Removing the makeup

During my time working in television, everyone who appeared on screen (whether staff or guests) was made up with foundation, powder, and pressed powder to prevent facial shine caused by studio lights. I used to feel as if my face were covered in plaster. As soon as the program ended, I would first wipe my face with toner and then wash it with plenty of soapy water to remove the makeup. In this article, I will attempt to remove the makeup from economic data.

Over the past week, both the Central Bank and TÜİK released quite a bit of data regarding the economy. I want to be happy, especially when looking at the decline in the current account deficit. But when looking at the same data alongside industrial production, retail sales, income distribution, unemployment, and the composition of imports—all released this week—the impression arises that things are not actually improving as claimed; on the contrary, they are likely to get worse.

There is a fascinating improvement. The 12-month current account deficit has decreased from 51 billion 842 million dollars last August to 11 billion 250 million dollars this year. We are talking about an improvement of 40 billion dollars in one year. It’s like a miracle...

However, here is the problem. The main element at the source of this improvement... Let's wipe off the makeup and try to understand the decline in the current account deficit.

First, a very brief summary of Turkey. Since 1948, we have abandoned Gazi Mustafa Kemal Atatürk's model of “industrialization and development with one's own resources.” In the new world order established after World War II, we chose a growth model based on external resources along the US axis and gave up on capital goods industries. Turkey, which had never run a foreign deficit until 1948, has run a constant foreign deficit since that year. It has also tried to roll over its foreign deficits with foreign debt.

In the 1980s, when world trade began to liberalize and what is called globalization or neoliberalism emerged, Turkey's openness to the outside world increased. But Turkey, which had not completed its industrialization, was not in a position to compete in world markets. While we said we were opening up, we were actually opening our market to the outside. Despite this, in the first 20 years of the neoliberal system, the 1980-2002 period, the ratio of the current account deficit to national income in Turkey never reached 1 percent, except for a couple of crisis periods. The 20-year average was at the level of 0.5 per thousand.

With the economic crisis at the beginning of the 2000s, foreign currency began to enter the country following the hot money policy needed for a temporary period. Managing the country became easier. The AKP government did not care about the cost of this foreign currency raining in from outside. It continued the hot money policy, which should have ended in mid-2003, until the 2008 global financial crisis.

This had two separate heavy costs. One was a significant transfer of resources from Turkey to the outside world due to high real interest rates. (Approximately between 1 and 2 percent of national income each year. This amount was around 10 billion dollars annually.)

The other heavy cost was that foreign exchange rates remained low due to the abundant foreign currency arriving with high interest rates. Industrialists, especially, gave up on the production of intermediate goods and turned to imports. Similarly, farmers also took a heavy blow. Importing agricultural products started to become cheaper than producing them. The already low competitiveness of agriculture and industry weakened even further. In Turkey, industrialists began to give up on producing intermediate goods, and farmers began to give up on producing agricultural products. The competitiveness of the Turkish economy was permanently lost. The competitiveness of industry was attempted to be maintained solely through suppressed wages and proximity to the European market. As a result, an economic structure with high import dependency emerged, which had to import the intermediate inputs it would use in industry. As we consumed more than we produced, we began to need more foreign debt and more hot money. Just like a drug addict... Moreover, we did not have the chance to increase the prices of the industrial goods we produced in world markets as we wished. Because with an increasingly deteriorating education system, we could not produce high-tech industrial products either. As a result, the ratio of the current account deficit to national income in the Turkish economy increased tenfold from the 0.5 per thousand average of the first 20 years of the neoliberal period to the 5 percent level during the 20 years of the AKP.

TOXIC GROWTH

This is an unsustainable, diseased structure. In countries in the category of developing countries like ours, we see that there has been no current account deficit in the last 20 years either. On the contrary, we see that they have given a current account surplus. How is the current account deficit financed? By selling land, selling existing factories, compromising economic and political independence, and with hot money for which we will have to pay more interest in the next period...

