Demystifying Erdoğanomics

I was planning to take on Prime Minister Recep Tayyip Erdoğan’s claim that high interest rates beget high inflation - until I realized that I would be wasting my (and your) valuable time.

Not that I think it makes sense. It is a crazy idea all right, even though it was even voiced by a Fed president in 2010. It actually recently resurfaced, causing a debate in the blogosphere. But Erdoğan is not asking for lower rates to combat inflation. A cursory look at the latest data will give you some clues on his objective.

Things do no look bad on the production side. Industrial production was strong in April, mainly thanks to exports. In a recent research note, Istanbul think-tank Betam argued that growth would get a boost from exports to Europe, which rose 20.5 percent annually in April, according to official data released on May 30.

However, consumption is an entirely different story. Having plunged after the graft scandal, consumer confidence had recovered in March and April. But it fell again in May and remains low. Credit growth is still weak. According to a recent report by real estate data company REIDIN, there is an oversupply of 1 million homes.

Erdoğan apparently would like to boost domestic demand to ensure that he is elected President in August. I guess the pork barrel spending he kicked off before the local elections, as evidenced by the growing wedge between revenues and non-interest expenditures, is not enough. Will it work? For one thing, it takes at least 3 months for Turkish monetary policy to be effective. A major rate cut at the next rate-setting meeting on June 24 would be too late.

Besides, unlike in the movies, if you build it, they won’t come: If...

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