Central Bank Independence and the Central Bank of the Republic of Turkey

TODAĐE’s Review of Public Administration, Volume 4 No 1 March 2010, p.67-92.

Central Bank Independence and the Central Bank of the Republic of Turkey

Berkay Ayhan* - Yılmaz Üstüner**

Abstract: The issue of central bank independence is a crucial aspect of the neoliberal administrative reform process. It aims to achieve the isolation of monetary policy from politicians, thus the democratic processes. Advocates of this view anticipate that inflation will decline when central banks conduct monetary policy accompanied by governance practices, such as transparency and accountability, independent from the interventions of self-oriented politicians. This article maintains that arguments for central bank independence, which is attempted to be presented as a rationalization-based technical improvement, should be settled within an historical and ideological context. In this framework, the article will attempt to analyze the evolution of the Central Bank of the Republic of Turkey along with its various policies implemented in different periods and the winners and losers of its inflation-focused policies following the independence reform.

Key Words: Central Bank Independence, neoliberal reform.

INTRODUCTION

In the 1970s, capitalist relations of production entered an important crisis period, thus leading to the search for restructuring the system at national and transnational level. One of the significant problems in search of restructuring the international monetary system was the re-arrangement of currency relations in market economies. This inevitably brought the role of the central banks onto the agenda. In that period, capitalist economies faced stagflation - stagnant growth coupled with rising inflation - and they began the search for a new system to regulate value relations among national currencies, after the abandonment of the gold standard as a reference point. In this context, the fight against inflation has become the economic policy priority of countries (Harvey, 2005). Many suggestions about how to fight back against inflation were discussed in this period.

* Research Assistant, METU, Department of Political Science and Public Administration, [email protected]

** Associate Professor, METU, Department of Political Science and Public Administration, [email protected]

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Among them were liberal proposals that central banks should be abolished and private companies should be allowed to issue currency (Hayek, 1990); the increase in money supply should be limited to a determined rate (Friedman, 1962); monetary rules should be binding at constitutional level (Buchanan, 1987). The idea of central bank independence, one of the proposals, began to be argued in this very period.1 Central bank independence, in its broadest sense, can be defined

as the prevention of the elected politicians’ intervention in central bank operations. In general, legal regulations drawn up for this purpose contain provisions that prohibit central banks from receiving instructions from the government while conducting monetary policy. These legal regulations also forbid the financing of the Treasury by the central bank; terms of office of administrative levels have been extended and conditions of dismissal have been made more difficult. These measures aim to curb politicians’ desires to intervene in the economy. Apart from these measures, after it was argued that monetary policy could not achieve certain targets, such as a decline in unemployment, other than for short terms, it began to be asserted that central banks should focus on price stability. Therefore, it was affirmed that central banks should merely concentrate on price stability and they have to govern towards this purpose, independent from politicians, who are deemed to intervene in the management of the economy for their short-term interests. Moreover, with the adoption of the inflation targeting regime, central banks began to determine and conduct monetary policy in line with the course of inflation, endeavoring to achieve the announced targets. In the meantime, new practices called governance2, such as transparency

1 It is also possible to find pre-1970s texts that argued for keeping central banks away from politicians’ interventions. For example, David Ricardo maintained in his book, Plan for the Establishment of a National Bank(1824), that the power of creating money should be purified from the interventions of politicians. Although such texts are undoubtedly of historical importance, his study will examine the arguments developed with the 1970s, during which the independence of central banks was explicitly supported and was conceptualized, as used today.

2 With various meanings, governance is a concept, which has increasingly been used in many academic disciplines, such as public administration, political science and sociology from the 1990s onwards. The concept of governance, which, in one sense, bears similarities with the New Public Management approach, and ,which was developed by the World Bank under the name of good governance, accentuates on efficiency, decentralization and transparency. Moreover, it argues for the involvement of the civil society in the administration along with the central government and involves the prominence of democratic accountability (Rhodes, 1996: 656; Kersbergen - Waarden, 2004: 145). The governance approach, which explicitly aims for legitimacy by its democratic discourse, can in fact be interpreted as a part of efforts towards “the marketization of the State” in the context of liberal discourse.


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and accountability in the conduct of monetary policy were brought onto the agenda. Central bank independence that has increasingly met with approval throughout the world has become a fundamental norm in worldwide central banking with the reforms effected in the 1990s as can be seen in Figure 1.

Figure 1. Central Banks Between the Years 1870 and 2003, Central Bank Independence and InflationTargeting

Source: Marcussen, 2007: 136. States: Devletler; MB:Central Banks; BMB: Independent Central Banks; EH: Inflation Targeting.

The mainstream approach to central bank independence, which plays a critical role in the restructuring of capitalism, incorporates a rational economic ethos that absolutizes the issue. The most distinctive feature of studies on central bank dependence is that the phenomenon is isolated from the historical and social context and is discussed on a technical level that requires a high level of mathematical and quantitative economic knowledge. Indeed, discussions that are conducted in the literature of monetary policy constitute the theoretical basis of the study on the independence of central banks. Apart from these, indices created to render independence measurable and efforts towards country comparisons are noteworthy as well. Many definitions for central bank independence have been developed; the phenomenon has been rendered measurable by the help of various indices and the relationship between independence and inflation and growth has been investigated via country comparisons.

