Turkey will reduce inflation via competition – Erdoğan adviser

Turkey must slow down the rate of inflation by increasing competition between small and medium-sized enterprises, rather than through higher interest rates, according to Cemil Ertem, a senior economic adviser to President Recep Tayyip Erdoğan.

The premise that higher interest rates reduce inflation is false because it is based on the assumption that the economy works in a perfect, competitive environment, Ertem wrote in the Daily Sabah newspaper on Wednesday.

Inflation in Turkey has become production-based because of the output gap in the economy and an increase in the profits of monopolies, he said.

“High monopolistic production costs, including interest rates, are the main cause of inflation,” Ertem argued. “In other words, as Erdoğan says, high interest rates are the cause of inflation or inflation is the direct function of (monopolistic) high production costs, including interest rates.

“Therefore, no mater how tight monetary policy becomes, inflation cannot be reduced, rather it increases instead. This is because the economy does not have perfect competition or full employment. The relationship between the money supply and the general level of prices is severed. In other words, both quantity theory and Friedman monetarism are invalid,” Ertem said.

Turkey therefore needs to take steps to ensure perfect competition between small and medium-sized enterprises, introduce anti-monopoly regulations quickly and ensure sectoral competition. Then, growth and anti-inflation policies would not contradict each other, he said.