looting of the economy ensues it isn’t obvious that a choice was made and who is to blame. The misery is blamed on foreign powers, the political opposition, and the poor while power and wealth end up in the hands of a few.

agapon 3y ago

I think that the elections were the main reason for that financial / economic policy.