These reforms, which are neutrally presented, suggest the regulation of the administrative device in line with market principles (Güzelsarı, 2004: 113).


Such an approach to central bank independence can be explained by the distinction made between Robert W. Cox’s terms, problem-solving theory and critical theory. The first takes the world as it finds it, with the prevailing social and power relations and, approaches problems from a narrow framework and solves them. Despite all value-free claims, problem-solving theories are in fact conservative; because, they accept prevailing relations as granted and aim to solve the problems that arise during functioning. Critical theory, on the contrary, does not accept prevailing institutions and power relations as data; it aims to explore their historical evolutions. Besides, it goes beyond the disciplines defined as narrow and, sets forth a point of view over the whole of relations (Cox, 1996: 88-89). According to Cox, “theories are always for someone and for some purpose” (1996: 87). He underlines that despite value-free claims, it is more important to examine it as an ideology, and to lay bare its conceived perspective .When looked at from this standpoint, in the 1970s, during which inflation became an important problem in capitalist production relations, economists’ studies on monetary policy eventually produced and defended central bank independence as a solution. Central bank independence literature, which is conducted at a level that requires technical specialization and, which is asserted to be objective and impartial on the surface, finds a meaning in the context of neoliberal thought, i.e. when considered as a part of an understanding that glorifies the operation of the free market mechanism.

This study, unlike the current problem-solving theories on central bank independence, offers a critical approach. This critical outlook largely overlaps with Antonio Gramsci’s social analysis. Gramsci, with his unique contributions to the fields of politics, ideology and culture, avoided reductionist Marxist interpretations. He even highlighted that popular judgments sometimes had material power and, he drew attention to the complex relation between the base and superstructure by his concept of historical bloc (Gramsci, 2005: 377). Gramsci explained the bourgeoisie’s power, as constituted by the alliances beyond narrow economic interests with the concept of hegemony, in which consent and coercion is blended. His work was followed by academicians like Cox and Gill in global political economy literature. Although they face significant criticisms (Ayers, 2008), the neo-Gramscians present notable critical approaches in their writings on the restructuring of global capitalism. In the same context, this study asserts that the issue of central bank independence finds a meaning, when looked at in the context of the restructuring of state-society relations, and the administrative device itself, within the neoliberal era via class struggles. It is asserted that


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even though the arguments for central bank independence, which are technically and apolitically presented by the mainstream economics discipline, seem to exclude politicians from the formulation of monetary policy formally, they do not isolate politics; on the contrary, this is an institutional “solution”, which is the product of a conservative political attitude. The study will first focus on central bank independence literature. Then, the political economy of central bank independence will be examined in conjunction with a brief history of the Central Bank of the Republic of Turkey and a comprehensive evaluation of independence reform.

The Central Bank Independence Literature

The literature on central bank independence involves two main discreet approaches. These are the political business cycles analysis proposed by Public Choice School and the time inconsistency literature developed in the context of New Classical Macroeconomics.

Public Choice School is a theory based on methodological individualism, political catallaxy and homo-economicus. Its main subject area is the relationship between politics and economics. According to the Public Choice approach, the individual, who maximizes his or her self-interest, constitutes the main analysis unit. Thus, the State is nothing but an institution constructed to serve the goals of individuals collectively. Within this institution, politicians pursue their self-interests via political tradeoffs, like what exactly they do in the market (Aktan - Dileyici, 2007: 10-18). The paradoxical aspect of this approach, which is frequently voiced to legitimize some elements of the transformation of the State in the neoliberal era, is that despite all these negative emphases attributed to politics, it cannot explain the motives for introducing reforms, except by technocrats or state people, who are somehow liberated from the pursuit of self-interest (Grindle, 1991: 58-60). Besides, the analyses proposed by the Public Choice School based on economic theory in order to prevent the intervention of politics eventually turn into search for an autonomous State, isolated from the influence of rent-seeking groups (Yalman, 2007: 406).

The studies on political business cycles conducted by the Public Choice School specifically focus on the cycles in macroeconomics via elections and politician behavior. One assumption is the possibility of a trade-off between inflation and unemployment represented by the Phillips curve. Another underlying assumption that voters are “short-sighted” and they only consider the condition of the economy preceding the elections, asserts that politicians manipulate macroeconomics in the election process (Telatar, 2004: 385-389). Nordhaus (1975) maintains that all politicians are acting as


