Following inability to decrease unemployment and inflation rating which had been growing due to increasing currency deficit, misery has increased by 2.3 times in only 6.5 years in Turkey and the country has been returning to pre-AKP economic crisis years while also being one of the most fragile economies in the world.
Unemployment and high inflation have always been one of the primary problems of Turkish economy. According to Okun’s Misery Index, Turkey has returned to the level where AKP had assumed power in 2002, with 35.3 percentage. This gives Turkey the top position among “Fragile Five” which have high level of risk in misery index. According to indicators, as Turkey has been unable to complete the structural reforms successfully, the increasing trend in poverty index will continue.
Misery Index had first been formalized by American financial expert Arthur Okun. It consists of sum of annual inflation and unemployment numbers and allows taking a picture of the economy. According to this calculation, the index numbers would reveal that employment opportunities would be getting narrower as prices continuously increased due to high inflation, which increased overall misery.
Over time, the index has been re-formulised by Nobel-laureate economist Robert Barro who integrated debt share and growth rates into the calculation.
Barro’s Misery Index = (Inflation Rate + Unemployment Rate + Interest Rate) – Growth Rate
Lately, American economist Steve Hanke has been applying the index to countries other than the US. Barro and Hanke’s index states that misery is caused by combination of high inflation rate, disproportionate cost of borrowing and unemployment. Economic growth on the other hand decreases the misery levels. Barro takes into consideration the GDP while Hanke considers GDP/capita in calculating the index. Other than this, all other parts are the same; if growth is strong, inflation and interest rates are low, employment is abundant, then welfare is achieved.
How is the situation in Turkey?
Even though one may use Okun’s, Barro’s or Hanke’s calculation, the results do not differ much. Turkey appears to be playing for the top position in Misery Index.
Constant increase since 2012
Okun’s misery index shows that Turkey has been increasing its misery level since 2012 non-stop; and has marked 35.3 value according to latest numbers in 2018. It has folded by 2.3 times in 6.5 years and reached a record high under governing AKP’s rule, coming close to 40 value point of 2002 when the 2001 economic crisis was being felt at its worst.
The main cause of steep increase in the index is inflation. Turkish Lira has lost approximately 40% value in a year and its plummeting has caused a big pressure on prices. Due to the increase in import costs, in September the annual inflation has climbed up to 24.52%, record high in 15 years.
On the other hand, unemployment has not been able to get back to pre-2001 crisis records in 17 years. After 1991 economic crisis, it had been recorded as 8.2% and in 1994 economic crisis it climbed up to 8.6%. During 1998-1999 economic crisis unemployment rate had been 7.7% and in 2001 economic crisis it climbed up to 8.4%. In 2002 when AKP had assumed government, unemployment had risen to 11.5% only later in the year to drop down to 10.3%. Unemployment has only seen lower than 10% in 2014.
High Interest Rates
When growth rates and interest rates are included in the calculations for misery index, Turkey’s score gets higher. According to Barro Misery Index, Turkey currently has 47.92 points, making Turkey the top country among “Fragile Five”.
FED and Fragile Five
US Federal Reserve Bank FED in 2013 had announced that monetary expansion would stop and Brazil, India, Indonesia, South Africa and Turkey had lost value in their currencies which caused them to be described as ‘Fragile Five’ by US investment bank Morgan Stanley in May 2013. Common qualities of these countries is high currency deficit, high inflation, low growth rate, dependence on foreign direct investments and internal political problems.
The Fragile Five’s macroeconomic performances, when analysed based on Misery Index calculations show that Turkey’s growth rate compared to other four countries look better, while in 2018 Turkey is the worst-scoring one among the groupw. This also shows that it is a virtual growth in Turkey that does not create employment. According to the statistics, Turkey is the only country unable to decrease unemployment despite economic growth. Another significant indicator is despite governing AKP’s rhetoric on “low interest rates” Turkey being the country with highest interest rate.
The indexes refer to long term bonds as interest rates. For Turkey this means the 10 year term state bonds. However since Turkey has started issuing 10 year bonds in 2010, the 5 year bonds have been taken into calculation for 2008 and 2009.
Impact of Crisis
The numbers show that during the 2008 global financial crisis, Turkey had the second highest unemployment rate with 10.1% among the Fragile Five, while offering the highest interest rate with 17.5% and with lowest growth rate, 0.8%. The governing AKP had claimed that the crisis had only “slightly touched” Turkey and not impacted, while in reality it shows that actually it did impact. In 2009 Turkey’s economy shrank by 4.7%.
On the other hand, in 2008 long term interest rates for Brazil was 12.6%, for India 5.3%, for Indonesia 11.9%, for South Africa 7.3%. In terms of unemployment South Africa led the group with 22.5%, and Indonesia led the group in terms of inflation rates with 11.1%. Yet, Indonesia also had the highest growth rate with 7.4%.
