The Political Economic Sources of Policy Non-design,Policy Accumulation,and Decay in Policy Capacity

Drivers of Policy (Non-)Design and Instrument Choice

Policy design is a specific form of policy formulation that involves “[t]he deliberate and conscious attempt to define policy goals and match them with instruments or tools expected to realise those objectives” (Howlett et al., 2015, p. 291; see also Howlett, 2014). It is based on conscious thought and deliberate action (Peters, 2018, p. 5), as policymakers engage in a rational process to assess (de)merits of policy alternatives based on knowledge, technical analyses to match goals and instruments to achieve preferred, expected outcomes (Howlett, 2019; Howlett & Mukherjee, 2014). As such, policy design emerges upon decision-makers’ identification of problems, solutions, and matching goals with instruments to achieve their preferred, expected outcomes.

Indeed, policy design is not only a technical endeavor. Political economic drivers influence deeply policy design both as the process and the output (Peters, 2002; Howlett & Ramesh, 1993). The existing literature points to various drivers such as institutional arrangements (Linder & Peters, 1989) in the form of mechanisms, procedures of interactions within the state and/or between state actors and private actors (e.g., firms, citizens, interest groups), policy styles and/or administrative styles (Guy Peters, 2021; Haelg et al., 2020; Howlett & Tosun, 2019; Krause et al., 2019; May, 1991), policy ideas (e.g., ontological approaches to policy problems, solutions) (Linder & Peters, 1990; McConnell, 2018; Öberg et al., 2015), uncertainties surrounding (un)expected consequences (Nair & Howlett, 2016), and/or political, technical feasibility concerns (Curley et al., 2020; Feiock & Kim, 2021; Feiock & Yi, 2018; Feiock et al., 2008; Meltsner, 1972).

As we know that such drivers influence policy design, the design process takes place in spaces that are widely understood as the constellation of either policy capacity and design intention being political or instrumental, or that of political capacity and technical capacity (Capano, 2018; Howlett & Mukherjee, 2014, 2018; see also Capano & Lippi, 2017; Lodge & Wegrich, 2014). While such various conceptualizations of design spaces are fundamental to our understanding of under what conditions and through which constellations design spaces are structured, the will and mobilization of capacities and whether the incumbent has political or instrumental orientation are still subject to political economic drivers, more importantly coalitional politics (de Mesquita et al., 2003; Haelg et al., 2020; Milhorance, 2022; Pepinsky, 2009).

Exploring the coalitional, and thereby political economic drivers, scholars have documented that incumbents often prioritize political gains and remuneration to appeal to their coalitions and constituencies, as they can hardly ignore distributive and political costs and benefits, which, in turn, determine the likelihood of political survival (Capano & Lippi, 2017; Curley et al., 2020; Feiock et al., 2008). In this regard, following Peters (2002) and Howlett and Ramesh (1993), scholars have underlined that the structures of design spaces reflect the constellation of institutional arrangements, policy ideas, and actors; and they have explored the conditions under which incumbents may have more (or less) political orientation to serve their constituencies for political remuneration. For example, Haelg et al. (2020) have pointed to “design coalitions” with a focus on various types of actors, their positions over time and across policy issues, and stages of the policy process. Relatedly, the political market framework posits that instrument choice (as the product of policy (non-) design) reflects political economic interests of decision-makers (i.e., policy suppliers) and constituencies that demand certain policies whose interactions are mediated by institutional arrangements that determine transaction costs (Feiock & Yi, 2018, pp. 101–102; Feiock et al., 2008, p. 463). When decision-makers prioritize their political gains while serving interests of the constituency, policy (non-)design reflects the constellation of demand for and supply of certain policies and instruments (Curley et al., 2020, p. 578), whose dynamics are regulated by institutional arrangements (e.g., clientelism, corruption, bureaucratic autonomy).

Noting such constellations, we can conceive design spaces as wherein the design process takes place, and the output of that process is various types that vary from patching to non-design. Here, it is useful to note that Howlett and Mukherjee (2014) argue that design varies from patching to non-design. Packaging, which relates to decision-makers’ concerns about legitimacy and instrumentality whereby design aims to address the substance of the policy problem. Conversely, non-design refers to “[c]onsiderations as political gain or blame avoidance calculations outweigh instrumental factors in policy formulation” (Howlett & Mukherjee, 2014, p. 59). In this vein, non-design is driven by “[p]ure electoral opportunism or corruption – where party, leader or individual self-interest replace policy instrumentalism” (Howlett & Mukherjee, 2014, p. 64). More specifically, non-designs can emerge due to corruption, clientelism, as “[p]olicy-makers often privilege certain types of evidence and facts while ignoring others in promoting and disseminating self-interested policy alternatives from building bridges in their ridings to ignoring or promoting kickbacks and other kinds of corrupt behaviour around procurement or governmental tenders and contract” (Howlett, 2020, p. 615; see also Howlett et al., 2020, p. 140).