When the structure of the economy became completely dependent on the outside and the competitiveness of industry disappeared, this time the growth in the economy began to become first hormonal and then toxic. I no longer reject the definition of hormonal growth. This is called toxic growth. Hormonal growth was an unsustainable, unhealthy growth, but in the end, all segments of society were getting a share of it, albeit a little or a lot. Until about 2016... After that, things turned into toxic growth.

Growing in an economy is good. For example, when you look at the family economy, for your prosperity to increase, your income must increase more than inflation. However, if you are meeting consumption and prosperity increases without increasing your income, by selling household goods or property, by getting involved in illegal activities, or by borrowing in a way that might pay heavy prices after a while, this increasing consumption and prosperity is not a healthy and sustainable increase in prosperity.

The same applies to firms and countries. As the Turkish economy grew, Turkey's debt began to increase. And it became a permanent feature of the economy.

As a result of this 20-year policy that I have briefly summarized above, the Turkish economy has become unable to sustain its economic activities without running a current account deficit. The current account deficit is falling, but Turkey is also becoming unable to sustain its economic activities.

Due to the implementation of only tight monetary policy in the name of fighting inflation, the economy has slowed down. Again, a very heavy hot money policy is being implemented. The exchange rate is being suppressed. The competitiveness of exports is already weak...

There are two main elements at the source of the contraction in the current account deficit. One is the hot money inflows that will cause a serious transfer of resources abroad... The problems it will cause upon exit will also be very large. The other is the decline in intermediate goods imports due to the regression in industry due to monetary policy. Also, let's recall the restriction imposed on gold imports.

Industry's intermediate goods imports are falling. Consequently, industrial production is also declining. For the last three months, Turkey's manufacturing industry production has fallen on an annual basis by 7.2 percent in June, 5 percent in July, and 5.4 percent in August. If one leg of fighting inflation is to curb demand, the other leg is to increase supply. Industrial production and supply are falling. The cost of this will be heavy. Sooner or later, unemployment will increase further. Again, last week, TÜİK showed the narrow-defined unemployment rate as lower according to industrial production, but the real one is the broad-defined unemployment. That rose from 26.5 percent to 27.2 percent.

Industrial production is falling. But is the consumption demand of the segment that triggers inflation falling? We need to look at that. No. Imports in Turkey are generally falling, and this reflects positively on the current account deficit, but consumer goods imports are not falling. In the last year, our imports declined by 7.9 percent. Our intermediate goods imports contracted by 14 percent. We imported 38 billion dollars less in intermediate goods. However, in contrast, our consumer goods imports reached 53 billion dollars with a 20 percent increase, supposedly while fighting inflation.

There is another new piece of data released along with the current account deficit. That is the retail trade index in Turkey. As a result of tight monetary policy, consumption demand should fall. You say inflation is falling, but the retail trade index, also announced by TÜİK, rose by 13.3 percent in August.

The decline seen in inflation was not achieved by the policies implemented. We are seeing the base effect of the decline in the very high July and August months of last year.

Indeed, the increase in consumer goods in imports and the increase in retail sales volume prove this to us.

Again, we have said it many times. The inflationary demand effect of the retiree, worker, and farmer whose purchasing power has been lowered is very low. The segment you should really deal with is the top 20 percent of the population. And again, last week, TÜİK published the income distribution survey. The richest 20 percent of the population receives 48 percent of the income. The share received by the bottom 60 percent is 30.7 percent in total.

You are strangling the bottom 60 percent. If their demand falls by 10 percent, total demand will fall by 3 units. But if the demand of the top 20 percent increases by 10 percent, total demand will increase by 4.8 units. Despite the tight monetary policy implemented in the name of fighting inflation, this income distribution also very clearly explains the increase in consumer goods in imports and the turnover increase in the retail sector.

We have written and explained on television many times that fighting inflation cannot be done with monetary policy alone; fiscal policies are also needed. You went and tried to introduce a tax on credit cards as a new tax. That is a separate topic for an article in itself...