In a country like Turkey, which has to choose between low growth and high current account deficit; what does it mean if interest rates are lower than inflation rate?

The other day I chatted with an economist from Georgia. He had his PhD in the US and has been working there for a long time now. He worked in Georgia for a couple of years too. He complained that many economists in his country stuck to simplistic paradigms on many issues. Life was quite simple for them, he complained: leave it all to the market, cut tax rates and reduce the share of the state in the economy etc.

It is quite a common phenomenon that people who lived through decades of central governance later switch to the exact opposite pole. Turkey as well has gone through this process. Remember Turkey before the 1980s: prices of many goods and services from refrigerators to tractors were set by the “price setting committee.” With this mechanism, coupled with the hike in oil prices, queues came into our lives. There was a queue for everything: gas, light bulb, oil and so on. Whenever you saw a queue, you would hop in not even asking what it was for. The program introduced in 1980 on the other hand, was at the exact opposite strand: everyone was free to do anything; the market corrected it all. The words supervision and monitoring were no longer heard. Soon after, the banker catastrophe burst out, which proved that, uncontrolled, market system could not work. There is need for mechanisms to access goods and services. Market mechanism is one and there of course are other alternatives. But no matter which one, the mechanism has to work well. For instance, every consumer willing to buy a refrigerator must be able to do so at the market price. If the inventory is not sufficient to meet the demand, the market price must to increase. But at the end of the day, every consumer must be able to access the good at the current market price. Certain goods and services are vital, such as medication. If a consumer cannot access medication at the market price, the social security system will step up to ensure the accessibility.

If this is the case, we can say that the mechanism working. But it is not in Turkey, as Güven Sak wrote on Tuesday in reference to the incident between cancer patient Dilek Özçelik and the Minister of Environment and Urbanization. Currently in Turkey certain drugs cannot be found at the market, even if you are or the social security institution is willing to pay the market price. Not a problem if we were talking about a purple pen or a Petrus wine, for instance. We could just buy a substitute instead. But we are talking about a medication for malign melanoma. The mechanism designed to access the medication is dysfunctional. What a pity for Turkey who has proudly terminated the IMF debt recently.

There is also a personal dimension to the issue. There is a macroeconomics literature developed in the 1970s and survived until the first half of the 1980s: the disequilibrium macroeconomics. The literature sought to identify what types of equilibria emerged when the price mechanism does not work. Reading those studies while waiting in the light bulb queue was quite an amusing experiment for me. Currently the literature has faded out off books except a few chapters in graduate textbooks. In my graduate class, I skip the chapter on disequilibrium macroeconomics. I hope such dysfunctional mechanisms will be abandoned so that I don’t have to study those chapters again. In a country like Turkey, which has a radically low savings rate and which hence has to choose between low growth and high current account deficit; what does it mean if interest rates are lower than inflation rate? That the market mechanism is functioning? Or what?

This commentary was published in Radikal daily on 16.05.2013