Here, non-design, which occurs in a setting where political, technical capacities exist but are not mobilized to tackle policy problems, appears more important than design spaces where capacities do not exist and/or the incumbents prefer instrumentality or political gains, which Howlett and Mukherjee (2014, p. 62) call these contexts as poor policy design space and poor political non-design space. This is because the incumbent may(not) prioritize instrumentality against political gains, but the lack of capacity is likely to prevent the incumbent engaging in design given capacity constraints. However, it is more intriguing when non-design occurs in a space wherein the incumbent chooses legitimacy against instrumentality (i.e., political remuneration to appeal constituencies’ preferences) (Capano & Lippi, 2017; Curley et al., 2020), and the design space is capable political non-design space given the existence of policy capacity to tackle policy problems (Howlett & Mukherjee, 2014, p. 62). This space emerges as policy preferences of the incumbent and constituencies overlap over non-design; and, even though the incumbent may have both political and technical capacity (Capano, 2018), the constellation of actor preferences, and institutional arrangements, does not require (or force) the incumbent to mobilize those capacities to address policy problems. In contrast, a capable policy design space (Howlett & Mukherjee, 2014, p. 62) may occur when the incumbent is more instrumentality oriented as opposed to legitimacy and survival motives. This space may emerge through two different constellations: either the incumbent is powerful, autonomous enough to counter constituencies’ diverging policy preferences and capitalize on its existing political, technical capacities to address policy problems. Or we may observe overlapping preferences and enabling institutional arrangements that facilitate the incumbent to mobilize political, technical capacity toward design. While noting such possibilities and following John’s (2018) call for marrying public policy with comparative political economy, a political-economic approach to policy (non-)design can provide an analytical framework to make sense of (non-)design and instrument choice, while we can define the design space wherein policy and instrument choices are made, which the next part elaborates.

Growth Models and Regimes, Policy Design, and Implications for Policy Capacity

We have noted above that policy design and instrument choice are closely related to why some policy alternatives are adopted and some are ignored (Linder & Peters, 1988; Öberg et al., 2015). Such concerns are not immune from coalitional politics (Curley et al., 2020; Haelg et al., 2020; May, 1991) which are mediated through institutional arrangements and actors’ policy preferences (Curley et al., 2020; Feiock & Kim, 2021; Feiock & Yi, 2018; Feiock et al., 2008; Guidi et al., 2020; John, 2018).

Here, we draw on the growth models and regimes literature. This recently emerging strand in comparative political economy scholarship builds on the weaknesses of the VoC literature (Hall & Soskice, 2001) whose focus is on the supply-side with an emphasis on variation in financial system, institutional arrangements, industrial relations, which in turn justify whether and how firms gain (or lose) competitiveness. In contrast, the growth models and regimes literature approaches macroeconomic policy and examines the drivers of economic growth, and institutional arrangements through the demand side (i.e., the drivers of demand such as wages, exports, credit) (Baccaro & Pontusson, 2016; Hassel & Palier, 2021).

Growth regimes, which resemble policy regimes, are constellations of actors, policy ideas, and institutional arrangements (Baccaro & Pontusson, 2016; May & Jochim, 2013): actors refer to “[c]oalitions of social forces . . . that can legitimately claim to represent the ‘national interest’]” (Baccaro & Pontusson, 2016, p. 200; Baccaro & Pontusson, 2022); policy ideas relate to actors’ policy preferences that reflect their ontological approaches to policy problems and solutions. Institutional arrangements regulate the interactions between actors within the growth regime (e.g., bureaucratic autonomy, clientelistic relations between the incumbent and business).

Growth regimes emerge on growth models. The literature on growth models refers to two main different modes of economic growth: credit-led and export-led (Baccaro & Pontusson, 2016; Hassel & Palier, 2021). Credit-led growth models rely on credit-financed consumption and investment as the main bases of economic growth. In export-led models, foreign demand constitutes the basis of economic growth. More specifically in credit-led growth models, economic growth relies on credit allocation: when credit allocation gains pace so does economic growth, which is achieved with lower interest rates and loose bank regulatory standards that enable consumer consumption and allow cheaper investment and production for business, hence stimulated economic activity. The growth regime reflects the constellation of consumers preferring lower interest rates to sustain smooth consumption, and business that relies on lower interest rates for investment and production. The incumbent also prefers lower interest rates because higher economic growth, which lower interest rates stimulate, can secure political survival by serving the preferences of constituencies.

Given our focus on a major developing economy, whose growth model is classified as credit-led (Akçay, 2021), credit-led models in these small open economies are characterized by dependent financialisation. Dependent financialisation refers to shallow domestic capital markets, dependence on capital flows to maintain rather stable rates of economic growth (Bortz & Kaltenbrunner, 2018). Given their dependence on capital flows, these countries are crisis prone: economies perform well during periods of abundant credit; however, the rise in indebtedness increases the likelihood of debt-led stagnation that causes a decline in private consumption, and, therefore, slowdown in economic growth (Stockhammer, 2022; Stockhammer & Kohler, 2022). Therefore, policymakers need to balance lower interest rates and sustained capital inflows to finance domestic consumption and investment.

