In an interview with pro-opposition Cumhuriyet Daily, renown economic Prof Sinan Alcin expressed disbelief in Erdogan’s ability to stage a U-turn. The economist thinks that austerity and reform are not implausible in the current political atmosphere. He adds that if Simsek were to press for too much orthodoxy, he may be “sidelined.”
Alcin: It is obvious that the current ruling coalition is trying to send a message with the newly formed economic administration that it intends to stage a U-turn from the economic policy it has been carrying out since October 2021. It would not be wrong to say that the message – at least for the time being – did not create any excitement among voters. At the end of the two weeks, it seems that apart from the limited foreign investment inflow to the stock market, no serious interest has emerged. This indifference is mainly due to the fact that the structural problems in the economy remain unsolved with all their weight.
PROBLEMS GET DEEPER
The motivation behind the recall of Mr. Mehmet Şimşek, who was previously kicked out of the government, as the “savior” again, is not the solution of the structural problems of the economy, but to draw FX funding – albeit at high interest – from international financial institutions to improve negative Central Bank reserves. However, the current degeneration of the economy and the increasing risk of Balance of Payments Crisis reduce the appetite of foreign financial institutions. Still, a certain amount of capital inflow can be achieved by increasing the price to be paid (interest, concessions, etc.), but although this saves the economy today, it causes the structural economic problem to deepen.
With Mehmet Şimşek, a U-Turn is aimed from the policy that has been in practice since October 2021, but it is also anticipated that this turn will be a soft rather than a hard one. As a matter of fact, local elections that will take place 8 months later make it difficult for the ruling coalition to follow hawkish policies regarding fiscal discipline and tight monetary policy. If Mr. Şimşek behaves more hawkishly than expected during this process, he can probably be selected the scapegoat before the local elections and benched.
The basis of the unjust income distribution problem in the economy lies in the public procurement system. Here, the state should shape its economic power in a way that will spread wealth among the less-well-to-do. Concentration of capital in a certain segment or sector throws the rest “out of the game”.
The improvement of the investment climate is the most important condition for value-added production. The first condition for this is to strengthen the trust in the justice system and to secure freedoms. The Erdogan-centric resource allocation approach negatively affects the investment appetite of domestic and foreign investors.
FINANCIAL DISCIPLINE HAS ONLY ONE LEG
Behind the inflation, which has become chronic and high especially in the last three years, lies the exchange rate attacks since 2018 and the foreign exchange dependency that triggered these attacks. Each attack in the exchange rate doubled the production cost in the domestic market, and this was reflected in consumer prices. The fact that the ruling coalition did not put forward any anti-inflation program during this period supported the deterioration of pricing behavior.
On the other hand, the increase in crude oil prices triggered by the Russia-Ukraine war in 2022 also strengthened inflation in terms of costs. On the other hand, consumption, which was postponed during the pandemic period and brought forward due to high inflation, also strengthened the consumption leg of inflation.
Food prices, which have as much impact on inflation as the exchange rate pass-through, is due to the bottlenecks in supply due to the agricultural policies that have been followed for a long time. While food prices are falling in the world, food inflation, which doubles the current official inflation in our country, continues and hurts the pockets of large segments.
For inflation to drop permanently, citizens need to be convinced of an idea that the Treasury’s borrowing requirement will decrease and the Central Bank will reduce money printing. Considering the current conjuncture and the local elections in 8 months, it is not easy to be convinced of this. Probably, with the new economy management, Fiscal Discipline will operate with one leg (new taxes and increase in current tax rates), and restrictions on public expenditures will be realized by the “new economy management” after the local elections -perhaps. Apart from this, price controls in selective goods groups only cause the general pricing behavior to deteriorate much more and the loss to increase.
Source: U dönüşü işe yaramadı: Ekonomideki yapısal sorunlar tüm ağırlığıyla duruyor
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