Is there anything worse than a politician who does not understand economics? The answer is a politician who mistakenly thinks he does.
There is a bizarre experiment taking place in monetary economics right now. The purpose is to determine what happens when a central bank lowers interest rates to fight inflation and a currency collapse.
If that sounds intuitively odd to you, you are right. It is the economic equivalent of pouring oil on a burning building to put out the fire.
Well, the country on fire is Turkey, and the oil-spraying firefighter is none other than its President, Recep Tayyip Erdoğan.
Turkey’s currency, the Lira, has plunged over the past 10 years. The exchange rate has risen from a level of about 2 Liras to over 13 Liras to the US Dollar. Consumer price inflation has hit over 20 percent annually.
Markets are collapsing in Turkey, and some imported goods are no longer available (or only against hard currency). Turkey’s economy, which was once fast-growing and promising, has become a basket case.
The main reason behind these developments is the Turkish President’s strange concept of monetary policy, which relies on the magical power of low interest rates.
Erdoğan, first Prime Minister from 2003 and then President since 2014, has developed his own system of economics. Though some commentators have dubbed it ‘Erdoğanomics’, it is unlikely to make it into conventional textbooks. At best, it could serve as a warning.
Erdoğanomics focuses on short-term economic growth by any means. Even if foreign debt increases substantially, if current account deficits balloon, and if loose monetary policy leads to inflation, Erdoğanomics assures us that, in the end, all will be well.
Erdoğan’s economic ‘logic’ goes like this: Low interest rates lead to lower growth rates of consumer prices and lower output prices. Therefore, if prices rise strongly across the board, further interest rate cuts must stimulate consumption. That will create economic growth, and somehow, miraculously, inflation will then disappear.
It really is as bizarre as that. Erdoğan even makes Social Credit sound sophisticated and respectable.
Since no half-decent economist, regardless of their political views, would agree with Erdoğanomics, the president must also control Turkey’s central bank. Otherwise, it would refuse to do what Erdoğan deems necessary.
Thus, since 2016, there have been almost as many Central Bank Governors as there were leaders in the NZ National Party.
Murat Çetinkaya lasted almost three years before being fired by Erdoğan in 2019. Murat Uysal lasted just 124 days in 2019. His successor, Naci Ağbal, outdid him by 9 days. The current governor, Şahap Kavcıoğlu, has been in his position for 269 days, so it is probably time for him to check the job listings.
Turkey’s economy is in freefall, and there is no obvious solution to the problem. Sure, there could be, but that would require a more conventional economic approach. But for as long as Erdoğan remains President, that pathway is blocked.
Which leads us back to the opening question: do politicians need economics degrees?
Unfortunately, Turkey’s experience does not give us a straightforward answer. That is because President Erdoğan has a business degree. At least that is what he claims.
His official biography says he holds a diploma in management from the Aksaray School of Economics and Commercial Science. However, there are doubts, because his graduation from the school, now part of Marmara University, has not been documented. The Turkish Constitution, interestingly enough, requires that the President have completed higher education.
We can only speculate whether Erdoğan actually studied economics, whether he really holds a business diploma, or whether he just misunderstood something in class. Perhaps his professors were bad or mumbled?
Another possibility, of course, is that he is just an autocratic politician with no interest in economics whatsoever. That would be sad but not unprecedented. Such politicians exist, even in proper democracies.
Still, under normal circumstances, it should not matter if the head of state does not understand economics – not even in Turkey, and at least not for monetary policy.
Anticipating the economic illiteracy of future politicians, some wiser past politicians have therefore outsourced monetary decision-making to central banks.
In Turkey, for example, the central bank is governed by a law that outlines both its duties and independence: “The primary objective of the Bank shall be to maintain price stability,” it says in Article 4. “The Bank shall determine on its own discretion the monetary policy that it shall implement and the monetary policy instruments that it is going to use in order to maintain price stability.”
Such provisions sound good on paper. Price stability and autonomy: what else would one want from a central bank?
But these paper promises are worthless when an autocratic president can remove central bank governors at a whim. Especially when that same president also controls most of the country’s media, so there is no public scrutiny of either the government or the central bank.
The result is a mixture of politics and central banking, with the former driving the latter. As Turkey shows, there can be dire consequences. Turkey’s central bank has become a part of the president’s government.
The bank has thus lost all credibility, and both Turks and international markets have drawn their conclusions. Lira holders are well-advised to exchange them quickly for durable goods or harder currency. And they do. This is how rapid inflation starts.
At the beginning of the century, Turkey’s economy was one of the best-performing in the region. Its growth rates were phenomenal. The sense of optimism and hope was palpable. There was even a chance the country might, at some stage in the future, join the European Union.
However, Turkey today is in a precarious place after 18 years of Erdoğan undermining its economic, political, and media structures. Ultimately, this is a cautionary tale that emphasises the importance of sound social and political institutions.
Perhaps high office holders do not need a higher education, let alone an economics degree. But they should at least know, and respect, the limits of their power.