Within this context, the incumbent’s policy concerns relate to maintaining capital inflows and stable rates of economic growth rate to remain in power, especially in an authoritarian context wherein the leader engages in political economic calculations to retain electoral support and serves its economic constituents such as cronies (de Mesquita et al., 2003; Desai et al., 2009; Pepinsky, 2009). Those calculations come to the fore during a crisis that shakes the political economic bases of the credit-led growth model when capital inflows may stop or turn into outflows. A sudden stop or an outflow translates into downward pressure on the local currency, and, therefore, a higher inflation rate that is accompanied by higher interest rates, slowdown in credit allocation and economic growth. The response to crises is critical to whether the incumbent can remain in power while generating economic growth because crisis management failure can put political survival at risk. And, this means that policy (non-)design and instrument choice need to appeal to constituencies (Curley et al., 2020, p. 540) by addressing policy preferences of consumers and business to prevent defection and loss of electoral support against the risk of replacement.

This is more fundamental, once the design space faces a crisis, the interactions between the existing growth model and the growth regime impose two main policy alternatives for the incumbent: design robust responses or opt for non-design. In this case, the incumbent needs to consider political economic trade-offs. If a robust response (i.e., design) puts economic growth at risk which economic constituency might not prefer, and because of which survival could be threatened, it is legitimate to expect that the incumbent will choose non-design to remain in power to serve the interests of its constituency. This is because within this context, the interplay between the growth model (i.e., macroeconomic context) and the growth regime (i.e., institutional arrangements, ideas, and actors) constitute a capable non-design space wherein the overlap of political economic interests and related instrument preferences release constraints toward non-design, even when the incumbent may have political and technical capacities for design. Thus, political gain and survival motives lead to a capable political non-design space and instrument choices that demonstrate overlap of policy preferences, institutional arrangements that enable non-design, and the lack of mobilization of policy capacity with the aim of serving the demands of the constituency (Curley et al., 2020; Feiock & Kim, 2021; Feiock & Yi, 2018; Feiock et al., 2008; Howlett & Mukherjee, 2014; Mukherjee & Howlett, 2015). And, the outputs of the capable political non-design are haphazard instruments given legitimacy concerns (i.e., retaining electoral and political economic support) while disregarding instrumentality (Capano & Lippi, 2017).

Indeed, when the incumbent resorts to non-design, and such preference is sustained for a considerable period, such prolonged non-design in the face of a crisis generates significant implications for the trajectory of policies: prolonged non-design is likely to generate policy accumulation along with pressure on policy capacity at different levels. To begin with policy accumulation which refers to “[a] continuous addition of new policy elements to existing policy portfolios without the compensatory reduction of already existing policy elements” (Adam et al., 2019, p. 17). Policy accumulation occurs through a rise in policy density (i.e., the number of instruments and targets they impact) and/or policy intensity (i.e., the level of stringency of instruments) (Bauer et al., 2012; Knill et al., 2012). Given that crises are surrounded by the need for urgency to tackle emergencies, perception of threat to the existing equilibrium, and uncertainties about the future (Boin et al., 2009), they provide a tremendous stimulus for policy accumulation (Knill & Steinebach, 2022). This is because the existing policies are less likely to be terminated given urgency and threat caused by the crisis (Bauer et al., 2012), and there could be demand for more instruments to (dis)incentivize policy targets to tackle the crisis (Albright & Crow, 2021).

Finally, along with policy accumulation, non-design has non-trivial implications for policy capacity at various level. Here, we know that policy capacity – “bureaucratic capacity,” “administrative capacity,” or “problem-solving capacity’ ¹ (Brenton et al., 2022; Krause et al., 2019; Lodge & Wegrich, 2014; Mukherjee et al., 2021; Wegrich, 2021; Wu et al., 2015, 2018) is determinant of policy (non-)design and instrument choice. Yet the political economic drivers of policy (non-)design can resonate significantly with policy capacity in the form of improvements or decay at various levels (i.e., individual, organizational, and/or system). Indeed, how policies are designed and which instruments are implemented may also determine policy capacity. This is mainly because of reliance on bureaucracy and its organizational policy capacity for policy design and implementation, as well as system level capacity to retain legitimacy and political support for policies and instruments. As Brenton et al. (2022) argue the level of policy capacity cannot define solely how well policies can be designed. Indeed, the way and toward which policy goals policy capacity is(not) mobilized determines maintenance or loss of policy capacity over time. As such, non-design, which leads us to policy accumulation can also cause erosion in organizational policy capacity within bureaucracy. This can emerge, for example, through bureaucrats’ hesitance about or resistance to implementing non-design, which arises from policy alienation, and/or incumbent’s intervention into bureaucracy for implementation of non-design (i.e., through replacement of officials, changes in legal arrangements), which reflects the denial of mobilization of existing expertise, technical prowess in bureaucracy. At the system level, non-design and policy accumulation can cause confusion about the goals of the incumbent and its intentions about addressing the root causes of policy problem, which may, in turn, lead to the loss of legitimacy and trust, which limit effectiveness.

