A man carries goods on his back in Eminonu commercial area in Istanbul, on May 2, 2023.Francisco Seco/The Associated Press
Katharine Lake Berz is a freelance journalist who writes about how national and international issues have an impact on people’s lives.
Political candidates in Canada and the United States are threatening the independence of their central banks, and voters should be worried.
This month, I visited Turkey for the first time in 10 years, and everywhere I saw the tragedy of what happens when central bank independence is lost.
Istanbul now is a shadow of the vibrant city I remember visiting years ago. Hotels and restaurants are empty. Hundreds of construction projects sit abandoned. High food prices are having a devastating effect on the poor.
Over the dinner hour one evening, Ibrahim Torum’s kebab restaurant had just one customer. With soaring input costs, Mr. Torum has had to increase the price of a kebab from 100 Turkish lira to 250 lira and borrow heavily to keep afloat.
“Turkish people have no money,” he said. “I don’t know how much longer we can operate.”
This is a consequence of President Tayyip Erdogan’s politicization of monetary policy. For years, Mr. Erdogan has demanded that Turkey’s central bank reduce interest rates when standard economic theory suggests that raising them would control inflation. Pressing his unorthodox policies, the President has gone through six different bank governors since 2019.
In the meantime, domestic inflation surged to more than 85 per cent in 2022 and the Turkish lira crashed to historic lows. Five years ago, you would have needed to part with five liras for one U.S. dollar. Today, you need 34.
Last year, the central bank gave in to mainstream advice and raised interest rates 36.5 percentage points over eight months to hit 50 per cent last March. But inflation is still running rampant (the annual rate eased to 52 per cent in August), and the lira continues to slide.
There are important reasons for central banks to remain independent, according to economist Paul Krugman. For one, monetary management sometimes requires unpopular policies to preserve currency stability. For another, interest-rate manipulation can be an easy tool for politicians to abuse.
International Monetary Fund research also shows that a bank’s independent credibility is important to its success. The consistent track records of the U.S. and Canadian central banks over decades have fostered expectations that their efforts to keep inflation in check will be effective. Federal Reserve chair Jerome Powell recognized the importance of this trust in a speech last month, saying that “anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation.”
The number of Turkish companies applying for bankruptcy in the first seven months of 2024 has already surpassed the total for all of last year.
High costs of foreign inputs are causing considerable distress in the important construction and textile sectors. Tourism is suffering, too, as many Europeans and even Turks are finding it cheaper to travel to Greece, according to reports. In my empty hotel, hallway lights and air conditioning are kept off to save expensive imported energy, and fans work only on a timer.
Sema Barakali, 44, a hairdresser, says that she could barely make ends meet before inflation skyrocketed. Now it is impossible. Prices for food and consumer products have risen sharply, but her salary has remained the same. With interest rates now also high, she is not able to make her interest payments, and her debt is compounding.
“I try not to think about it,” she said. “I am just grateful to be alive.”
But despite Turkey’s example, central bank independence is at risk in the United States and Canada.
In the United States, the Republican presidential candidate, Donald Trump, is well-known for claiming that he has “a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
In Canada, the leading candidate to become the next prime minister, Pierre Poilievre, has echoed Mr. Trump’s refrain. He called the central bank “financially illiterate” and has repeatedly said that he wants to fire Tiff Macklem, the Bank of Canada Governor, because he has not taken enough action to reduce interest rates.
Mr. Poilievre is not the only politician to comment on the Bank of Canada, of course. Finance Minister Chrystia Freeland, for example, has said her recent budget had the effect of “creating the conditions for interest rates to come down.” But this amounts only to communication of fiscal strategy. And while various premiers have publicly urged against rate increases, none has gone as far as attempting to strong-arm the Bank of Canada like Mr. Poilievre.
I hope that voters understand that what has happened in Turkey can happen to us. This is not another vague issue that politicians can wave around without much effect. This is a specific policy with devastating consequences we can predict.