Erdogan’s populism gives way to economic pragmatism

Turkey’s President Recep Tayyip Erdogan after his historic re-election for a third time has taken two major decisions which reveal that he will not push for his unorthodox economic ideas this time round to tackle the country’s economic crisis, which had faced a 85.5 per cent inflation rate last October and which had come down to 43.7 per cent in April. And the interest rate was brought down from 19 per cent to 8.5 per cent. The low interest rate seemed to have helped push inflation to a dizzyingly high rate.

Erdogan had appointed former banker Mehmet Simsek as finance minister and deputy prime minister, and he has chosen Hafize Gaye Erkan as the central bank governor. Both Simsek and Erkan are seen as traditional economists, and observers see in these appointments Erdogan changing tracks, and moving back to orthodox economic solutions. For two years now, Erdogan wanted the interest rates to remain to push for growth. What had happened was that instead of growth, Turkey is burdened with humongous inflation. The remedy of course is to raise interest rates to curb inflation and in the process cut off easy money for borrowers.

Simsek is an England-educated economist who had worked with Merrill Lynch. He is a traditional economist who has traditional remedies for the volatile Turkey economy. He has declared after his appointment that a “rules-based predictable Turkish economy will be the key to achieving the desired prosperity.” And the principles on which the Turkish economy is to be run has also been made clear by Simsek: “Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving this goal.”

Erkan brings interesting credentials to the table. A Princeton-educated economist who worked with Goldman Sachs, the investment bank, and headed the now failed First Republic Bank for six months. It has been pointed out that she has been with the First Republic Bank long before it got into trouble. This is to ensure that she has nothing to do with a failed bank which nearly brought the American financial system to the brink. Erkan is also the first woman governor of the country’s central bank. Interestingly, former central bank governor Sahap Cavcioglu, who has carried out Erdogan’s policy keeping interest rates low, has now been appointed head of the Bank Regulation and Supervision Agency (BDDK).

The question that Erdogan observers are asking is whether Erkan will be given a free hand to raise interest rates which is what she needs to do, and finance minister Simsek would want as well. Apparently, Simsek had put forward certain conditions to Erdogan before he accepted assignment as finance minister, and that includes freedom to design the strategy to manage the economy, and that Erdogan had agreed to the condition.

It would indeed be interesting to see whether Erdogan would sit back and allow the experts to handle the economy, or he would be impatient and interfere in economic policy making. One of the reasons for Erdogan’s unprecedented success has been his populism, especially on the political front. But it has become evident that economic populism is not a good thing for Turkey. So, he is forced to fall back on traditional economic solutions which could initially pinch people and the economy as a whole. But there would be no other way of taming the inflation. Simsek is trusted by foreign investors and that would be a big factor in turning round the economy though politically Erdogan may want to assert that Turkey does not need foreign funds. The nationalist rhetoric of Erdogan which has been his winning card would need to make way for economic pragmatism.