Barriers preventing Turkey from creating high value added activities boost Turkish inflation. Efforts to make imported goods more expensive, instead of trying to reduce producer costs, have caused 15-year efforts to come to naught.
85% of Turkish imports consists of raw materials, intermediate and investment goods, which means we have to import in order to produce. Despite this very fact, Turkey watched the producers of intermediate goods be destroyed one by one whereas they should have been provided with government support. But, when we realized the big mistake we made, it was too little too late. As a result of fair and harsh criticism by a few remaining producers, Ankara made another big mistake: customs tariffs and barriers became higher than ever just to protect these firms. However, the present capacity of these businesses was not enough to accommodate customer needs. Therefore, production of final goods became more expensive than ever. But, why did the government take such an action in the first place?
It’s because it was easier to impose higher tariffs than to reduce production costs. But in fact, Turkey needed to gain strength to tackle foreign competitors. This utterly wrong policy has caused cost of living and inflation to increase further, let alone providing more strength to companies.
Panic began to set in as current account deficit kept growing larger. Government has imposed import taxes even on goods that are not made in Turkey. As if that weren’t enough, indirect taxes were increased too. By singing the praises of export performance, the Administration tried to hide the fact that imports was hitting much bigger record highs. However, both current account deficit and private sector foreign debt continued to rise higher along with the inflation. Naturally, exchange rates too started to climb up sharply.
“That’s what happens when you fall into the popularity trap…”
Thinking that they would finally breathe a sigh of relief thanks to protectionist measures, manufacturing companies began having difficulties because of the deteriorating economic conditions whereas they have been trying to ensure that the Foreign Trade Regime is kept intact while a lot of companies were facing bankruptcy due to high trade barriers.
One of the most important reasons why Producer Prices remain above 45% today is that Administration was careless enough to do the bidding of pressure groups just for the sake of improving government popularity. In the process, leaders turned a deaf ear to complaints, praising Turkey’s glorious growth. “We are producing”, they said whereas in fact Turkish economy was growing only through construction and contracting industry. Almost all international firms investing in Turkey were offended while making more and more expensive for everyday citizen to purchase high quality goods. In the meantime, the Administration kept ignoring that some companies, which have been producing only though domestic input, were pricing their products based on foreign currency movements. As producer and consumer inflation kept rising, each and every bad decision made regarding the Foreign Trade Regime has slowly lead to further deterioration in economy.
So, the latest inflation data should surprise no one. Those, who were harshly criticizing me when I said this would happen one day, now cannot dare to say a word, mainly for two reasons: First, they feel ashamed. Second, they no longer hold their positions.