Causes of Inflation Crises in Turkey Within Historical Perspective, Inflation Theories and Different Disinflation Policies

Turkey, a country which has been struggling with high inflation figures throughout its history. The periodically implemented development plans, economic measures, economic decisions did not help weaken the chronic course of inflation, and inflation reached triple digits in the 1994 crisis. In 1960-1970, only in 1967, it reached double digits with 13.97%, except for this year, inflation was kept in single digit. Between 1970 and 1980, the level where the unfavorable course of inflation increased and one of the highest inflation figures in history has been reached. Inflation figures, which reached 20% a year after 1970, declined in 72 and 73, but reached 94.26%, with a hard and high macro imbalance until the 1980s. Although the level of inflation was decreased by 37% and then 29% after the January 24 Stability Decisions, the positive effect of these stability decisions did not last long and inflation started to rise again. Inflation, which reached historical levels (105.22%) in the economic crisis of 1994, declined continuously after this date (97-98 moderate balancing) and settled to 8.64% in 2004, and after 2002 -with the public budget balance- inflation fell on single digits. Although the TCMB has acted with 5% inflation targeting for many years, it has been observed that this target is far from reality with the level of inflation achieved. With the rise of inflation to double digits in the following years, the purchasing power decreased even though it was not before 2000, although it is predicted that the target of 2020 will decrease to single digits according to the Turkish Treasury and Ministry of Finance, but it is over 10% according to IMF data and 11% for 2022, 42 inflation targets were foreseen. Upon this point, in the context of historical perspective on the causes of inflation in Turkey to discuss the theories of inflation and it would be useful to discuss the effectiveness of different government policies implemented by different disinflation. Until the mid-1970s through early 2000s, one of the most important problems of Turkey's economy has been proposed various theoretical approaches to dealing with inflation. The most basic of these approaches can be explained as follows:

1)     Classical Model of Money and Prices

In order to combat inflation, which is a monetary phenomenon, money supply needs to be curtailed. Since the increase in money supply in the short run lowers interest rates and increases spending, the increase in total demand causes real income, production, to increase. Total demand shifts to the right due to the increase in money supply in the short term. With total demand shifting to the right, production rises above the potential production level in the short term. Firms, however, restrict their production to compensate for increased production costs. In the long term, real GDP returns to its former level, as wages (based on investment and consumption expenditures) increased.

2)     Okun’s Law and Philips Curve

There is an inverse proportion between unemployment and inflation. When the amount of production in the economy exceeds the potential production, it causes unemployment to increase. If this rate decreases, total income increases. Expenditures increase when income increases. The inflation rate increases as the spending increases.

3)     Inflation Expectations

Inflation expectations in the coming period are implemented in 2 ways. It is shaped according to the inflation rates in the previous period and the policies to be used in the future. For example, expectations are said to create inflation, as they are reflected in employees' salary increases, and hence in prices.

In sum, it can be said that inflation is analyzed under 4 categories.

• Demand - pull inflation: Budget deficit increases in money supply
• Cost - push inflation: Increases in total demand increase inflation. Increases in costs increase inflation as they increase production costs.
• Inflation Expectation: People's inflation expectations adjust salaries and payments. Inflation is rising.
• Institutional - Political Factors: The unstable political environment is one of the causes of inflation. Institutions (Such as; Central Bank) should be independent of the political authority.

Following the general information about inflation, crises in Turkey can be summarized as follows. 1. Crisis (1977- 1980), 2. Crisis (1994), 3. Crisis (2001), 4. Crisis (2008- 2009).

1. Crisis (1977- 1980)

The reasons for the increase in inflation observed in the 1980s are the increase in the money supply with the wrong economic policies followed by the government, the increase in the deficits in the public sector, and the increase in domestic and foreign debt interest rates. A stabilization program was signed with the IMF on January 24, 1980 in order to make radical changes in the economy and get rid of inflation that caused by the increase in the money supply stated in the classical money theory and the increase in the total demand in the oil crisis. Thus, it was aimed to break the inflation pressure and regulate the markets. It is observed that the inflation rate of 107.2% in 1980 decreased to 36.8% in 1981 and to 27% in 1982.