“opportunists”, stripped of their ideological preferences. Prior to the elections, they artificially expand economic activities via monetary and fiscal policies, thus leading to lower unemployment. On the other hand, Hibbs (1977) asserts that politicians have “partisan” ideological preferences. In other words, while left-wing parties (the Democrats in the United States) typically attach far greater importance to full employment than to inflation, right-wing parties (the Republicans in the United States) generally assign higher priority to inflation. Thus, after the election, either inflation or recessionarise in line with the preference of the winning party. In fact, all these studies draw attention to the question “are democratic institutions bad for the economy?” and the probable costs of elections to the economy (Alesina, 1989: 85) and thus, clearly show their ideological attitude. Indeed, these theories and approaches, where inflationary policies pursued by left-wing parties are deemed a problem and a single party state that does not necessitate elections is considered an ideal situation (Akçay, 2009: 139), offer central bank independence as a solution that will prevent such political business cycles. The second approach that argues for central bank independence

was developed by New Classical Macroeconomics, which is sometimes called the Rational Expectations School. This school, contrary to the Keynesian paradigm’s tendency that deems state intervention in the economy necessary, asserts that the capitalist economy operates by self-regulating markets and, conducts its analysis in line with these assumptions. The economic agent with rational expectation is chosen as the analysis unit, who has no altruism and does not make systematic mistakes in his or her expectations for the course of economy and thus makes excellent predictions on the consequences of public policies. Also considering the assumptions that the markets tend to be stable and that natural rate of unemployment is inherited in the economy, New Classical Macroeconomics, despite its ongoing value-free claims due to its use of excessive mathematics, display a conservative attitude that state intervention in the economy is useless. (Backhouse, 2005: 383; Lapavitsas, 2005: 34). This theory, which was developed in line with the policymakers’ choice to assign top priority to inflation, instead of unemployment, asserts that the economy involves a natural rate of unemployment; the surprise inflation generated by politicians to reduce the said rate cannot impose systematic effects on unemployment and it will have no use at all, other than causing high inflation in the long-term (Watson, 2007: 69).3

3 New Classical Macroeconomics criticized the theory of political business cycles with the objection that the economy cannot be manipulated systematically. It is obvious


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As an outcome of the problem of time-inconsistency, which was developed by Kydland - Prescott (1977) and Barro - Gordon (1983) in the context of the New Classical Macroeconomics approach, central banks attempt to reduce unemployment in the short-run, thus deviating from their pre-determined inflation target. The consequence of politicians’ efforts to deceive economic agents with rational expectations will be a sub-optimal high inflation rate (Kibmer - Wagner, 1998: 6-7). The reason for facing the problem of time-inconsistency is not the central bank itself, but politicians that force the central bank to adopt expansionary policies (Mishkin, 1998: 3). This approach, like the theory of Political Business Cycles, in fact, aims to stop politicians, who endeavor to reduce unemployment at the expense of inflation. For this purpose, two different solutions called “conservative central banker” (Rogoff, 1985) and the “contract approach” (Walsh, 1995) have been proposed. Rogoff asserts that the type of central banker, who attaches higher priority to reducing inflation than unemployment, should be appointed to an independent central bank. This analysis sets forth that success can be achieved in fighting back inflation by ensuring the credibility of an independent central bank, albeit at the cost of relative unresponsiveness and inflexibility in unemployment cycles (Kibmer - Wagner, 1998: 10-11). On the other hand, Walsh proposes a contract between the independent central bank and the government to be enforced by legislation punishing/rewarding the central bank governor if he or she fails/succeeds to achieve the determined inflation target. In other words, the central bank governor’s performance in achieving the inflation target set by the government is associated with his or her salary or the risk of losing his or her job (Walsh, 1995: 151). This approach is criticized for having a logical error, since let alone bringing a solution to the problem of time-inconsistency, it re-incorporates the problem into the contract made with the government (McCallum, 1995: 210). The problem with this result is that while attempting to keep politicians away from central bank management on the one hand, the contract that contains the rules for the management of the central bank will again be drawn up by politicians on the other hand.

The different dimensions and forms of central bank independence have been defined from these theoretical models. A central bank that that the theory of political business cycles, which is based on individuals’ voting in view of the pre-election economic situation in a short-sighted and naive manner, conflicts with the rational expectations assumption that can foresee the politicians’s future preferences. With the inclusion of the rational expectations assumption in new models formed, the political business cycles literature has continued to develop in two seperate branches; Rational Opportunistic Political Business Cycles and the Rational Partisan Theory (Telatar, 2004: 389-390).


is given control over the levers of monetary policy and allowed to use them freely has instrument independence, defined in line with the contract approach, in achieving the targets determined by the government. According to the conservative central banker approach, a central bank with goal independence can set its own monetary policy goals and is allowed to freely use instruments to achieve these goals (Fischer, 1995: 202). Likewise, the central bank’s capacity to choose monetary policy instruments has been defined as economic independence, while its freedom to determine monetary policy, as political independence. These have been rendered measurable. Within this framework, a central bank can be considered as independent with the following criteria:where the government is not influential in the appointment of the central bank management, when the government does not interfere in policy-making, price stability is clearly set forth as an objective, and it has the capacity to prevent resource transfer to the public sector (Grilli et al., 1991: 368-369). According to another study, central bank independence relates to three areas: independence in personnel matters, financial independence and independence with respect to policy (Eijffinger - De Haan, 1996). Because of significant differences in legal independence and actual independence of central banks, particularly in developing countries, the efforts towards rendering central bank independence measurable have been shifted to indicators other than laws. Even interesting methods, such as measuring the rate of turnover of central bank governors and surveys that assess the implementation of laws are employed for this purpose (Cukierman et al., 1992: 367).

