Osman Şenkul
Istanbul, June 22 (HNA) – The first ‘state-guaranteed standard coins’ in history were put into circulation in Lydia, one of the most advanced city-states of Western Anatolia. The new coins quickly spread across a wide area, encompassing both sides of the Aegean Sea and the interior of Anatolia, and became an integral part of all commercial life. The coins used in the old system were abandoned. The coinage also brought great freedom of trade.
While this freedom of trade helped the merchant class to accumulate wealth rapidly, it led to the economic collapse of the aristocracy, the peasantry, and the artisans who ran the workshops of the time. Products gained significant value in the hands of merchants after leaving the producers and were transferred to consumers in exchange for large sums of money.
These ‘newly rich’ merchants greatly disturbed the aristocracy. Seeking to match the merchants’ financial power, the aristocracy first resorted to ‘exploiting the peasants even more.’ They increased taxes and land rents. The peasants became increasingly impoverished. The aristocrats experienced a ‘temporary’ period of prosperity; however, their weapons soon backfired. Because the peasants, who had become even poorer than before, were now venting their anger at the aristocrats.
These developments also paved the way for usury based on property speculation. Money that had previously changed hands at low interest rates became increasingly expensive. By the end of the 7th century B.C., interest rates may have reached 50% for the first time in history. With interest rates soaring to such heights, many peasants who had taken on debt to engage in trade lost their land, while aristocrats began to lose their political power.
Hundreds of peasants who were unable to pay their debts were enslaved as artisans, while aristocrats began to sell their ‘political power’ in the face of economic turmoil. Aristocrats either sold their class-based political power directly to merchants or married their daughters to wealthy merchants to gain a wealthy relative. The Lydian King Gyges (716–678 BCE) and the Phrygian King Midas (738–696 BCE), who were the subject of legends, were ‘merchant princes’ with great financial power at the time and gained tyranny through their financial power.
While these events were unfolding in Anatolia, where the sun rises, similar developments were taking place on the other side of the Aegean Sea, in Attica. The aristocracy and peasantry were rapidly declining, and merchants were seizing all power, including political power. In Attica, an economic crisis that devastated all classes except merchants began in the early 6th century BC. Peasants could keep only one-fifth of what they produced, while the lowest class received less than one-sixth.
Interest rates in Attica had also skyrocketed to 50%. Peasants who had fallen into the hands of moneylenders sold their children and then sold themselves into slavery or begged. Many poor Atticans preferred to go to foreign countries and become slaves there rather than work as slaves on land that had once been their own. The peasantry had reached the brink of rebellion.
This economic crisis, which brought the peasants and artisans in the workshops to the brink of explosion, unwittingly brought the first class compromise in history to the fore. Merchants called on aristocrats to join forces against the peasant and artisan uprisings that were breaking out here and there, rather than fighting among themselves. Aristocrats, seeing that they would be affected by the peasants’ rebellion at least as much as the merchant class, accepted that it was more reasonable to ally with them than to fight them.
After intense negotiations, members of both classes decided to proclaim Solon (640–559 BCE), a ‘complete class hybrid,’ as dictator. Solon, who was of aristocratic origin, was also involved in trade. Thus, Solon, who embodied the characteristics of both classes that had allied, was declared dictator in 593 BC to prevent a possible uprising. Solon may have been the first ‘official’ dictator in history. As the dictator of both the aristocrats and the merchants, Solon’s task was to ‘prevent an uprising before it happened,’ and the decisions he made were aimed at eliminating the causes of the uprising.
To this end, Solon first reduced the burden on the peasants by cancelling taxes and other accumulated debts. He prohibited slavery in exchange for debt. However, in order not to touch the income sources of either class, he neither reduced the aristocracy’s share of the produce taken from the peasants, which was five-sixths, nor did he impose any restrictions on the 50% interest rates.
All these developments, which took place approximately 27 centuries ago on the very lands we inhabit today and went down in history, were repeated numerous times over the centuries that followed; at times leading to great destruction, and at other times serving as the cradle of developments that paved the way for the evolution of civilisation.
During the same period, similar stories were taking place throughout Anatolia, Egypt, Kabul, and Sparta; merchants, in particular, would take handkerchiefs of different colours with them when they went shopping, and for each unit sold, they would tie a knot in the handkerchief of the colour corresponding to the item sold. The handkerchief for wine was red, and the unit of sale was an amphora with a volume of 19.44 litres. The unit of sale for wheat, represented by the yellow handkerchief, was the ‘talanton,’ which weighed 36.39 kilograms. For merchants who sold 15-20 types of goods at the time, these handkerchiefs served as the sole record for stock control, accounting, orders, and other transactions related to buying and selling. These colourful cloths, which were used to control the stock and prices of thousands of goods and to track buy-sell orders and positions in international markets, can be considered the ancestors of today’s computer systems. They were also the first disciplines of the ‘shopping system.’
However, more importantly, as was the case during those periods, whenever interest rates rose to 50% or higher over the past 27 centuries, broad sections of society, primarily artisans, farmers and today’s workers, who earn their living through labour, were crushed under the weight of rent avalanches, those who rely on the rent created by interest rates have also prospered.
What is happening in Turkey today reflects a typical extension of this long journey: the vast majority of society is being crushed under the heavy burden of inflation, which, despite interest rates holding steady at 50%, is officially (according to the Turkish Statistical Institute – TSI) approaching 40% and exceeding 70% in real terms.
Despite all these developments, the Central Bank of the Republic of Turkey (CBRT) Monetary Policy Committee (MPC) has kept the policy interest rate at 46% and the overnight borrowing rate at 49%, focusing on curbing demand by raising interest rates rather than supporting production to reduce inflation.