Revisiting the Context

In the aftermath of the local banking and economic crises in Turkey in the early 2000 seconds fiscal austerity and capital inflows facilitated household and the private sector indebtedness (Orhangazi & Yeldan, 2021), as high interest rates used to deter households and the private sector from indebtedness in the past decades. With the possibility of greater access to credit and the decline in interest rates, household debt and private sector debt have risen immensely. Such rise was also possible thanks to dependent financialisation: shallow local financial markets, the lack of adequate local savings, and dependence of the banking sector for credit allocation, which require persistent capital inflows. Given ample liquidity in global markets both before and after the Global Financial Crisis (GFC), at least until 2013 when the Federal Reserve (Fed) resorted to tighter monetary policy, capital inflows supplied demand for private debt, and thereby higher economic growth rates. (Orhangazi & Yeldan, 2021). In this sense, the post-2000 period in Turkey has been characterized as capital inflow-dependent credit-led growth model: when capital inflows slow down or they exhibit a sudden stop, economic growth suffers in Turkey, as domestic demand declines and inflation rate rises (Boratav & Orhangazi, 2022; Orhangazi & Yeldan, 2021).

Within this setting, dependence on capital inflows comes along with a dilemma for the incumbent: while high interest rates can attract inflows, which can stimulate economic growth, lower rates can deter inflows, which is in turn likely to generate sudden stops or outflows. Besides the macroeconomic dimension of the dilemma, the political economic dimension is equally critical: finding a balance between interest rates that are technically and politically feasible to sustain the support of its economic constituency and maintaining constant flow of capital so that NFCs can continue to have cheap and easy access to credit, and economic growth does not suffer. This, in turn, ensures political survival of the incumbent (Apaydin & Coban, 2022b: figure 3; Boratav & Orhangazi, 2022).

The interactions between these two actors took a clientelistic, symbiotic shape through which the incumbent channeled and mobilized public resources toward its economic constituency through concessions on public land, favoritism in public procurement, targeted privatization, or contracting out public service delivery (Bugra & Savaskan, 2014; Ercan & Oguz, 2006; Gurakar, 2016; Tuğal, 2022; Yagci, 2021). Moreover, policy and instrument choices also overlap over low interest rates and loose bank regulatory standards (Apaydin & Coban, 2022b): NFCs prefer low interest rates and loose bank regulatory standards to have cheap and easy access to bank credit because this ensures enabling household demand for housing and other goods and products through cheaper access to credit, and it facilitates investments and finance for operational costs.

Under the circumstances of the growth model emerging upon the constellation of the preferences of NFCs and AKP toward low interest rates and loose bank regulatory standards, which rely on constant capital inflows, and therefore sustained credit allocation that stimulates economic growth, crisis periods test the resilience of the growth model and the growth regime. This test reflects itself in policy response to crises: the interactions between the growth model and the growth regime generate a capable political non-design space. This is because when the growth regime cannot address the policy problems exposed by the crisis, as instrumentality concerns are ignored or put aside due to political economic concerns and political survival motives, non-design becomes more likely. Such non-design then leads to policy accumulation and decay in policy capacity at various levels.

Growth Regime and Growth Model Responding to the Currency Crisis-Induced Economic Crisis

The capital inflow-dependent credit-led growth model in Turkey served the political-economic interests of the AKP and the NFCs until 2013, the Fed’s “taper tantrum.” With the announcement of the reversal of loose monetary policy in the United States, capital inflows toward emerging economies (EMEs) had slowed down, which included Turkey as well (Orhangazi & Yeldan, 2021). This year was also marked by the Gezi Protests and the December 17 to 25 corruption scandal, which intensified pressure on TL given tightened international financial conditions that limited capital flows (Akçay & Güngen, 2022). However, the government delayed this decision until January 2014 when the interest rate rose from 7.5% to 12% following an emergency meeting of the CBRT. ² Erdogan was unhappy with the interest rate hike and asked for a rapid reversal. ³ The CBRT did not resist and began to cut interest rates, ⁴ however, Erdogan and the then-CBRT governor, Erdem Basci, engaged in a public polemic over the level of interest rates, as the rates did not decline to a “politically satisfactory level.” Erdogan accused the governor of treason and accused him of serving the interests of the infamous “interest rate lobby.” ⁵ As the pressure for interest rate cuts amplified, the CBRT reduced interest rates in 2015 as well, which the NFCs supported, as the cuts helped them borrow cheaper. They thanked the CBRT for contributing to greater production, employment, and therefore prosperity. ⁶