The relationships between central bank independence and inflation and growth have been investigated via these definitions and indices. The relevant literature contains many studies that point to the inverse relation between central bank independence and inflation (Alesina - Summers, 1993; De Haan - Sturm, 1992). On the other hand, in developing countries, no significant relationship was found between legal independence of central bank and inflation (Cukierman et al., 1992: 430), thus indicating that there is not convincing evidence for the role of central bank independence in reducing inflation (The World Bank, 2002: 104). The findings of empirical studies pointing to a negative correlation between central bank independence and inflation do not signify a causality relationship that the independence of central bank leads to low inflation. This correlation cannot only be explained by a third factor (e.g. traditional low inflation), but also by two-way causality between the variables (Eijffinger - De Haan, 1996: 30; Cukierman et al., 1992: 376).


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There are serious problems in the logic and development methods of indices and empirical researches as well in their relations with theoretical studies. Firstly, these were ad hoc studies and they evaluate the period from the 1950s until the present using the criteria for independence determined today. The evaluations have been made regardless of the historically changing objectives of central banks and their structures constructed in the context of relations established by national and international institutions and, the periods, during which central banks did not aim to reduce inflation and its independence was not recognized as an international norm have been included in the analyses. Moreover, while compiling legal independence indices, a highly subjective method is employed in setting and combining the criteria as well as in interpreting laws. In the questionnaires, the actual independence of a central bank is attempted to be measured by perception analysis questions, such as, to what extent the central bankers themselves feel independent. The criticisms emphasize the fact that the interpretations of widely used indices on the independence criteria and laws of countries significantly differ from each other (Itoh - Lapavitsas, 1999: 172; Mangano, 1998: 490). An important empirical finding that contradicts the assumptions of theoretical foundations is the study, which asserts that central bank independence does not have a negative impact on growth (Grilli et al., 1991). The finding that growth is not affected by the independence of a central bank contradicts with Rogoff’s (1985) model. The conservative central banker in that model assigns higher priority to inflation than production cycles, thus leading to costs, such as low growth and high unemployment. This inconsistency was accepted as normal and was not regarded to be problem of central bank independence understanding, but almost ‘a free lunch’ (Itoh - Lapavitsas, 1999: 172).

The isolation of monetary policy from the democratic process with the recognition of central bank independence has led to a democracy debate. The assertions that the elected politicians pursue their own interests rather than public benefit and therefore, they manipulate the central bank have eventually resulted in the determination of monetary policy by a group of technocrats, a practice that conflicts with democracy. In this very context, the idea of backing up independent central banks with governance practices, such as transparency and accountability, was proposed. Transparency practices aim to diminish the closeness and secrecy of central banks through inflation targeting that became prominent in monetary policy regimes in the 1990s. It meant that monetary policy would be transparent; central banks would clearly state their objectives; they would share their forecasts on the course of the economy with the


public; they would regularly hold press meetings and would release reports on inflation. This aspect was also rendered measurable. For this purpose, indices were developed to analyze five broad aspects of transparency: political, economic, procedural, policy and operational (Dincer-Eichengreen, 2007: 26-28). It is asserted that increasing transparency and accountability not only helps to align central banks with democratic principles, and is thus worthy of its own right, but it also has benefits for the ability of central banks to conduct monetary policy successfully. Moreover, transparency reduces uncertainty, thus shaping actors’ expectations and ensuring the support of monetary policy by the public (Mishkin, 1998: 10).

The deficiency of central bank accountability is one of the criticisms directed at central bank independence in the relevant literature. Different accountability mechanisms for different types of central bank independence have been developed. For example, the Governor of the Central Bank of New Zealand, endowed with instrumental independence, can be dismissed for bad performance, that is, for not meeting the stated objectives laid down jointly by the government. In case of the president of the European Central Bank with goal independence; he is appointed for an eight-year non-renewable term; his failures do not constitute reasons for his dismissal; once a year, he presents the ECB's Annual Report to the European Parliament. Moreover, independence of the European Central Bank cannot be changed by the majority of the European Parliament; it requires the unanimity of all countries at the level of the Maastricht Treaty (De Haan et al., 2005: 111-113). Only few independent central banks that have been linked to Parliaments via different ex post accountability mechanisms can get close to a real democratic process. On the other hand, the existence of independent central banks that have the capacity to determine their objectives themselves; that sometimes do not announce those objectives; that do not receive instructions from the government; that seldom appear in Parliament and that consider supporting the government’s economic policy among its secondary objectives conflicts with the understanding of democracy. Undoubtedly, even though it is admitted that laws are enforced by governments and they can be changed, this process has also been made difficult especially for cases of central bank independence secured at constitutional level.

