Inflation

 Once before I visited a country experiencing high inflation (Zimbabwe, '99) and discovered a whole series of economic lessons that are hard to understand outside of the high-inflation context. These are not the same as the 7 or 10% inflation that we see in countries with "hard" currencies; these inflation environments have much higher rates of inflation, are much more corrosive to the economy, and are much harder to control. The latest official statistics from Turkiye are showing 60% annual inflation--the real rate may be higher--and the central bank raised bank interest rates by 500bp (to 35%!) while we were in-country.

There are many effects, large and small, when prices rise this rapidly. For example, prices rise so fast that restaurants can't print menus--the menus have blank prices which are written over periodically.

Conventional wisdom suggests that bank rates have to exceed the inflation rate in order to bring inflation down, and at these rates one can see why--if you deposit money in the bank you'll get 35% (sounds good!) but if prices are rising at 60% you still have a (large) incentive to consume. Savers are left with only two options: become a spender, which increases aggregate consumption and pushes prices even higher, or convert the money into euros or dollars, which tanks the exchange rate and increases prices on imports (again inflationary).

The dollar-lira exchange rate was about 28.5 while we were in Turkiye, down from about 5.5 in 2019. The Topkapi Palace entry fee, which was apparently 30 TRY a few years ago, is now 950 lira per person. When I reached the front of the line, and asked a number of questions, I was able to get a price of 120 TRY for the two boys, which still resulted in an entry fee for five of 3090 lira ($108)!! When I sighed, and swallowed, and handed over a credit card, the woman in the ticket office frowned and said "Sorry, only cash here." So we didn't go. (For comparison, three days later, in Madrid, we have all gone to the Prado and the Reina Sofia for a total cost of 54 euros, paid in moments with a credit card.) 

Meanwhile, we found public toilets where the entry fee was 5 lira (as opposed to lots of places in western Europe where they cost 1 euro). Why? Well, the toilets aren't tied to an international market, or trying to stay ahead of a falling exchange rate, or pricing in further declines expected in the currency. They are, at most, tied to the salary of the cleaning person, which is probably set periodically and thus doesn't inflate very often.

In both Zimbabwe '99 and Turkiye '23, most tourist-focused operators just give up and price things in a hard currency. We took a couple of tours from Fethiye and the prices were always quoted in British Pounds and then converted at the time of payment. But, in both places, the long-term damage to the economy is pretty extreme. Savers are wiped out. Lenders get very cautious. Talented people watch their savings disappear and just give up and leave. Unskilled workers are driven deeper into poverty.

As always, there is a big political dimension to this--Turkiye had elections in May, and, like many autocrats, President Erdogan has always loosened monetary policy in the run-up to elections, including handing out large salary increases to public-sector workers. In addition, the government intentionally kept interest rates low. Why is a bit of a mystery, but the overall effect has been disastrous.

Hopefully Turkiye doesn't go the way of Zimbabwe after my visit--after 1999, when Zim inflation was "just" 60%, a cycle of hyperinflation set in, and by 2007 the inflation rate was millions of percent (the wikipedia page uses scientific notation to describe it). By 2009 the government had effectively abandoned the Zim-dollar and had adopted US dollars, along with a series of rather insane legal changes like outlawing price increases. Time will tell what happens in Turkiye, but the next few years will be painful either way.