The following year constituted another challenge for AKP. In 2016, the government replaced the CBRT governor with Murat Cetinkaya in 2016, who was a close ally of Erdogan’s son-in-law and the then-Minister of Finance and Treasury, Berat Albayrak (Apaydin & Coban, 2022b). Cetinkaya began his term by cutting interest rates. However, the failed coup in mid-July caused a serious decline in economic activity because of political instability. In response, the government loosened bank regulatory policy to allow households to consume more and NFCs to borrow at cheaper terms (Akçay & Güngen, 2022; Apaydin & Coban, 2022a, 2022b). More importantly, the CBRT had to hike the interest rates in early 2017 to address domestic and external pressure on TL (see Figure 1). Yet, since the rising interest rates resulted in tightened lending standards, the government decided to subsidize credit allocation through the Credit Guarantee Fund (Akçay & Güngen, 2022, p. 307). The Fund’s collateral helped subsidize loans to be distributed at lower interest rates compared to those in the market. As a result, the indebtedness of NFCs rose significantly shortly thanks to the capacity of the Fund, which rose from 8 billion TL between 2010 and 2015 to 186 billion TL recently. And, the major beneficiaries of that steep expansion of lending capacity were the SMEs, a key economic constituency of the AKP within the growth regime, which relied on the credit-led growth model. ⁷

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Figure 1.

Capital inflows, foreign exchange rate, and interest rates.

While the government was successful in addressing NFCs’ borrowing needs through the Fund, the credit boom throughout 2017 paved the way for a currency crisis-induced economic crisis which began in 2018. Interest rate hikes continued in early 2018 as well to stem the rise in the inflation rate. However, following an unexpectedly high rate hike in April 2018, Erdogan stated in May 2018 that “[i]nterest rates must go down, calling them the ‘mother of all evil’” ⁸ ; and taming the inflation rate by cutting interest rates resonated oddly among international investors during his visit to London in May 2018. ⁹ Similar calls continued after the elections in June 2018, which replaced legally the parliamentarian system with the executive presidential system wherein the policymaking processes have centralized legally as well, even if it had been de facto institutionalized since the presidential elections in 2014. Erdogan’s commitment to reducing interest rates while the country was experiencing high levels of inflation rate caused pressure on TL. The peak of such pressure emerged with Erdogan’s clash with President Trump over pastor Brunson who was imprisoned due to alleged involvement in the failed coup in 2016. ¹⁰ Furthermore, the spat between the two leaders continued and Trump threatened “destroying the Turkish economy” in October 2018. ¹¹ The currency crisis intensified, adding to sharp depreciation in TL (see Figure 1). Taming the pressure required the CBRT to hike the interest rates again in September 2018 to the recently highest level of 24%. The deterred relations between the United States and Turkey constituted the critical juncture marking the beginning of the currency crisis which then translated into an economic crisis due to non-design and oscillation between interest rate cuts and hikes given the limited policy space of the AKP (Akçay, 2021; Apaydin & Coban, 2022b). A significant interest rate hike in response to the spat between the two countries triggered concerns about political survival and serving the interests of the economic constituency while ensuring economic growth.

Under these circumstances, the depreciation of the local currency in the face of capital outflows and the rising inflation rate would not be best addressed by cutting interest rates given capital inflow dependence (Orhangazi & Yeldan, 2021). Yet Erdogan justified the removal of the CBRT governor Murat Cetinkaya in March 2019 by noting that the governor was not listening to his calls to cut interest rates, even if Cetinkaya was appointed to the role to cut interest rates. ¹² Cetinkaya’s successor, the then-Deputy CBRT governor, Murat Uysal, began his term by cutting the interest rates to stimulate the credit-led model, as the interest rates went down from 24% to 19.75% in 3 months (see Figure 1). Unsurprisingly, the NFCs endorsed the rate cuts again. ¹³ However, reactivating the loose monetary policy with a steep decline in interest rates translated into renewed pressure on TL, and therefore a rise in the inflation rate. During this period, the loose monetary policy with low interest rates and the growth regime’s preferences over keeping interest rates lower caused political pressure on the CBRT to control the exchange rate. To this end, the CBRT released its foreign currency reserves through informal and undisclosed channels, which was based on a disguised agreement between the Ministry of Treasury and Finance and the CBRT. Professional economists claimed that the CBRT’s release of its reserves reached 128 billion US Dollars, a major share of the reserves which then declined to historically lowest levels, ¹⁴ while the net foreign currency reserves of the CBRT declined to the negative territory, ¹⁵ and have yet to recover. According to them, the main driver of the depletion of foreign currency reserves was to socialize the foreign currency risk of NFCs (e.g., energy, construction, and retail sectors, the main actors within the growth regime (Bugra & Savaskan, 2014; Tuğal, 2022; Yagci, 2021). This was because the dramatic depreciation of TL had a negative impact on NFCs’ balance sheets given their high foreign currency-denominated debt. ¹⁶ Socialization of foreign currency risk meant that NFCs purchased foreign currency reserves that the CBRT released to pay their foreign debt. Consequently, NFCs’ net foreign currency position improved significantly. ¹⁷ Still, as the CBRT tried to control both the exchange rate and the interest rate in a small open economy, ¹⁸ a former central banker mentioned that “[i]t was very difficult to manage inflation expectations . . . Controlling both the exchange rate and the inflation rate was difficult in these conditions.” ¹⁹

