Turkey rejects economic orthodoxy on fighting inflation : Planet Money Turkey is facing really high inflation, over 60 percent. Its president is taking an unorthodox approach to dealing with it. | Subscribe to our weekly newsletter here.

Turkey's runaway inflation problem

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Emre Peker was born and raised in Istanbul. In the '90s, when he was in middle school, he worked summers at the city's Grand Bazaar - a sprawling covered market of stalls and shops.

EMRE PEKER: I have very fond memories.

WONG: People came from all over Turkey to buy everything from furniture to clothing to pots and pans. Emre's family ran a jewelry store there, selling gold coins and traditional Turkish finery.

PEKER: I started out as a runner boy - sweeping the floors, cleaning the windows, setting the displays. Then, I graduated to ferrying gold and cash around.


Today, Emre lives in London, where he follows Turkish politics and economics for his job at the Eurasia Group, but he's been steeped in this stuff since he was a teenager working at the family jewelry business.

PEKER: I remember one of the guys working at our shop - he was, in age, somewhere between my father and my grandfather - had kept a daily record of the lira-dollar exchange rate dating from 1916 - a small book he kept. And it was just fascinating to see how the exchange rate went from one lira to the dollar to - by the time I was done at the bazaar, to about 1.6 million lira to the dollar.

BERAS: Turkey's economy has been very up-and-down over the years, and now it's down again. Since 2018, the Turkish currency, the lira, has plummeted in value, and inflation is over 60%.

WONG: In the U.S., we're seeing inflation near 8% - way below what's happening in Turkey. And even at that level, the Federal Reserve has jumped into action, raising interest rates for the first time since 2018.

BERAS: Now, when interest rates go up, that means it gets more expensive to borrow money. And when it's more expensive to borrow, businesses and people spend less. And less spending means less upward pressure on prices, which should eventually curb inflation.

WONG: And so raising interest rates - this is what central banks around the world do to combat inflation, but not in Turkey, and that's because Turkish President Recep Tayyip Erdogan really, really hates high interest rates.


WONG: Hello, and welcome to PLANET MONEY. I'm Wailin Wong.

BERAS: And I'm Erika Beras.

Around the world right now, countries are dealing with higher inflation than they've seen in years, so lots of policymakers and pundits are weighing in on how much to hike interest rates and when to do it. But they're not debating whether raising interest rates leads to lower inflation - they don't question that basic relationship.

WONG: Today on the show - what happens when Turkey goes it alone and throws out the standard inflation playbook? It's a story of three deposed central bank governors, two-digit inflation and one very powerful president.


WONG: President Erdogan spent his younger years playing semi-professional soccer and getting involved with politics on a grassroots level.

PEKER: My first memory of Erdogan is the municipal elections in 1994, when he swept to power as the mayor of Istanbul.

WONG: Emre Peker at the Eurasia Group says Erdogan is a conservative - a devout Muslim in a country that had mostly secular political leaders. Just a few years after becoming mayor, Erdogan read an Islamic poem at a political rally that got him charged with inciting religious hatred. He was kicked out as mayor, jailed, and banned from holding political office.

PEKER: When I was growing up - in my circles, at least, - the assumption was always that there's a limit to what Erdogan can do. And when he was jailed, that just sort of reinforced that.

WONG: A limit because of the powerful secular forces running the country - but Erdogan was not to be counted out so quickly. He staged a comeback and became prime minister in 2003.

BERAS: At first, the U.S. and Europe embraced Erdogan as a pro-democracy, moderate Islamic leader - someone with conservative social values, sure, but would check off the right boxes on Western economic policies, like privatizing state-owned businesses and opening up to more foreign investment. There was even talk of Turkey joining the EU.

WONG: But over the last decade, and especially after a coup attempt in 2016, Erdogan has taken an authoritarian turn, cracking down on political dissenters and claiming really broad political powers. He even abolished the office of Prime Minister, an office he used to hold, getting rid of power-sharing at the top. He now appoints judges, provincial governors, even the heads of public and private universities.

