Turkey, like Europe and the U.S., is engaged in a serious debate over economic policy nowadays. Obviously, the source of these debates is the current global financial crisis we are experiencing. Here, the word "global" is of critical importance, because no matter where the crisis emerges first, it goes beyond the borders of that country and turns into a crisis for everyone. Therefore, the discussion about a country's economic policies is no longer a local or national debate, but rather a global one. Additionally, the question of when the process, called economic globalization began, is another matter of debate among economists.
When British colonialism precipitated the Industrial Revolution, the trade rate among countries was not very different from that of today. However, when globalization is mentioned today, we consider it a phenomenon of the recent past. If we are to describe globalization in the real sense, we need to talk about the period of economic and political convergence and mutual interaction, which started with the fall of the Berlin Wall in 1989. When he was asked what he thought about the French Revolution, Zhou Enlai, one of the founders and premiers of current China, said that it was too early to talk about the matter. In other words, this period is still continuing and we do not know when it will end.
Although all of the arguments, theses and theories that we use in these debates were embedded in history in 1989, we are not quite aware of that fact. Now, we are also discussing how the global crisis will end. Even though significant social studies are being conducted on the matter, there are a good many people who tell us the same old stories, to which we can respond with "so what?"
The emergence of the quantity theory of money goes back to the 18th century. In the last quarter of the 20th century, American economist Milton Friedman updated the thesis that the supply of money determines the overall balance of the economy. While saying that "inflation is always and everywhere a monetary phenomenon," Friedman actually argued that central banks would ensure financial and economic stability with the quantity of money and monetary instruments (1976). Well, is this rule applicable in all parts of the world now? To what extent is it scientific to argue that a social phenomenon and a related rule are applicable at all places and times, even if they were valid at one place and one time in the past? Leaving aside this general methodology, what is it other than idiocy to resort to the quantity theory, which emerged from the realities of the 18th century, to explain the economy of developing and developed countries in this phase of globalization?
Since Canadian economist Robert Alexander Mundell, "the globalization trilogy" points to the fact that monetary authority loses its ability to control interest rates and exchange rates at the same time and it determines only one of them, leaving the other to the market in an environment where capital movements are liberated. In such a situation, the transfer of the exchange rate to the monetary sphere means closing the way of using monetary policy against income and production fluctuations that are caused by economic conjuncture. Furthermore, in some special circumstances, the achievement of the desired stability in exchange rates might bring about the fact that monetary policy escalates the negative impacts of internal or external shocks. In other words, while representative money enables governments to issue money in a way that will minimize the real economy's production loss that might be caused by economic conjuncture, anchor currency makes this opportunity unusable. Today, however, the monetary policy path, which is called inflation targeting and is based on Friedman's thesis that inflation is merely a monetary phenomenon, targets both currency and interest rates in developing and developed countries. However, this is not possible in theory in a country that practices a floating exchange rate regime and open economy. This is the impasse facing the policy called inflation targeting. As Friedman suggests, while central banks try to prevent the quantity of money and the inflation through interest rates, they also target exchange rate. Here, a high interest rate that is above the world average causes a large quantity of hot money to flow into the country and makes local currency artificially valuable. This is a trap and a state of desperation particularly for developing countries, which import more goods unnecessarily by using the overvalued local currency and become more indebted. Well, is the inflation really a demand-side and monetary phenomenon in Turkey today? For instance, broad money supply M3 increased by 14 percent in 2014 compared to 2013. According to Friedman's theory, in an economy which grows by 4 percent, such an increase is an element that is expected to make the inflation go sky-high. But the reality is far different. In the same period, Turkey's consumer confidence index, which showed the increase in demand, was 75 late in 2013, but it dropped to 67 at the end of 2014. Secondly, the share of household final consumption expenditure in Gross Domestic Product (GDP) was 71.2 in 2013 and this figure fell to 70.5 in 2014, revealing that there is no increase in demand in 2014, quite the contrary, it saw a decline.
Then, Friedman's inflation theory does not apply to Turkey. According to a research conducted by the Istanbul Chamber of Industry (İSO), the interest-based financing costs of Turkey's 1,000 largest industrial companies increased by 122 percent in a year. On the other hand, production-based costs are very high and they bring down profit rates. Currently, the average profitability of Turkey's manufacturing industry ranges between 5 percent and 10 percent, even though interest rates in Turkey are between 12 and 15 percent for businesses.
What else is it other than idiocy to defend economic policies dating back to the 18th century for countries like Turkey? As a columnist of a newspaper claims, there is no need for brains to go through a "short-circuit" to argue all this, because there is no brain available.
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