Here, addressing the depreciation of TL, and thereby, the inflation rate, was sacrificed for economic growth. And the rising inflation rate could have required the use of the interest rate as the primary instrument to tame inflation expectations. Yet, the CBRT had to cut interest rates during the pandemic crisis which had caused a dramatic decline in economic activity. In this period, the government instrumentalized public banks to allocate subsidized loans to NFCs and households (Gungen, 2020). Moreover, bank regulatory policy was loosened: the grace period for loan loss-provisions was expanded, and delays in loan repayments were introduced among many other deregulatory attempts. ²⁰ Still, loose monetary and bank regulatory policies added to the trend of cuts and hikes with interest rates remained low until late 2020. This was politically and economically beneficial for the growth regime and sustainability of the growth model because the country was among the few countries that had recorded a positive economic growth rate despite the pandemic crisis thanks to loosening monetary policy and bank regulatory policies. ²¹ However, low interest rates and the rising inflation rate generated another round of downward pressure on TL. For example, while the economic program had forecasted the inflation rate to remain at 10.5% by end-2020, it was already 11.89% in October. The CBRT governor Uysal, therefore, noted that the inflation rate would have remained high for foreseeable future, however, the CBRT left the policy rate unchanged in October 2020. ²² Even though there was a disconnect between loose monetary policy and chronic inflation rate Erdogan replaced the CBRT governor Murat Uysal with a former technocrat, parliamentarian, and an AKP veteran Naci Agbal in November 2020. Next day, the then-Minister of Treasury and Finance, Erdogan’s son-in-law, Berat Albayrak resigned. In his resignation letter, he criticized implicitly the pressure against the low interest rates and prioritization of economic growth. ²³ The CBRT hiked the interest rates but the critical juncture for another spiral of rate cuts occurred following Agbal’s “unexpectedly high” rate hike of 2% points in March 2021, lifting the policy rate to 19%. In response to the unexpected hike, the NFCs stated that the decision addressed the conjunctural objectives of the monetary policy but sustained low interest rates would have been preferred. ²⁴ Yet 2 days after the unexpected rate hike, Erdogan sacked Agbal. ²⁵

The latest episode of the rate hikes-and-cuts, with the sustained low levels of interest rates, or the “long and bitter fall” (Şenses, 2022), was marked by the beginning of the tenure of the current CBRT governor, a former AKP parliamentarian, Sahap Kavciouglu in March 2021. The CBRT reduced interest rates rapidly from 19% to 14% in September 2021. The ideational basis of this move, as the CBRT governor Kavcioglu mentioned during the press conference on the inflation report in October, was that the CBRT began to monitor the level of current account to tame the inflation rate. The governor’s mechanism of addressing depreciation in TL and the rising inflation rate was to reduce interest rates, which could stimulate production and thereby exports, which in turn reduces the current account deficit, and the end result is a stable foreign exchange rate that tames the inflation rate. ²⁶ Defying calls for interest rate hikes, Erdogan said that “[h]e would lift the interest rate burden and urged businesses to take advantage of aggressive monetary easing since September to invest, hire, and export goods.” ²⁷ The then-Deputy Minister and the current Minister of Treasury and Finance, Nureddin Nebati, a former businessman and a former AKP parliamentarian, mentioned that they were determined to maintain low interest rates. He even further noted that “[S]ince 2013, every time we attempted to implement our low interest rate policy, we were met with strong opposition. This time, we are determined to carry this out.” ²⁸

As a result of the latest episode of avoiding design for the sake of the sustainability of the growth model and growth regime, the collapse of TL gained incredible pace: The USD-TL rate went up from around 9 to 18 by mid-December, which then declined to around 12 following the announcement of several instruments (see Figure 2), which caused policy accumulation that we detail below. Reflecting on this outcome, a senior central banker noted that “we have cautioned the key decision-makers [including the Governor] that that is fine but it has serious consequences as the country is dependent on foreign savings to sustain economic growth, for which negative real interest rates would not help. Indeed, NFCs influenced the key decision-makers deeply, and they engaged in this experiment last year . . . we are now experiencing the consequences of this experiment in the form of a very high inflation rate.” ²⁹

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Figure 2.

Foreign exchange rate, interest rates, and consumer price index.