BERAS: Erdogan has also muscled his way into basically running the economy. In 2018, he decreed that from now on he would choose the head of the central bank without any kind of confirmation process, and he put his son-in-law in charge of the finance ministry. So people who follow Turkey, economists and investors were understandably on edge in May of 2018, when Erdogan made a state visit to the United Kingdom.


UNIDENTIFIED PERSON #1: The President of Republican Turkey and Mrs. Erdogan, your Majesty.

BERAS: On his visit, Erdogan went to Buckingham Palace to meet the queen.




ELIZABETH II: So we meet again.

BERAS: He gave a joint press conference with then Prime Minister Theresa May - pretty standard state visit stuff. And he also stopped by Bloomberg TV in London for an interview.


GUY JOHNSON: Your Excellency, thank you very much indeed for taking the time to join us here at Bloomberg.

WONG: By this time, the lira had been losing value all year, and annual inflation was in double digits. The TV appearance was an opportunity to offer some reassurance that he had a plan to address Turkey's economic problems, that maybe he would raise interest rates to get a handle on inflation.

BERAS: Instead, Erdogan, through an interpreter, doubled down on the opposite idea.


ERDOGAN: (Through interpreter) First of all, when you look at the cause and effect relationship, the interest rate is the cause and inflation is the result. The lower the interest rate is, the lower inflation will be.

WONG: This is something that Erdogan has been saying for over a decade, that raising interest rates fuels inflation. It is a completely unorthodox belief that's universally rejected by mainstream economists.

BERAS: Because it flies in the face of economic logic - logic that says if you make it more expensive to borrow money by raising rates, that slows down the economy. So, like, a business owner might hold off on taking out a loan to expand their factory, or a shopper might not put a random impulse purchase on their credit card because they're thinking about how much they'll have to pay in interest.

WONG: These micro-decisions add up across an economy over time. Eventually, demand goes down and prices follow. And this chain of events is what policymakers want to set in motion when inflation gets too high.

BERAS: It's why the U.S. Fed is raising rates right now. But in Turkey, even with its runaway inflation problem, Erdogan was like, no way.

WONG: After his television interview, the Turkish lira dropped to a new record low. Because if Erdogan wasn't going to change his mind on interest rates, even with inflation spiking, markets calling for action and Turkey facing a really bad economic future, then maybe nothing would bring him around.

BERAS: And when the president went back to Ankara, the capital, the sell off in the lira kept going. Investors holding Turkish stocks, bonds and currency were like, we want to get off this ride.

WONG: And Emre, our expert who grew up selling jewelry in the Grand Bazaar, says the president was not sad to see them go. Erdogan had characterized foreign investors as speculators, outsiders just trying to make some quick lira on Turkish stocks and bonds.

PEKER: To maintain the investors in your economy, you had to at least have a semblance of Orthodox monetary policies and then provide some certainty. So more and more foreign investors left Turkey because the message to them from Ankara was clear. You know, we don't want you here.

BERAS: So what was Erdogan doing? What was his logic in making these calls?

WONG: Erdogan is not an economist, but Emre says he does have these very set ideas about how economies function, based in part on his early years as an ambitious young leader in Istanbul.

PEKER: Erdogan hails from a sort of hard-knuckle neighborhood in Istanbul, known for its tough guys and all of that.

WONG: He would go out and talk to his constituents like small business owners.

PEKER: He has a reputation as someone who would go door to door to mom-and-pop shops and be very humble and inquire about people's needs and problem solutions and listen to them.

WONG: And this is what Erdogan gathered from these conversations was that high borrowing costs in the form of high interest rates were hard on these mom-and-pop shops because those small business owners told him they would pass higher expenses onto their customers in the form of higher prices, also known as inflation.

PEKER: So his logic follows that if you cut lending costs, then reductions to inflation will follow.

WONG: Emre says there are some other factors at play, too. There's an ugly and anti-Semitic undercurrent in some of the president's rhetoric. Erdogan talks about something called the interest rate lobby. It's like a vague reference to a shadowy group of financial puppet masters trying to destabilize the Turkish economy.

PEKER: It conjures up this image of a bunch of people in, like, pinstripe, sitting in their room, smoking cigars, laughing and saying, ha ha ha, look at turkey paying us very high interest rates.