One of the important criticisms emphasized in the relevant literature is that central bank independence leads to potential policy coordination problems. The problem of policy coordination refers to the conflict of monetary and fiscal policies. Actually, when the primary preference of democratically elected governments is expansionary fiscal policy, which is implemented concurrently with tight monetary


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policy adopted by an independent central bank in line with the price stability target, a coordination problem arises in the economic policy, thus leading to a sub-optimal choice of uncoordinated policy instruments (Alesina, 1989: 83). The irony here is that the conflict between the choices of democratically elected governments and independent central banks is also used to argue for the independence of central banks. According to this assertion, central banks might ensure that policies deemed “inappropriate” in the context of policy coordination are under the auspices of an independent authority that does not possess the same objectives and thus, they might even enhance their credibility to the extent they can discipline other policy areas (Swinburne, Castello-Branco, 1990: 421). This approach defends tight monetary policies that do not conflict with price-stability-oriented monetary policy pursued by an independent central bank; it considers other policies as inappropriate choices that should be taken under discipline.

The coordination problem, which is examined in the context of the conflict of monetary and fiscal policies, becomes a very critical problem in times of crisis due to central banks’ status as lenders of last resort. For example, during the 2008-2009 global crisis, central banks that acted in coordination with the Treasury officials in many countries conducted gigantic bail-out operations. Apart from the coordination problems among them, rescue operations that signify very serious political choices (saving the whole financial system) were realized in such a way so as to not be influenced by the democratic process, thanks to the independence of central banks. As this example clearly shows, although granting independence to central banks prevents the politicians’ interference formally, considering the fact that the central bank is not a technical institution and makes political choices, this is an obstacle to its democratic supervision.

The Evolution of Central Banking and The Central Bank of The Republic of Turkey

Central banks, which were specific to a few capitalist countries throughout the 19th century, were founded to assume duties such as the unification of the national currency, management of gold reserves of the country and improvement of payment systems. Central banks, the banks of the State, with their roles of ensuring confidence in currencies of sovereigns and access to seniorage revenue on the one hand and, with their status as the bank of the banks on the other hand, have occupied a very important place in the capitalist economy. Central banks have assumed different duties in different historical contexts directly related to class struggles, crisis dynamics of capitalism, the establishment of international currency systems and


restructuring of the State and the administrative device. Unlike the narrow and technical viewpoint of central bank independence literature criticized in the previous section, in this section, the evolution of the Central Bank of the Republic of Turkey will be discussed along with a brief history of central banking. This section will focus especially on the transformation in the neoliberal era.

The gold standard system that was adopted under British hegemony and continued until the end of the First World War was the first important phase in the history of central banking. In that period, ensuring the conversion of national currency to gold became the primary objective of central banks. In that period, during which confidence in the liberal markets, namely laissez faire, was strong, the implementation of the gold standard system was consituted by free gold inflow/outflow. This created a system that was deemed to automatically eliminate economic instabilities (Capie et al., 1994: 10-11). With the establishment of thatfinancial system, the Bank of England assumed the role of lender of last resort (Itoh - Lapavitsas, 1999: 169). In the same period, Bank-ı Osmanı-i Şahane founded in 1863, which was majorly owned by the English and French, served as the central bank of the Ottoman Empire. The Empire’s need for resources arising from its increasing debts and to obtain seniorage income were responded negatively particularly by the central bank, which was in the hands of foreign capital (Kazgan et al., 2000: 43-44; Tekeli - Đlkin, 1997: 59).

The time between the two World Wars, especially the 1920s, was a “conservative” period marked by repetitive efforts towards restoration of the Gold Standard System (Polanyi, 2001: 26-28). In that period, the allied powers’ request that central banks did not directly finance governments with regard to huge war reparations was voiced in the international community (Tekeli - Đlkin, 1997: 242). Within that context, establishing a national central bank, which was considered one of the symbols of becoming a sovereign State, became one of the priorities of the young Turkish Republic. Thus, the Central of the Republic of Turkey (CBRT) was founded on 11 July 1930 by making use of advices of international experts and the relevant laws of various countries. The CBRT, which was founded as a joint stock company with a limited State share, in Türel’s words, “was shaped in line with the rules of Orthodox economic thought”. Actually, the CBRT, with its clear emphasis on price stability in its duties (Law No. 1715, Article 3/d) and its policy of correlating money supply to gold stock, was established in a context, where the Gold Standard period was longed for and, it adhered to the principle of “balanced budget/strong currency” until the Second World War (Türel, 2001: 72).