The result of the latest episode of interest rate cut caused a historic collapse of TL, which led to a skyrocketing inflation rate impoverishing the masses (Şenses, 2022). This last episode cut marked the culmination of a prolonged economic crisis that was initially triggered by the currency crisis in 2018, even if the challenge to the capital inflow-dependent credit-led growth model had begun to observe its limits since 2013 (Akçay & Güngen, 2022). Most important, non-design in the form of oscillations between (de-)activating the interest rates, the main instrument of monetary policy, which leads to and fails to address the collapse of the TL and rising inflation rate, as prices are changing on a weekly basis, if not on a daily basis by mid-April 2022. ³⁰ Indeed, non-design in the face of the currency crisis-induced economic crisis since 2018 did not remain within the realm of ineffective crisis management. Non-design in this form caused policy accumulation in the form of an increase in policy density and intensity (i.e., the rise in the number of mixed instruments, and the level of stringency) with significant decay in organizational and systemic policy capacity.

Policy Accumulation and Decay in Organizational and Systemic Policy Capacity

With the latest episode of the oscillations between (de-)activating the interest rates since September 2021 within the capable non-design space, which has dismantled the main instrument of monetary policy that steers price stability and the value of TL, dollarization has reached its historically highest levels at more than 60% of deposits (Şenses, 2022). To address such high levels of dollarization and the overshooting inflation rate, which emerged as a result of prolonged non-design, the government responded to demands for policy action with rising policy density and intensity since late December 2021. Since then, the frequency and stringency of instruments of have risen. ³¹

The government announced a time deposit instrument that guarantees the difference between the interest rate charged on a time deposit in case the foreign exchange rate rises beyond the charged interest rate in on December 21, 2021, when the value of TL against the US Dollar had reached its historically lowest level above 18 (Şenses, 2022). ³² This financial instrument covered initially households, but NFCs became eligible later on end-January 2022. More importantly, NFCs were allowed to deduct the amount they transform their foreign currency holdings from annual pre-tax income in 2021. ³³ The income tax incentive was overhauled in early April 2022, but the corporate time deposit accounts are deemed eligible for foreign exchange rate guarantees. ³⁴ The same instrument was enabled for foreign nationals and Turkish nationals living abroad as well with attractive financial incentives in mid-March 2022. ³⁵

Furthermore, export-oriented NFCs, which had favored and lobbied the government for lower levels interest rates (Apaydin & Coban, 2022b; Yagci, 2021), and their preferences provided the bases of loose monetary and bank regulatory policies, were initially required to deposit 25% of exports earning with the CBRT in mid-January 2022, which was then raised to 40% with the aim of addressing the depleted foreign currency reserves of the CBRT in mid-April 2022. ³⁶ A senior central banker noted that “this measure is only to replace drained capital inflows while the economic system [the capital-inflow dependent credit-led growth model and the growth regime] needs foreign savings. The government is trying to pay external debt by relying on export earnings.” ³⁷ At the same time, such a stricter instrument has been complemented with subsidized loans to these firms financed directly by the CBRT to smooth the financing needs of NFCs at subsidized levels so that they can produce, export, and earn hard currency needs of the growth model. ³⁸

Meanwhile, the CBRT and the BRSA introduced various measures to stem demand for foreign currency among NFCs and households. For example, a senior central banker mentioned that “the banking sector is no longer providing foreign currency-denominated loans as was the practice in the past. We are regulating the system for allocation of credit in TL.” ³⁹ Reflecting this, the BRSA warned banks to watch out NFCs that could transfer TL-denominated credit overseas, which could be used to create downward pressure on TL. ⁴⁰ Moreover, the CBRT initially deferred charges on foreign currency deposits in mid-January 2022, ⁴¹ but the CBRT implemented this instrument with tightening reserve requirements for foreign currency deposit accounts. ⁴²

Additionally, the government has implemented fiscal and regulatory means to address the overshooting of the inflation rate. To this aim, the government slashed tax rates on staple food in mid-February 2022. ⁴³ Second, on-site supervision and regulatory checks have become stricter. The Minister of Finance and Treasury argued that they have formed “[A]nti-inflation teams [which conduct on-site supervision in the market by visiting supermarkets and NFCs] . . . [W]ith these teams, we never allow exorbitant price manipulation and stocking.” ⁴⁴ Third, the government activated the Competition Authority to regulate the pricing practices of major supermarkets. The Competition Authority sanctioned major supermarket chains in end-October 2021. ⁴⁵ And it is reported that the authority is conducting another investigation. ⁴⁶ The executive believes that their pricing practice is among the major causes of the rising inflation rate, as Erdogan mentioned in late 2021 that “they are spoiling the market.” ⁴⁷

While non-design led to policy accumulation with frequent changes in regulatory, monetary, and fiscal instruments that are mixed in a short period of time in a haphazard manner, the inflation rate has continued its rise along with depreciation in TL. Attempts to “manage the unmanaged” had significant implications for organizational and systemic policy capacity that had greatly reduced the effectiveness of monetary policy by end-2021. Policy accumulation emerged in this sense due to prolonged non-design that does not address the core of the policy problem (i.e., rising inflation rate) while deactivating the main policy instrument given the lack of the will of and/or exogenous forces for mobilization of policy capacity at various levels within the capable non-design space had important implications for systemic policy capacity, as well as organizational policy capacity of the CBRT and the BRSA, the two main organizations that are central in policy design and implementation in monetary policy and the regulation of the banking sector, and thereby sustainability of the growth model and regime.