BERAS: There's also a religious component to Erdogan's stance. He's a devout Muslim, and Islamic law, according to a widely held interpretation, forbids earning money or getting any kind of benefit from a loan. Charging interest is considered exploitative. Emre says he's heard the president will kind of quiz business leaders when he meets with them - asks them, are interest rates allowed under Islamic law?

PEKER: They have to answer to that, no. And then he would say, well, there you have my answer about why I think we should have zero interest rates. So I think it's a bit of, like, religious belief infused with populism, infused with misguided conception of basic economics.

WONG: So Emre says that's why Erdogan is so dead set against raising interest rates.

BERAS: Even though Erdogan has held these beliefs for a long time, they've only been put to the test recently. Because until recently, interest rates in the major global economies were low. Inflation was under control and had been for decades. And Erdogan presided over a flourishing Turkish economy that brought in foreign money. Construction boomed, luxury condos and skyscrapers went up, tourists flocked in for the country's history and beaches.


UNIDENTIFIED PERSON #2: Did you know one of the capitals of windsurfing is in Turkey? Today, we're in Alacati.

WONG: And Erdogan wants to keep pursuing growth now by promoting Turkey's exports. He thinks the lira should stay weak because that makes Turkish products a bargain for the rest of the world.

BERAS: But there's a big flaw in this weak lira policy according to Selva Demiralp. She's an economist at Koc University in Istanbul.

SELVA DEMIRALP: Turkey is a country that imports significant amount of intermediate goods.

WONG: Intermediate goods are like the materials used to make something else.

DEMIRALP: Let's say you buy steel and turn it into appliance parts and then sell it to Germany, and Germany turns it into a refrigerator.

BERAS: This is what a lot of Turkish manufacturing looks like - companies import cotton yarn to make clothing or they import vegetable oil to make cookies. And when those Turkish companies import steel or yarn or vegetable oil, they pay for those things in dollars. So when the lira is weak, those materials get more expensive.

DEMIRALP: And as a result, the appliance parts that I produce in Turkey are going to be costlier and therefore the final price tag is going to become more expensive.

BERAS: Turkish manufacturers have to pass those higher costs on to their customers. And so Turkish exports aren't so cheap anymore.

WONG: And if you look at Turkey's total trade, it imports more than it exports. It buys oil and gas and a lot of its food from the rest of the world. So Erdogan's insistence on a weak lira is making all these things more expensive in Turkey. In other words, it's actually leading to higher inflation.

DEMIRALP: The government's motivation - I mean, this - they have the good intentions to promote growth. But we have to think about the long run as opposed to focusing on the short run gains for the economy.

BERAS: When inflation is as high as it is in Turkey, it wipes out all the benefits from a weak currency and it can make the economy seize up. That's the big problem.


WONG: Coming up, how Turkey arrived at 60% inflation.


WONG: In 2018, when Erdogan went on Bloomberg TV and doubled down on his idea that high interest rates cause inflation, that was not the only thing he said that scared investors.

BERAS: They were looking for some signs of checks and balances within Turkey, some sign that Erdogan wasn't the only one making economic policy, that he might have some advisor pushing back on these ideas about interest rates, like maybe the head of the Central Bank. But Erdogan, speaking through that very proper British interpreter, dashed that idea.


ERDOGAN: (Through interpreter) Of course, our central bank is independent. But the central bank can't take this independence and set aside the signals given by the president.

BERAS: Basically, Erdogan said the central bank would have to answer to him.


JOHNSON: So you will play a role in monetary policy going forward? Is that the big change?

ERDOGAN: Yes. (Through interpreter) This may make some uncomfortable, but we have to do it because it's those who rule the state who are accountable to the citizens.

BERAS: This was a big red flag. Modern central banks, like the Fed and the European Central Bank, are typically independent, so they're protected from short-term political pressures.

WONG: Erdogan was saying, nope, not in Turkey. And he followed through. Over the last three years, there has been this pattern. A central bank governor will try to do the thing that economic orthodoxy says they should. They'll try to deal with inflation by raising rates. And then the office of the president issues a decree. That central bank governor is gone - fired. Then a new guy comes in - and yes, they are all guys - same thing. Eventually, he gets around to hiking rates and gets fired. Turkey's gone through three central bank governors since 2019. That's a lot of turnover.