10-year economic performance chart of the Fragile Five shows that except for Turkey all other countries have tamed their inflation rates. Despite Turkey’s increasing interest rate, inflation rate is not falling. In the past year, in India and Indonesia inflation rates have been falling while in Turkey, Brazil and South Africa there has been increase. The same pattern also shows in Misery Index. In the past decade in Turkey, Brazil and South Africa misery has been increasing while in Indonesia and India it has been declining. Indonesia and India’s separation from other fragile countries can be explained through Turkey, Brazil and Sout Africa’s dependance on foreign investments, weak national currencies and domestic political problems.
Turkey is the Most Fragile Country
Turkey tops the list of Fragile Five countries in Misery Index in 2018 with 47.92 points, followed by South Africa with 42.02, Brazil with 27.01, India with 13.6 and Indonesia with 13.31. In 2017’s Misery Index, South Afriac had topped the list with 39.5 while Turkey followed with 27.3. In the past year misery in Turkey has increased by 75%. According to the available data, Turkey has been unable to curtail inflation and despite economic growth unemployment has not seen numbers below 10% and it is still a country with high inflation rates. Turkey’s budget deficit to its GDP is 5% while other countries’ is less than 3% which makes Turkey the most fragile country.
Turkey ranks among the top 3 countries in Misery Index that is prepared based on Okun’s approach. In 2017 Venezuella, Egypt, Argentina, South Africa, Greece and Ukraine had been above Turkey that ranked on 7th place with 22.2 points. Following rapid increase of inflation rates, Turkey has climbed 4 spots in 2018 and received 35.3 index points, while Venezuella has 48.87 and Argentina has 44.
Hyperinflation in Venezuella differentiates this country; the decline in oil prices has caused stagnation in economic growth and unemployment has reached record points in this country.
Argentina and South Africa are the closest countries to Turkey in Misery Index; what unites this group is all three being referred to as “crisis countries” due to failing governmental policies.
Competition of Crisis Countries
In June 2018, Argentina has signed a stand-by agreement with IMF for $50 Billion, followed by another $7.1 Billion agreement in bonds in September. In South Africa the President Cyril Ramaphosa who had assumed the position promising economic growth had failed despite high expectations of reform in the country and economy started recessing. In Turkey, be it called a crisis or not, the worries concerning autonomy of institutions has ignited a foreign exchange shock, which in turn impacted the reel economy due to existing fragilities.
All 3 countries are open to sudden ending of capital flow due to high deficit and dependence on foreign direct investments. Moody’s had projected that these 3 countries are among the high risk group due to high deficit rates. While there has been experienced sudden decline of Turkish Lira, the most frequently compared currencies have been Argentinian Peso and South African Rand.
While Peso has lost 48.2% value, Turkish Lira followed closely with 40% loss initially which in the last 12 months has been recorded as 33%. South African Rand on the other hand has lost 13.2% in the last 12 months while this year’s decline has been marked by 37%.
When these countries’ other economic indicators are compared, similar ratings look significant. Turkey has the longest weekly hours of labour in terms of production. Argentina has highest inflation rates while South Africa tops the unemployment rating. Youth unemployment in South Africa is above 50%, as Argentina and Turkey rank close to each other. Turkey offers the highest interest rates among the three countries, while also being the country with highest deficit, and its GDP/capita and inflation are on the second place after Argentina. These numbers vary greatly from OECD median.
Increase Trend Continues in the Index
In summary, according to the Misery Index Turkey has not used the advantages of low interest rates to boost quality growth and employment, and failed to create sustainable mechanisms to combat inflation. The structural reforms that can resolve the growing problems seem far from actualisation. If one is to ask “what are these structural reforms” then the answer would revolve around sustainable growth that will increase employment, decreasing deficit and dependence on foreign direct investments, while decreasing the inflation and debt costs.
The discussion around Turkish Central Bank’s autonomy is weakening Turkey’s combat against high inflation rates. The delayed political steps are bringing inflation rates that were last seen in 2002. Because of this reason, despite high interest rates, inflation is not decreasing. Moreover, the loss of value in Turkish Lira has not yet been reflected in high oil prices, nor in power or natural gas prices for the consumers. While the consumer price increase being 46.2% annually proves this, it also points to further increase in inflation. When the Central Bank’s expectations for end of the year inflation at 23.5% even if other ratings remain exactly the same, the Misery Index point for Turkey increases to 34.3 according to Okun, and 46.90 according to Hanke, remaining at high points; keeping the list of Fragile Five the same.
On the other hand, despite interest rate higher than 17%, due to high inflation the reel interest rate is in the negative. According to this, the decline in interest rates does not seem possible in the short run.
According to expectations of the government and international institutions, for the next 3 years growth rates, and this will also cause an increase in unemployment. All these also point to an increase in Turkey’s score on Misery Index further in coming years.