Fed Taper Injects U.S. Economics into Turkish Politics

The Turkish Central Bank raised interest rates drastically on January 28, re-setting the one-week bank lending rate at 10 percent, up from 4.5 percent, and hiking its rate on overnight lending to banks from 7.75 percent to 12 percent.  

The move has ramifications for America’s influence in the world.  In Turkish politics, which has an Islamist-secular fault line, and in global finance, in which emerging markets generally react to first world domestic policies, the economic damper of a rate hike fuels rhetoric painting us as callous or malevolent.

In Turkey, Islamist Prime Minister Erdogan has vociferously opposed rate hikes, railing against an “interest rate lobby” bent on exploiting the Turkish economy.  He also blames “foreign mischief makers” for protests against his government in Istanbul’s Gezi Park  last June.  And he invokes the memory of the secularist military’s intervention in labeling a corruption case against his political allies a “judicial coup.”  The details of political rivalries and divisions are complex, but Erdogan’s Islamist politics carries a strong flavor of populist resentment of an authoritarian secularism imposed by a Westernized elite.  Until Gezi Park, the major hallmark of his tenure in office was his dismantling of the military’s “deep state,” which had staged coups about once a generation.

In this context, January’s rate hike reflects a political victory for the secularists.  Erdogan will likely rally his base by painting the constricting effects on Turkey’s economy as the work of that established elite and its foreign, largely Western, connections.

A problem for American policy is that the fall of the Turkish Lira, which prompted the rate hike, stems directly from the Federal Reserve’s curtailment of its purchases of U.S. Treasury securities, which raises U.S. interests rates and makes other currencies less attractive.  Investors had been migrating into emerging markets such as Turkey, driven by near-zero rates in the U.S. resulting from the Fed’s Treasury-purchase program to seek higher returns in riskier economies.  With the Fed’s “taper,” that inflow is reversing precipitously.  Turkey is not the only country suffering from this reversal.  A number of others, including Brazil, India, and South Africa, are raising rates and otherwise trying to cope with drops in their currencies’ value.

For politicians in these countries to blame the Fed for callousness, or worse, is inevitable.  Some, such as Argentina, are clearly excusing their own deficiencies.  But many claims have credibility, which is bolstered by a complaint from India’s central bank governor and former IMF chief economist Raghuram Rajan, that the rich countries are tending selfishly to their domestic concerns at the expense of poorer nations.

For the Fed, the taper addresses the concern that monetary stimulus, which has been going on for nearly five years, is unsustainable.  With signs that the U.S. economy is stabilizing, the timing was right to start winding it down.  Fed leaders resolved to continue the wind-down on January 29, on the heels of the Turkish rate hike.

Fairly or not, America risks convincing the developing world that we, with our wealth and our freedom, seek only to keep our wealth.  The American domestic economic policy of tapering injects us into the politics of emerging- market countries.  Populists, anti-Americans, and anti-Liberals in those countries will use the effects of the taper to advance their own causes.  They will take reinforcement not only from their common complaints, but also from the critiques of figures such as India’s Rajan.

We must not paint Liberalism and America in this way.  A Fed taper is necessary at some point and shows the responsibility of a free society in scaling back its emergency government.  But we need to take into account how our domestic policies affect other countries.  We have a national interest in promoting, not tarnishing, freedom and democracy.  These attributes, not our material interests, are America’s proper hallmark in the world. 

U.S. strategy should be to build a broader backdrop of American support for freedom and its conditions.  In the future, when we pursue other policies such as the taper, we should place it within a policy context substantiating our commitment to development that supports freedom for others.  Setting this context will take many declarations and actions, concerted over time.  But such actions can be imagined and initiated.  In any case, if we fail to set a new context, we will continue to build another backdrop, in the impression that a free society simply licenses its people to exploit others.