BERAS: And then the central bank went in the opposite direction - instead of raising rates, lowering them.

DEMIRALP: If you plot the inflation rate in Turkey, what we have seen in the last six months is really one of a kind. When we all expected the central bank to hike rates, we have seen these rate cuts, and that's how we have seen inflation getting out of control.

BERAS: That's how you see inflation over 60%. And some say the government might be lowballing those numbers.

WONG: And now the Turkish central bank has a big credibility problem. Economists, investors, businesses, regular people - they think the central bank is too beholden to politicians to do its most important job - control inflation. And so people expect prices to keep going up and up and for their money to be worth less and less. This is a dangerous spot for a central bank to be in.

DEMIRALP: In an economy where the central bank has good communication and works together with the markets, the central bank's main role is to guide the markets in the right direction. You just tell the markets what you are going to do, and they move in that direction because the central bank has credibility, and the markets see that the path that you defined for the markets makes sense. But when that relationship is broken, then central bank pushes interest rates in one direction, and the markets go in the opposite direction.

BERAS: Like in the U.S. when the Fed makes a little hike in interest rates, other interest rates, like mortgage rates, tend to follow. But in Turkey, the trust is broken. Everyone expects higher and higher inflation. And expecting inflation basically makes it come true because all through the economy, people start making decisions based on the belief that their money will be worth less in the very near future.

WONG: Workers negotiate for higher salaries. Landlords raise their rents. And consumers try to buy that new refrigerator they need now because in a few months, the price tag will be even higher. All of those actions send prices up.

BERAS: And at the same time, with the lira losing value, people are abandoning the currency. Instead, they're buying U.S. dollars because dollars are more stable. So the lira keeps losing ground.

WONG: Emre Peker says that when people start dumping the lira to buy dollars, that behavior is really hard to unwind.

PEKER: Ultimately, there isn't too much trust in the government's ability to manage this whole thing. And when push comes to shove, everyone wants to be able to say, well, you know, at least back in January, I bought $1,000. And that will help me get through this month.

WONG: Emre lives in London now, but his friends and family back home are telling him that imported medications are now hard to get, and they're struggling to deal with prices that go up from one day to the next.

PEKER: Even my sort of, like, well-to-do white-collar friends are, like, talking about the price of toilet paper and how they switched buying it from their regular supermarket to a discount market because it's just absurd how quickly things went up.

BERAS: The crisis is mainly hitting working-class Turks and people living on pensions. And even though protesting can get you in trouble in Turkey, people have been turning out.


UNIDENTIFIED CROWD: (Chanting in non-English language.)

BERAS: In this video from November, people marched down both sides of a busy street in the capital. They're calling for Erdogan's party to resign.

WONG: Now the war in Ukraine is adding to Turkey's problems.

BERAS: Oil and gas prices are way up, and Turkey's usual summer tourism boom won't help it either because a lot of its foreign tourists come from Russia and Ukraine.

WONG: The government has tried to lessen the economic pain. Early this year, it raised the minimum wage and started subsidizing some utility bills. And to stabilize the lira, it's introduced special savings accounts that are meant to encourage people to keep their money in lira instead of dollars. But economists say none of these measures will amount to much if Erdogan holds his ground and doesn't raise interest rates. And that's been his red line all along - the thing he says he won't allow.


BERAS: Two years ago, most student loan payments were paused. For an upcoming episode, we're wondering, what have you been doing with that money instead, and how are you preparing to start paying again? Let us know. You can email us or record a brief voice memo. Please include your name and location. Our email is, as always, planetmoney@npr.org. Thank you.

WONG: You can also find us on social media. We're @planetmoney on Twitter, Instagram and TikTok.

BERAS: This episode was produced by Emma Peaslee. It was mastered by Isaac Rodrigues and edited by Molly Messick. PLANET MONEY's executive producer is Alex Goldmark.

WONG: Special thanks to Mary-Claire Pete (ph) and Merty Sherry (ph). I'm Wailin Wong.

BERAS: And I'm Erika Beras. This is NPR. Thanks for listening.


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