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The Bretton Woods system, which was established under U.S. Hegemony in 1945, was centered on the US dollar as the new common denominator. Fixed but adjustable exchange rates were pegged to the US dollar, which was backed by gold. The United States, which had institutionalized its hegemony with the establishment of the International Monetary Fund that deals with national balance of payments problems and the World Bank that operates in the field of development held the vast majority of the world’s gold reserves after the war. The new historical bloc, which was cemented by the organized labor struggles that arose at national level, generated the Keynesian social democratic welfare state (Devine, 2009: 59). Economic theory was dominated by the Keynesian approach, according to which markets could not be stabilized without state intervention. The objectives of central banks were extended to include high employment and growth, as well as maintaining the value of currency (Capie et al., 1994: 24). Turkey, by formulating its economic policy based on plans from the 1960s onward, followed an “inward, protectionist and import substitutive” course. In that period, the bourgeoisie that produced durable consumption goods for the domestic market was protected and supported; workers and villagers, as future consumers of this production, were granted social rights with a “populist” distribution policy (Boratav, 2007: 118-124). By the law amended on 14 January 1970, the CBRT, albeit with some delay, defined its fundamental duties, in line with the principles of the period, as implementing the “monetary and credit policy within the framework of development plans and yearly plans” Law No. 1211, Article 4/a). In this context, the CBRT adopted expansionary monetary policy and played an important role in the financing of the country’s development (Kazgan et al., 2000: 168-173).

In the early 1970s, the Bretton Woods system collapsed with the break of the dollar-gold link due to the United States’ heavy-cost Vietnam War and the opposition of Germany and France to the system and, instead of a fixed exchange rate regime, countries adopted a system of freely floating exchange rates. In the post-Bretton Woods period, which was shaped by unlinking national currencies to gold, the volatility in exchange rates and financial speculation increased; an inflationary tendency appeared. Above all, with the removal of reserve discipline on central banks, the obstacles before central banks to create money were eliminated. The internalization of this constraint by central banks, which was externally formed by international currency systems in the past, gained importance (Akçay, 2009: 152; Itoh - Lapavitsas, 1999: 174). This was the very context in which price stability became governments’


high priority economic policy and arguments for the independence of central banks began. One of the major problems faced by financial capital is the

uncertain environment brought by inflation. As the World Bank clearly states, “high inflation erodes the capital of financial institutions and makes it difficult to mobilize savings or to expand services, imposing additional costs and risks on these institutions and their clients” (The World Bank, 2005: 119). Therefore, it should be clearly underlined that the focus of a monetary policy merely on inflation, abandoning other objectives, such as growth and employment, is not a technical choice as central bank independence literature asserts, but a political preference that has consequences with respect to distribution. In other words:

Low inflation is not a neutral, value-free policy objective. It involves the protection of the value of money and existing wealth, and sometimes this objective has been pursued to the detriment of those at the lower end of the income scale and often at the expense of growth and employment... Prioritizing low inflation ensures that creditors can reclaim the full value of their investments, but it can also exacerbate the costs of debtors, leading to bankruptcies and rising unemployment. Yet, only a few macroeconomic studies take notice of the social outcomes of persistent demand for low inflation (Baker, 2006: 78).

Tight monetary policies systematically favor large domestic and foreign capital, especially financial capital, at the expense of smaller capital and workers, thus leading, in virtually every country, to higher unemployment and wage stagnation (Saad-Filho, 2005: 116). In the 1980s, in the leadership of the United States, a political

project was adopted to re-establish the conditions for capital accumulation and to restore the power of capital against labor (Harvey, 2005: 19). In this process, which Stephen Gill (2000) defines as disciplinary neoliberalism, the increasing commodification and alienation of social relations and especially the discipline of capital markets came into prominence. The states gave high priority to ensuring the credibility and consistency of their economic policies as well as investors’ confidence. In that period, issues such as the elimination of uncertainties before capital, creation of an atmosphere of confidence and protection of property rights came to the forefront. The list of “right policies” recommended by international institutions like the IMF, which is also known as the Washington Consensus, involves emphasis on tight monetary policy, tax reform, financial and commercial liberalization, deregulation and property rights (Williamson, 1993: 1332-1333). Though not mentioned in the list, central bank independence had became part of the “Washington orthodoxy” (Fischer, 1995: 201). In Turkey, in line with the 24


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January 1980 decisions, a devaluation was made; steps towards abolishing price controls were taken: exports were promoted by incentives, such as tax returns; macroeconomic policies aiming to shrink domestic demand were introduced. In Boratav'’s words, the primary objective of this structural compatibility program was “to strengthen international and domestic capital vis-à-vis labor by means of market liberalization” (2007: 148).

The neoliberal project that continued throughout the 1990s led to crises at global scale and in Turkey, the anti-globalization movement arose and, even objections from international institutions rose over the advisability of policies, albeit recommended by them. In this context, the World Bank highlighted, under the name of the Post-Washington Consensus (the PWC), the need for the establishment of right institutions, along with right policies, as well regulatory rule; “civil society, governance, transparency, safety nets, poverty reduction” began to be emphasized (Stiglitz, 1998; Higgot, 2006: 431). The said process can be investigated by the analyses conducted on international institutions and the bourgeoisie hegemony in general. As Cox (1996: 138) maintains, international institutions, which are the mechanisms of hegemony themselves, have functions, such as helping define policy guidelines for the development of the prevailing order, ensuring its ideological legitimacy and absorbing counter-hegemonic views. A situation of bourgeois hegemony implies the construction of a historical bloc that transcends narrow interests of dominant classes and channels their direction into an active and largely legitimate system of rule. The bloc that combines coercion and consent incorporates certain interests of the subordinate classes (Gill, 1995: 400). For Gramsci, hegemony brings “not only a unison of economic and political aims, but also intellectual and moral unity” (2005: 181). The fight against poverty, which is emphasized via governance concepts, such as transparency and accountability and is brought forward via democracy and safety nets, finds meaning when considered together with the emphasis on the moral dimension of the hegemony of bourgeoisie and the need to produce “consent”. Besides, in this very context, neoliberalism increasingly diverted the interest of its organic intellectuals in international institutions to the search for an autonomous State and developed suggestions for the “regulatory State”, of which, the independent central bank constitutes an important part. The consent aspect of neoliberal hegemony is endeavored to be strengthened via the establishment of institutions that seems to be independent of any interest. The attempts to grant central bank independence and acceptance of the governance practices in order to improve its legitimacy could be understood to enhance the bourgeois hegemony (Yalman, 2006: 44-45).