2. Crisis (1994)

In the 1990s, the current political power saw the inflation as one of the most important problems of the country but fell into the misconception that the foreign exchange shortage was overcome. As a result of these developments, the Turkish economy entered a stalemate at the beginning of 1994. The US dollar-TL parity, which seemed stable for a long time, was seriously deteriorated, inflationary expectations increased greatly, and the Treasury became unable to borrow inside. Together with the 1994 Economic Crisis, Turkey's economy between 1990-2000, the first of the most serious economic downturn in the history of the Republic after the Second World War is experienced. The economy contracted by 6.1% in the same year due to the 1994 Crisis, which could be called the “first major financial crisis”. The distrust to the government has been observed to continue after the implementation of the economic stabilization program put forward with the IMF, and economic actors who think that the current power and the stabilization program implemented will not be long-lived, have not turned their expectations into a positive framework. In this case, it can be argued that the expectations of inflation affect inflation. Since individuals are insecure and rational in the economic stability program from the very beginning, the theory has come true. This stabilization program can be claimed to fail because it is the product of the environment of insecurity.

3. Crisis (2001)

Although there was a temporary relief in the economy after the 1994 crisis, the absence of structural reforms delayed solving the underlying problems. In 1998, Turkey's most important trading partner Russia's entry into the crisis and 1999 Marmara Earthquake have created additional pressures on the budget, caused the folding of economic hardship. Thus, in Turkey's institutional and political problems have also said a broader role in the 2001 crisis. Because the IMF program implemented by Turkey in that period was aimed at lowering the inflation rate hovering at very high levels. Free interest and fixed exchange rate regime were applied under the program. The rate was kept constant at the rate announced by the Central Bank for each day, while the interest rates were determined by the market. The first blow to the economy was the liquidity crisis in November. Interest in the banking sector rose rapidly in an instant. With the problems experienced, the foreign investors were worried, and a large amount of funds moved out. During this period, Demirbank, which has a loaded Treasury bond, was one of the banks that was affected by this liquidity crisis and was transferred to the Savings Deposit Insurance Fund (TMSF). With the support of the Central Bank, the turmoil was also stopped for a while. However, interest rates remained at higher levels than before the crisis. The institutional and political problems in the government caused the foreign investors to exit the market, which already had liquidity problems, and the economic program implemented lost serious confidence. The effects of the crisis that started in the banking sector were directly felt in the real sector. While thousands of companies have closed, peoples' hundreds of thousands were left unemployed. March period he served as vice president of the World Bank Kemal Dervis, was invited to Turkey and was appointed state minister responsible for the economy. A stand-by was signed with the IMF and a new economy program was launched, focusing on reforming the banking sector. Another point to be considered during this crisis period is the idea of "increase in money supply causes inflation". Because it can only be said that inflation did not arise for this reason. For example, although there was an increase in money supply in the 2003, 2004, 2005 period, inflation was stable. The reason for this is that after 2003 gained a relative stabilization of the economy of Turkey.

4. Crisis (2008- 2009)

That crisis started in 2007 but the effects of this crisis is felt mainly in 2008. Crisis was not originated from Turkey, it began with an external environment. In the USA, along with interest rate increases, the difficulties experienced in the return of "subprime" mortgage loans, which were given to low incomes with high interest, caused a sharp depreciation of the bond packages in which these loans were included. The liquidity problems that started in developed countries became more severe when the year 2008 was entered. In September 2008, Lehman Brothers, one of the largest investment banks in the world, announced that it owed $ 613 billion and went bankrupt. This was recorded as the biggest bankruptcy in US history. In this period, developed countries reduced their interest rates to an all-time low, keeping the market liquid. In this period, developing countries were relatively less affected by the crisis. Again, in this period, although the exchange rate increased, its effect on the real sector was limited in Turkey. Because, Turkey has experienced the effects of the global financial crisis in 1990, 2001 and 2008. Especially the international financial crisis in 2007-2008, forced Turkey's economy. But Turkey has developed strong policies to provide for the recovery encountered financial crisis. Here, the importance of strong institutions and policies on inflation is seen. Because, despite being adversely affected by the global crisis in Turkey, thanks to regulatory and supervisory reforms carried out in previous periods has achieved strong growth again. It can be said that the impact of the global crisis on the Turkish financial sector has been limited compared to other countries due to the structural transformation in the banking sector as a result of the crisis of the Turkish economy, which is a developing economy in 2001. Despite all this, the recession of developed countries caused a contraction in the global trade volume. In addition, a decrease in private investment expenditures occurred due to the increased risk perception on the consumer behavior. These reasons created rapid increases in unemployment and caused the loss of the country's welfare seriously in Turkey's the 2008 crisis. In addition, for Turkish inflation, it can be said that after 2013 (especially after the 2016 failed military coup), inflation started to rise and growth rates are relatively downward. These situations cause uncertainty. Uncertainty makes it difficult for economic actors to make decisions about the future and this causes further inflation.

Çağatay Çağlayan