As expected, the U.S. Federal Reserve (Fed) increased interest rates 25 basis points. Fed Chair Janet Yellen said the interest rate hike would be gradual and the expansionary monetary policy would continue, which suggests a certain amount of timidity on the part of the Fed. This is because Yellen and her team knew that a radical interest rate hike would be unnecessary and even harmful for both the U.S. and global economy. The important thing here is what developing countries will do in this process. I think there are two paths lying ahead for developing countries: First, they will continue to implement neoliberal and outdated economic policies, or they will grow more fragile and import the crisis of developing countries. Second, they will adopt new and unique monetary and fiscal policies; this is actually what they should do.
The problem facing developing countries today is not about what kind of a position the Fed will take up and what instruments it will use. Rather, it is about the unquestionable implementation of monetary and fiscal policies that fall short of meeting the requirements of the present day. Current monetary and fiscal policies make developing countries vulnerable against financial shocks and urge them to follow the Fed's interest rates. If you do not regard fiscal policy as a constituent of overall economic policy in a world where monetary policy is made inefficient and sidelined, it means you have already succumbed to the consequences of the Fed's interest rate moves. Developing countries should switch to a new growth model that uses added-value and growth-oriented fiscal policies as a direct instrument of economic policy. For instance, the fiscal policy that Turkey still pursues and is based on non-interest surpluses and outlay taxes is inefficient in the present conditions. Likewise, the monetary policies that the central banks of developing countries implement and which are based on inflation targeting, no longer take effect either.
Today, commodity prices are rapidly tumbling around the world and this fall is most visible in oil prices. However, this situation cannot be completely attributed to the fact that the dollar is gaining value while developing countries have already priced the Fed's interest rate hike out. The main reason for this is that the gap between the world's potential growth and real growth (output gap) is increasingly growing and a deflationist process is intensifying. In this case, the output gap is growing around the world, including Turkey, and in parallel with this, the possibility of high inflation is declining.
Turkey is a country that can make the most of this process, where basic commodities, particularly energy prices, are rapidly falling. While energy, food and intermediate goods prices are dropping on a global scale and the whole world is tussling with a deflation, it would be wrong for countries like Turkey to cripple markets and banking systems and suffocate the small- and medium-sized enterprises (SMEs) system with a cash shortage by holding on to the clichés of the 1980s and targeting inflation for the sake of financial stability.
Now, it is obvious that inflation, unlike what Milton Friedman claims in his currently falsified theory, is no longer a monetary problem for countries like Turkey and cannot be reduced with superficial monetary measures. This means Turkey and other developing countries have a great opportunity. So, Turkey will understand that President Recep Tayyip Erdoğan's objection to high interest rates does not concern interest rates alone. All along the line, Erdoğan has argued for a competitive, anti-monopolistic and open economy for Turkey and other developing countries.
At this point, there are two questions to discuss: First, what kind of an economic policy will lead to an improvement in favor of the poor in income distribution? Second, how can social areas be used and developed against the unfair distribution of income?
Erdoğan has adopted a clear vision on both issues and, particularly since 2008, he has criticized the neoliberal economic policies that led to poverty and transferred funds outside. So, Erdoğan has taken Turkey to a crossroads. Turkey's avoidance of the 20th standby agreement with the International Monetary Fund (IMF) and the Southeastern Anatolia Project (GAP) Action Plan are two major topics of this historic crossroads. However, opposition parties, particularly the Republican People's Party (CHP), have criticized the government and Erdoğan for this perspective and accused them of "breaking away from the world." Indeed, the reality is the complete opposite of the claims. First of all, debates on interest rates indicate that Turkey's top state echelons express Turkey's desire to switch to a production-oriented new growth model and its will to politicize and institutionalize this desire. In this sense, demand for low interest rates is an automatic response to claims about a closed economy that is based on unearned income. Obviously, if the average profitability of the manufacturing industry is above industrial financing costs in a country, this is not a sustainable situation. This canon is the starting point of interest rate discussions initiated by Erdoğan. Turkey will achieve an industry and knowledge society-based competitive economy as long as it cuts loose from neoliberal economic policies that are based on interest and unearned income. Turkey's main objective is to have a completely outward-oriented and competitive economy where market entries are ultimately free. Such an economy also includes anti-monopolistic regulations and a fiscal system of the same kind.
The Fed's interest rate hike, in a timid manner, indicates that the crisis is not yet over. And, it is obvious that developing countries should abandon the path that they have so far pursued and develop a new growth and development model. Today, the Erdoğan economy is the most concrete practice of this model.