In short, the CBRT/MPC, which 27 years ago turned the entire social system upside down and opened the door to ‘official dictatorship’ and thus postponed the ‘low or zero interest rate’ expectations needed to support investments that would boost production and increase supply for at least another 1.5 months (until 24 July). Coincidentally, the Swiss National Bank (SNB) also cut its interest rates by 25 basis points (0.25%) on the same day (19 June), bringing them down to 0%.
In its interest rate decision statement, the CBRT stated that ‘data for the second quarter indicate a slowdown in domestic demand,’ thus revealing, as always, that its latest decision is focused on ‘curbing demand’ rather than increasing production (supply) in the fight against inflation.
Alright; we can say that ‘price is determined by supply and demand’; however, we cannot argue that it is a healthy situation or approach to suppress demand to the extent that hungry people say, ‘Oh no, inflation must not rise; therefore, I won’t eat anything today either.’ is not a healthy situation or approach. Instead, we must tirelessly reiterate the need to increase supply so that people can say, ‘How wonderful, there is plenty; I will eat my fill.’
Furthermore, while supporting production that will increase supply, it is essential to remember that imports must also be kept under control. However, for many years in Turkey, the opposite has been the case, which is why Turkey’s foreign trade continues to run a growing deficit rather than a surplus. As a result, Turkey’s trade deficits, which arise from imports exceeding exports, are typically financed through external borrowing or capital inflows. This is also why the CBRT maintains high interest rates to curb currency appreciation.
However, just as increasing supply is necessary instead of suppressing demand, the way to close the foreign trade deficit is by increasing production. As we know, the current account deficit indicates that a country’s imports of goods and services exceed its exports. This deficit creates a need for foreign exchange. Turkey typically addresses this foreign exchange need by relying on capital flows, such as external borrowing, direct investments, and portfolio investments. To this end, both the public and private sectors borrow from abroad to indirectly finance the trade deficit.
However, the most crucial factor in this regard is the inflow of ‘direct foreign investment.’ These investments take the form of foreign capital establishing factories, purchasing real estate or forming partnerships in Turkey. These capital inflows generate foreign exchange earnings and help finance the current account deficit. Additionally, some may mention ‘portfolio investments’; however, these types of inflows, defined as foreign investments in financial assets such as Turkish stocks and government bonds, are short-term and speculative. As a result, they can exit quickly during periods of political and economic instability. Therefore, relying on portfolio investments may not be advisable.
Suppose sufficient investment-oriented foreign currency inflows do not come from external sources. In that case, it will be necessary to borrow to increase the Central Bank of the Republic of Turkey’s (CBRT) foreign exchange reserves, as emphasised by Treasury and Finance Minister Mehmet Şimşek in recent times, for which he has occasionally travelled abroad for talks. However, this method is limited and poses risks to the sustainability of reserves.
Additionally, in recent years, the Central Bank’s reserves have been temporarily supported through swap agreements with certain countries, including China, Qatar, and the United Arab Emirates, to meet foreign exchange needs.
Turkey’s current account deficits are primarily financed through foreign capital inflows, including external borrowing, direct investments, portfolio investments, and Central Bank reserves. However, these financing channels can sometimes be fragile in terms of sustainability. Therefore, Turkey must prioritise policies that increase exports and reduce import dependency in the long term.
The most crucial reason why Turkey’s exports cannot cover its imports, i.e. why the trade deficit has become a chronic problem, is its production structure, which is heavily dependent on imports. As everyone knows, Turkey’s industrial production is largely based on imported intermediate goods and raw materials. In other words, even to export, imports must first be made; the most well-known of these are the automotive, white goods, and textile industries, which are the most important sectors for exports. In other words, even the most important export products are based on elements obtained through imports, many of which are high-tech products.
Turkey is also an energy-dependent country. A significant portion of the world’s energy resources, including oil, natural gas, and coal, are imported. Energy imports account for a significant share of total imports and are a primary contributor to the current account deficit.
Turkey’s exports primarily consist of low- or medium-tech products, including textiles, food, and automotive assembly. In contrast, imports are dominated by high-tech products, including electronics, pharmaceuticals, and machinery, resulting in a persistent trade deficit. As a result, despite its strong presence in markets such as the European Union and the Middle East, Turkey’s brand value and competitive strength in high-tech sectors remain limited, lagging behind countries like China, South Korea, and Germany in export competitiveness.
Another essential factor underlying all of this is that Turkey’s innovation and R&D expenditures are pretty low, which makes it challenging to develop high-value-added products. Insufficient progress in technological transformation and digitalisation limits the quality of exports.
Additionally, one of the most significant factors contributing to Turkey’s large trade deficit is the very low share of high-tech products in its exports. According to data from the Turkish Statistical Institute (TÜİK) and the World Bank, high-tech products account for approximately 3–4% of Turkey’s total exports of goods. In contrast, this ratio stands at 25–30% in South Korea, over 25% in China, and around 15% in Germany.
For this reason, priority in Turkey should be given to increasing the share of high-tech products in exports. According to experts, this ratio can be increased to 10–15 per cent in the medium term (5–10 years) and to 20 per cent and above in the long term (10–20 years) in Turkey.
However, to achieve these ratios, Turkey must quickly increase its R&D expenditures from the current 1.3% to 3.0%, which requires improving the quality of education and the workforce, supporting technology companies, and simultaneously developing the domestic production ecosystem.
To make progress in this area, it is clear that more investment is needed in science, technology, engineering, and mathematics education. In this context, subjects such as coding, artificial intelligence, and data science should be taught at an early age. Practical collaborations should be established between vocational high schools, technical universities, and industry. Furthermore, brain drain should be reduced, and efforts should be made to encourage reverse brain drain.