The prominence of institutionalization at the end of the 1990s as a part of neoliberal reforms was conceptualized by Stephen Gill (2000) under the name of “new constitutionalism” as the search for a long term, safe basis for capital. This political project “locks” capital’s gains in macroeconomics, microeconomics and social policy by legal and constitutional frameworks and thus, prevents interference in them by democratically elected politicians. In this project, one of the most important moments is central bank independence among other institutional arrangements. Thus, economic and political spheres are separated from each other. In other words, with the establishment of independent and mostly unaccountable institutions, political interference in economic policy-making is prevented at constitutional level (as in the case of European Central Bank); anti-inflation policies formulated in line with the demands of financial capital are adopted, overlooking the elections that come from the democratic process. Similarly, Teivainen (2002) calls this process the politics of economism. The mentioned project seeks to define certain institutions and events only as economic and, to draw a line between the economic and political realms via economic neutrality. Moreover, certain issues are “depoliticized” and presented as universal truths above any power struggle (Teivainen, 2002: 12). In fact, this is what efforts towards central bank independence aim for. Monetary policy is defined in a purely economic sphere; technical literature produced is presented as a truth, free of the power struggles. By this means, economic and political realms are redefined; price stability, which is in fact a political choice with consequences related to distribution, as underlined before, is presented merely as an economic and technical issue. In Turkey, the steps taken toward central bank independence took

place from the 1990s onwards. Soon after the 5 April decisions taken in the face of the 1994 crisis, a law stipulating a progressive decline in Central Bank advances to the Treasury was enacted in 21 April 1994 upon the recommendation of the IMF (Bakır, 2007: 49). In the second half of the 1990s, the CBRT launched studies on a draft law as a preliminary preparation for its independence in the light of recommendations from various institutions, such as the European Central Bank and the IMF. Under the said draft law, the primary objective of the CBRT would be price stability; interest rates would be set independent of the government; the CBRT would not extend credit to the public sector and would not receive instructions from the government. Turkey’s relations with the European Union and the IMF assumed critical importance with respect to central bank


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independence (Bakır, 2009: 584-585; Türel, 2001: 74).4 Turkey, after being officially recognized as a candidate for full membership at the EU Helsinki Summit in December 1999, started preparations for achieving the convergence criteria set by the Maastricht Treaty. An IMF letter of intent dated December 2000 included a commitment that the CBRT would be granted instrumental independence by a new law the CBRT law. However, the program collapsed with the severe February 2001 economic crisis and, hopes were set on the resources and program to be brought by Kemal Derviş from the World Bank, who was invited to Turkey at the request of Prime Minister Bülent Ecevit.

“Strengthening the Turkish Economy: Turkey's Transition Program”, the new economic program prepared by Kemal Derviş that included legal changes, such as central bank independence, was put into effect in an exceptional rush with the slogan “15 laws in 15 Days”. The program, which was formulated by the typical terms of the Post-Washington Consensus, aimed for assertive objectives, such as “irrevocable prevention of irrational interventions; strengthening of good governance and combating against corruption” (Strengthening the Turkish Economy, Program, 2001: 12). Derviş’s diagnosis of the problems of the Turkish economy in the preface of strengthening the Turkish Economy was as follows:

“The main reason for this unfavorable debt dynamic is the relationship between the state and society; politics and economics. Despite various reform attempts, the rent contest continued in the economy and social life throughout the 1990s. Politics, besides its beneficial and legitimate functions like providing legal frameworks, conducting the duty of supervision, determining foreign and national security policies, and protecting the poor; maintained the habit of intervening in the operation of the market and the economic decision-making process... This is also the main source of high inflation that we somehow could not manage to overcome (Derviş et al., 2006: 104).

