“Our money has no value anymore”.
That’s what a retired bank worker told a New York Times reporter at the end of November. Can you imagine the horror that inspires? The notes in your pocket are suddenly worthless. Unimaginable in your country, you might think — that kind of thing surely only happens in places like Venezuela or Zimbabwe.
Except that this anguished cry came from Turkey, whose capital, Istanbul, which straddles East and West, is one of Europe’s finest cities. It has some of the most important architectural treasures the world possesses. Turkey is the seat of one of civilisation’s leading faiths. It’s a highly-favoured tourist destination; in 2019 almost 52 million tourists visited the country, spending around $42 billion. Turkey joined NATO, the North Atlantic Treaty Organisation in 1952; it long nurtured hopes of being admitted to the European Union. In 2019, the HSBC Expat Explorer report ranked Turkey as the 7th-best country in the world for international workers, ahead of Germany (8th), the US (23rd) and the UK (27th). In principle Turkey has a lot going for it.
For foreigners visiting Turkey, the collapse of its fiat currency, the Lira, means that many bargains are to be had. But it’s terrible news for Turks; the Lira has lost 75% of its value against the US Dollar since 2013, 20% of that in the third week of November this year. Impoverishment for millions is now a reality. The World Bank estimates that more than 1.5 million Turks fell below the poverty line in 2020. Prices have been spiralling — electricity prices in 2019 went up by more than 50%; youth unemployment was about 27%.
While we all might walk around thinking ‘it can never happen here’, that’s what many Turks thought a few years back. None of us are that far from Turkey. In the US, inflation is now running at an annualised 6%; in the UK, the deputy governor of the Bank of England (BoE) sees inflation rising beyond 5% by early 2022; in the European Union, the rate is currently 4.4% (but more than 5% in some member states); in Russia, inflation is now more than 8% a year; in Brazil, inflation is now expected to reach double digits by the end of 2021.
Root of the problem
Turkey’s President, Recep Tayyip Erdoğan, has overseen Turkey’s move to what some have described as a “competitive authoritarian regime”. Erdoğan co-founded with Abdullah Gül the Justice and Development Party (AKP) in 2001. He’s been President since 2014.
In July 2016, he and his administration survived a strange attempted coup, supposedly led by the ‘Council for Peace at Home’ which was alleged to be a clandestine group within the Turkish Armed Forces. The Council, whose leaders have never revealed themselves, are supposed to have taken their name from the Turkish phrase yurtta sulh, cihanda sulh, meaning “peace at home, peace in the world”. This phrase was memorably uttered in 1931 by the founding father of the Turkish Republic and its first President, Kemal Atatürk. Yurtta sulh, cihanda sulh became regarded as a guiding principle of the Turkish state — domestic as well as international peace and security.
There’s not much room for humour in the cafes of Istanbul these days. But even people struggling with inflation officially at 21% (and unofficially at least twice that) can spot the irony in the name — justice and development — of Erdoğan’s AKP Party. The AKP was re-elected in 2018; fresh elections are due to be held in 2023 but it’s looking increasingly likely that Erdoğan will not have a political future that far into the future — although he might be able to use force to cling to power.
Erdoğan is widely regarded within Turkey as being personally responsible for out-of-control inflation. He has a very unorthodox view of interest rates and inflation — while most believe that pushing up interest rates is one means of controlling inflation, Erdoğan has said that in his view high interest rates cause inflation: “Interest is the cause, inflation is the result… If you are saying the opposite, my friend, you don’t understand the issue” he said in September 2018. In November, Turkey’s central bank cut its main interest rate for the third successive month, to 15%. As if to reinforce his view he has regularly sacked central bank officials who oppose interest rate cuts. The main reason for the wave of inflation the world is now experiencing is the terrific boost to the money supply from governments confronting the consequences of locking their economies up for a year, under COVID-19. While it’s not clear that higher interest rates can combat this inflation, cutting interest rates and making money cheap certainly doesn’t help.
Authoritarianism is bad for growth
Sadly Erdoğan is far from being alone. In many corners of the world, from Myanmar to Russia, from Belarus to Lebanon, democracy is being undermined. The US and Russia are sabre-rattling over Ukraine and who dominates Europe; US diplomats will boycott the Winter Olympics in Beijing in February over allegations that China is conducting genocide against its Muslim Uyghur minority; Afghanistan, Syria and Yemen remain open sores; China, apparently irritated at not getting an invitation to President Joe Biden’s ‘Summit for Democracy’ this week, has published a white paper called”“China: Democracy that Works”, a view not shared by the Economist Intelligence Unit’s Democracy Index, which calls China an “authoritarian regime” and ranks it 151 out of 167 countries; the US it refers to as a “flawed democracy”. Around the world there are many examples of how authoritarianism has strengthened its hand, under cover of a global pandemic and the economic turmoil that has resulted.
Leaving aside matters that appeal to sentiment, such as human rights, freedom of expression, rights of association, there’s evidence that democracy brings about economic growth — it makes a difference to what’s in our wallets. In a paper published in the Journal of Political Economy in 2019, Daron Acemoglu, a Turkish-born American economist who has taught at the Massachusetts Institute of Technology since 1993, in collaboration with three others said their research found that “a country that transitions from nondemocracy to democracy achieves about 20% higher GDP [gross domestic product] per capita in the next 25 years than a country that remains a nondemocracy. The effect of democracy does not depend on the initial level of economic development, although we find some evidence that democracy is more conducive to growth in countries with greater levels of secondary education”.
Which seems to bear out Winston Churchill’s comment in 1947: “it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time”.
For Turks, the Lira can still be used to make purchases but it’s no longer a store of value — understandably, as their currency is on its last legs, they now try to change their Liras into US Dollars, Euros, gold, cryptocurrencies. Turkey’s government in April banned the use of cryptocurrencies in payments for goods or services, although trading continues. Given cryptocurrency’s volatility — Bitcoin lost more than 20% of its value last weekend that too seems an unreliable store of value. Cryptocurrencies were created precisely to act like gold and enable people to be more in control of what they use as currency; it was such a good idea that governments everywhere are thinking how they can hijack the underlying technology and develop their own digital currencies, whilst at the same time stocking up on the precious yellow metal. The world is getting smaller; none of us are far from Turkey.
