What did Nobel prize winner say about Turkish economy’s current state?

Turkey has not tightened monetary policy enough to achieve its disinflation goal because real interest rates remain negative despite last year’s dramatic policy U-turn, MIT economist Daron Acemoglu said in an interview.

Since June, the central bank has hiked its key interest rate to 45% from 8.5% as part of a broader monetary and fiscal shift to more orthodox policies after years of unorthoxy and soaring prices under President Tayyip Erdogan.

Inflation rose to 65% in January, leaving real rates negative as they have largely remained for years. Inflation is expected to rise through mid-year before, according to the central bank, dipping to 36% by year end due to the tightening

“I think if they still take you to negative real interest rates, that’s not going to be sufficient” policy tightening, Acemoglu told Reuters via telephone.

He said that even with bigger structural problems to address, the government over the last decade had instead pursued a policy of driving aggregate demand via monetary and credit stimulus.

“Occasionally, sporadically (this policy) became untenable and they had to increase interest rates. But then they doubled down and then they reduced interest rates again – and I think it had become particularly untenable,” Acemoglu said.

A policy-easing cycle in 2021, encouraged by Erdogan, sparked a historic currency crash late that year and eventually drove inflation to 85% in 2022.

But after his re-election in May last year, Erdogan appointed a new cabinet and central bank leadership to turn things around in the face of badly depleted foreign reserves, soaring inflation expectations and other economic strains.

The central bank says it will tighten more if inflation drifts above forecasts. Authorities have also raised some taxes and taken other steps to cool demand, which itself has been driven by inflation worries.

But with nationwide municipal elections set for March 31, Erdogan’s ruling AK Party is not expected to go too far in tightening demand, said Acemoglu, who has published several books on the intersection of world politics, economics and development.

Turkish economic policy overall is “ultimately not super successful,” he added. “They haven’t really brought down inflation. Perhaps they normalize it just a little bit more, but their targets and inflation don’t seem to be realistic.”

Erdogan’s past drive to slash rates in the face of rising prices, combined with him naming five central bank governors in as many years has hurt Turkey’s policy credibility and largely driven away foreign financial investors.

Acemoglu said that, despite the return of some portfolio investment late last year, the policy turnaround is not enough to reverse the tide to levels seen in 2001 and 2002 after a raft of free market reforms.

“I think you have to be insane to think that the Turkish macro economy has normalized and the Turkish structural problems have been solved at the moment and, you know, go in there with a big foreign direct investment for example,” he said.

Acemoglu said the extent of government control over markets discourages both domestic and foreign companies from investing in Turkey, especially in new technologies.

Turkish exports of technology, equipment and knowledge is similar to levels in 2006 and 2007, he said. “So there has not been any type of upgrading of technology that you would expect from a middle income country.”