The engine choked by growth: 'The last exit before the bridge' for industry

For instance, just hope your car and/or dishwasher doesn't break down these days... It's even worse if both break. Because, just like when a flush mechanism breaks, you instantly grasp the situation the domestic industry is in.

In the first two cases, it becomes clear that spare parts come from abroad and the local supplier operates without stock. Meanwhile, the famous flush mechanism manufacturer has gone bankrupt. Those who replaced them are not as high-quality but charge higher prices because “supply is in a state of distress.” Plumbers, knowing this situation, naturally demand their due as well.

If your car is an automatic and the transmission is also dependent on foreign parts, the maintenance fees you pour into it locally might be for nothing. The real dependency is on the electronic parts from abroad, and that takes time. For the dishwasher, the parts are again from abroad.

As we can understand from these consumer goods, the intertwining of industry and finance has not benefited industry at all in these parts. Once you become the weak link in the global chain, you are doomed to expensive capital inflows. It has been like this for many years, but the issue is deeper these days...

CAPITAL SCARCITY AND ENERGY COSTS

In a disinflationary monetary policy, capital scarcity is being created due to very high interest rates. For example, in SMEs, there is no talk of production other than receivables, payables, and collections every day. In September, the manufacturing industry entered its 30th month of production decline below capacity (PMI index, ISO). The industrial production index has been declining for the last three months in parallel with this. Since we learn about it two months late, we haven't seen the decline in August yet. That will likely decline as well, but September depends entirely on capital inflow/outflow conditions and energy costs.

However, global “PMI indices” show increases in Western Europe, the USA, and China; only France is near the threshold. Others are above the threshold value of 50, meaning industrial production abroad is increasing, even if it is costly.

On the other hand, in Turkey, the share of the manufacturing industry in national income has fallen from 22.1 percent to 15.6 percent in the last five years (according to TUIK data). Nearly 160 thousand people, especially in sectors like ready-to-wear, textiles, and leather, have fallen out of employment and become unemployed... The manufacturing industry, which created 108 thousand new jobs last June (TEPAV report), could not reach its former capacity. Uncertainty continues because financing and energy costs are very high. Losses in textiles and ready-to-wear continue. The problems brought and to be brought by the technological transformation in the automotive sector are at the door...

Since interest rates were kept constant by the CBRT last week, “non-operating” income continues in the industry. In short, developing new projects and increasing productivity in the industry are out of the question... The industrialist is not putting their idle capital into new investments, but into the bank to earn interest income. The banker, in turn, protects their profits from inflation with high-interest consumer loans. Yet, as we mentioned at the beginning, there is an increase in production globally that is driving an industrial transformation. There is even an inflationary trend coming from the excessive consumption of resources there. Producer prices in the USA are signaling this by exceeding 5 percent.

In Turkey, when financing costs exceed all input costs, such as energy costs, the industrialist hands over their increasing money to the bank. If the interest income obtained from daily time-deposit financial transactions is higher than the profit expected from the industry, this is what happens. While implementing a disinflationary monetary policy (orthodox), it was necessary to proceed by taking the decline in the industry into account. Just expecting the employment lost there to find jobs in services does not work. Because there is no services sector in the world that absorbs the rising unemployment originating from the industry. An industry that cannot perform productivity analysis cannot compete in the world, and that is exactly what is happening. Moreover, since the employment capacity of the services sector depends on the surplus value coming from the industry and the public's consumption expenditures, the engine of growth is thus choked.

However, if a one-time wealth tax had been levied on rentier income within fiscal policy, it would have been possible to transfer support to the industrialist and the working class that determines industrial employment through the relief of the budget. A peaceful environment cannot be determined by tight monetary policy before the taxation of capital—small, medium, or large—that adds to its wealth by taking out cheap loans through exploiting the interest and inflation gap between 2022 and 2023 is realized.

DECISION-MAKERS IN THE ECONOMY

In that case, while the problem of increasing surplus value continues in an economy piled into services, decision-makers in the economy are wasting time with the MTP (Medium Term Program) and reserve management. Because oil prices exceeding 100 dollars due to the Iran War are further straining industrial production. Moreover, yesterday the ECB raised European interest rates to 2.5 percent with a 25 basis point hike. Because a new wave of inflation is looming, especially in the USA (PPI 5.3 percent). Central banks have also rushed to raise interest rates with orthodox policies. In this environment, “our people” are putting forward expectations of interest rate cuts because financing costs are at a staggering level. Inverse correlation with the globe is often problematic..