To begin with organizational policy capacity, while the CBRT’s and BRSA’s organizational policy capacity had been acknowledged previously given operational, analytical, and political capacities that were operationalized across different policy areas and contexts (Coban, 2020, 2022), policy alienation among public officials through tactical powerlessness (i.e., bureaucrats being excluded from the policy process and becoming mere implementation agents of the executive) and societal meaninglessness (i.e., bureaucrats’ perception of their service not adding social value) (Tummers et al., 2009; van Engen et al., 2019, p. 1091) are observable. For example, a senior regulator mentions that

this role has become a liability for me . . . [and] it has lost its meaning for me and these ranks have become too dull, since you are asked to do what you do not believe in . . . there is no more bargain between us and the government because policy advisors within the President’s Office have dictated the decline in interest rates, and what we are doing today are only addressing the results of the core problem [low interest rates]. ⁴⁸

Resonating a similar perception of meaninglessness and powerlessness stemming from moral suasion at the CBRT, a former senior central banker mentioned that “[e]xamine the RePec list of top ten central bankers in Turkey. These colleagues left the CBRT. Before my departure, we were told to our face that we were not as nationalist as the government defined; and I used to question myself as a public servant if I were not serving my country.” ⁴⁹ Moreover, former central bankers also point to decay in the analytical capacity. A stark example emerged in a recent communiqué of the Monetary Policy Committee wherein the members referred to the war in Ukraine and the possible impact of moderation of global price hikes on domestic inflation rate without a rigorous analysis of the impact of loose monetary policy on skyrocketing inflation rate. ⁵⁰

Additionally, demand for organizational analytical capacity could determine the level and extent of whether policy (non-)design could emerge (Pattyn & Brans, 2015). In this sense, the impact of analytical capacity, which bureaucrats could aim to disseminate through formal analyses and/or deliberation, non-design also appears to emerge from the lack of demand for analytical capacity. In the words of a former senior central banker “you might engage in policy analysis, but the politician does not demand it at all . . . Then, what is your role here?” ⁵¹ Resonating the lack of demand for policy analysis and advice, a senior bank regulator “I am telling the parliamentarians and colleagues here [the bank regulator] that we are making a mistake [with loose monetary policy that has caused high interest rates] but I am unsure about my individual impact.” ⁵² Furthermore, another senior regulator notes that “there is indeed hot debate among us within the organisation about inconsistent, haphazard instrument choices. Our instrument choices do not address the core of the problem: inflation rate and structural issues. Even though there is ‘voice’ [within the organisation], we only discuss problems among ourselves and leave it there.” ⁵³

Furthermore, non-design along with policy accumulation caused decay in systemic policy capacity. This occurs through deinstitutionalisation of existing legal arrangements, procedures, and bureaucratic rituals due mainly to the centralization of the policy process, particularly in the post-2018 period (Apaydin & Coban, 2022a, 2022b). For example, a senior official in the Presidency of Strategy and Budget mentions that

[w]e observe that most of the policies are made and implemented on oral bases without any resort to written procedures. This eliminates accountability because you cannot even start the conversation on the procedures that reflect certain ideas, measures, and instruments. I mean, if you cannot observe the whole design and decision-making process, how can you keep the decision-maker accountable? ⁵⁴

Reflecting this, a former central banker mentioned regarding the depletion of CBRT’s foreign reserves worth of USD128 billion that “a central banker could not intervene in the market without a written order [as this means mobilising public resources on a discretionary basis]. Yet currently, interventions are made on an oral basis, and you cannot trace the orders given the lack of written official documents.” ⁵⁵ As the existing institutional arrangements have been subject to serious challenges, the decay in systemic policy capacity also relates to the legitimacy of monetary policy, which is essential for the effectiveness of monetary policy, in particular influencing market actors’ behavior through policy and instrument calibration. Reflecting such a decline in legitimacy of monetary policy, a nationwide survey, which was conducted in late 2021, reports that trust in the CBRT declined from 15% in 2020 to 10.5% in 2021 (Aydin et al., 2022, p. 34). Surely, it was not too high in the previous year, and the decline can hardly be ignored. Furthermore, the Minister of Treasury and Finance said that “the policy rate has become meaningless” during a meeting with professional economists (Gurses, 2022), in other words, the main policy instrument and therefore the policy itself has been dismantled, even though policy density and intensity have risen particularly since end-2021.