Although it is known that the real problem is the clogged channels of Neoliberalism, economic policy is helpless..

While the CBRT's interest rate policy is determined with rational expectations, the industry is melting.. Although it is known that a possible interest rate cut in October cannot be very high, activities to mask the decline in real wages are being maintained. The financial sector knows that industry is the engine of growth, and it knows that while preventing price instability, financial instability will also hit itself..

The only trump card they have is to use the information in all sectors through liquidity management to determine who can be given credit. Then, the selectivity of finance will be decisive in reaching the growth targets in the MTP (4.4 percent for 2026). This growth target is close to potential growth, but even if it is realized, it is clear that it will not benefit anyone except the capital and political class because it is unequal growth. What will be the position of the industrialist and the citizen in an economy decided by finance? In conditions where democracy is always postponed to another spring, how much longer can the working class grit its teeth? Was it necessary to impoverish the citizen by increasing the foreign dependency of the goods to be produced while trying to lower inflation? Of course not..

As an academic who has studied late-capitalizing countries in the last 35 years, I have determined that orthodoxy in economics causes these countries to crash into a wall (crisis) at certain intervals. An example? All Latin American countries and some South Asian countries... Even the inflation, unemployment, and widespread exploitation of labor in African countries should be evaluated in this framework...

If we perceive heterodoxy only as lowering interest rates, we fall into a great delusion. As implemented by the previous Minister Mr. Nebati, interest rates set far below inflation led us to be left alone with currency shocks and instruments like the KKM (FX-Protected Deposit). That also falls on the shoulders of the public as both an interest burden on the budget and inflation..

The interest rate barometer reflects the management success of political economy, just like inflation. Heterodoxy has the opportunity to intervene with many tools before reaching interest rates. When bridge and highway revenues are transferred to a “French company,” these problems will not be alleviated, only postponed for a while...

“HETERODOXY” AND “ORTHODOXY”

However, “heterodoxy” can be effective in a wider spectrum by expanding its determination on the root cause of the environment that creates inflation. For example, you can overcome many problems even by restoring merit. Because the guidance of the market alone is of no use. There is no need to say that MTPs are a very weak form of planning, I suppose..

With the latest MTP forecast, the failure of orthodoxy is actually admitted. Because, not only the decline in industry and the fall in employment, but in our country, which breaks records in agricultural prices, MTP forecasts set the 2027 inflation target at 21 percent. Previously, this target was 15 percent for the same period. What is intended is to lower inflation more slowly by dumping it on the masses. Thus, it will be possible to compensate for the loss of surplus value in the industry through the decline in the real wages of the working class. Unfortunately, for real wages to fall, inflation needs to fall not faster, but slower... Because election time is approaching..

But this “orthodoxy” does not stop there; it has increased the foreign dependency of the country's inputs even more. How? Let me suffice for now by reminding that exchange rate policy is a result of monetary policy and that it is possible to increase exports with increasing imported inputs while determining competitiveness. According to the latest foreign trade figures, the “record-breaking” export figure is actually made possible by more import growth every day. This means an increase in the need for foreign currency. The reserve accumulation you create with high interest rates (SWAP, etc.) is of no use other than being a buffer for this foreign currency need and creating inertia..

It can be easily seen that the current account surplus, which remained below expectations due to the tourism effect even if it was dim in the summer months, will be a nuisance in the winter period. An industrialist friend of mine told me: China is feeding domestic production with more imports from China to benefit from Turkey's Customs Union agreement. How? For example, by providing spare parts from Italy for the goods it will produce in Turkey... My friend who tells me this is trying to survive by producing intermediate inputs. Real support should be given to intermediate inputs so that import dependency decreases..

To return to the beginning, with orthodoxy, Turkey's foreign dependency in industry has increased rapidly in the last 30 years. Although the Customs Union helped by regulating this relationship, the main effect came from the neoliberalization of finance.

Look at the interest rate decision, which was passed last Thursday by saying let the disinflation “path” continue, from this perspective as well. The industrial engine of “surplus value” in growth has been choked. Even if interest rates fall soon, the engine may not start. Because there is a method problem...