Derviş’s words that clearly reflect the ideological stance of central bank independence reformers, contain an explicit suggestion of separating the state and the economy, in order to get rid of rent-seeking politicians. Derviş did not include economic policy-making in the “legitimate functions” of the politics.He presented a picture of a

4 With a Neo-Gramscian analysis, in Turkey, the “transnational historical bloc” was literally constructed in the post-1999 period (Şenalp - Şenalp, 2009: 228-230). The reformation of administrative device in the context of governance, which the IMF, the World Bank and the European Union that can closely be associated with the interests of global capital were closely interested with regard to their relations with Turkey and, which they sometimes imposed as a conditionality, gained pace in that period. Among these reforms were the CBRT independence, the establishment of supreme boards and the Arbitration Act that assumed importance for global capital.


supposedly self-operating market and economy and identified political intervention as the main source of problems in these fields. These suggestions fully overlap with the strategy of restricting political intervention via legal frameworks and isolating these spheres from the democratic process, which is discussed in the context of the concept of new constitutionalism. From the Public Choice viewpoint, it is ironic that the said reforms that curbed the opportunism for the “rent contest” were initiated and approved by the politicians blamed for being rent-seekers.

In line with the new economic program, the CBRT was granted instrument independence by the Law dated 25 April 2001. The primary objective of the CBRT was determined to “achieve price stability”; it was emphasized that the Bank would determine at its own discretion the monetary policy instruments for achieving the inflation target set jointly with the government (Law No. 4651, Article 4). The Article governing the CBRT short-term advances to the Treasury was repealed; The Monetary Policy Committee established within the body of the CBRT was held responsible for determining the monetary policy. The notion of accountability also took part in the CBRT reform as emphasized in the governance rhetoric: The CBRT Law stipulates that the CBRT shall submit a report to the Council of Ministers twice a year. Besides, it will provide information regarding its operations to the Planning and Budget Commission of Grand National Assembly of Turkey. Moreover, in the context of the attributed importance to the transparency notion, the CBRT will announce its inflation targets to the public via periodical reports and, in the event of deviations from the targets, it will submit information to the government in writing and inform the public by disclosing the reasons for deviation. As of 2006, the CBRT started to implement an explicit inflation targeting regime and undertook to announce three-year paths predicted for inflation. However, if deviations exceed the targets 2 points beyond the upper and lower limits, the ex post accountability mechanism will work (TCMB, 2006: 20-23).

The CBRT’s 2001 reform has been technically evaluated consistent with the general characteristics of central bank independence literature. Central bank independence literature involved in applying independence indices for Turkey (Eroğlu - Abdullayev, 2005) and inter-country comparisons (Türel, 2001; Bakır, 2007). The general conclusion derived from the evaluations is that the CBRT has attained a high level of independence, a level which enables it to compete with developed countries. Central banking practices (autonomy, transparency, accountability) that became a global norm in the 1990s have been reflected in the CBRT law and thus in its application to a large extent. Nevertheless, the European


85

Union found the instrument independence unsatisfactory. The EU maintained that the legal status of the CBRT, in its current form does not conform with acquis communautaire due its lack of goal independence (euractiv.com.tr, 2009). Some academicians, despite their positive approach in general, also consider the CBRT reform inadequate, proposing a monetary rule at constitutional level (Aktan - Dileyici, 2001). On the other hand, in rare critical assessments it is pointed out that apart from international financial capital’s demand for financial stability, the CBRT should also attach importance to growth (Yeldan, 2005) and the relationship of central bank independence with monetary and state policies was examined by political economy approach (Akçay, 2009).

In evaluating the monetary policy implementation of the CBRT after the 2001 reform in consideration of the interaction of global and national dynamics, what is seen at first glance is the negative relationship between independence and inflation, as widely confirmed by central bank independence literature. Indeed, fundamental economic indicators in Table 2 clearly demonstrate that consumer inflation has lowered to single digits since the 2001 reform. This result is attributed to the success of the stability programs adopted and the CBRT independence in breaking inflationary expectations (Doğruel - Doğruel, 2005: 213). However, it should be noted at this point that in Turkey, the disinflationary process has already displayed remarkable progress from 1998 onwards, during which the CBRT was not yet independent. Besides, as is known, the sole source of disinflation is not monetary policy. Disinflation is achieved by the concurrent implementation of contractionary monetary and tight fiscal policies (Interview, 2008; Kumcu, 2008). In that case, it is not easy to argued that the case of the CBRT confirms the prevailing view in the relevant literature.


Table 2. Fundamental Economic Indicators in Turkey

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Growth Rate (GNP)

8.0 7.1 8.3 3.9 -6.1 6.3 -9.5 7.9 5.9 9.9 7.6

Inflation Rate (WPI)

76.0 79.8 99.1 69.7 68.8 39.0 68.5 29.7 18.4 9.3 7.7

Unemployment Rate

7.6 6.6 6.8 6.9 7.7 6.5 8.4 10.3 10.5 10.3 10.3

Source: The CBRT Web Site, the SPO Web Site.

Another aspect of central bank independence and Turkey’s disinflationary process is that it generated winners and losers. The second half of the 1990s was marked by the severe effects of the Asian and Russian crises abroad, and Turkey, during the same period, experienced continuous political volatility and growth stagnation, albeit occasionally. Even with all these negativities, unemployment was around 6-7 percent. On the other hand, after 2001, despite relatively favorable international conditions, vast foreign capital inflows and high growth rates of the post-crisis period, unemployment rates failed to see below 10 percent. It can be asserted in the light of these data that developments in post-2001 Turkey with the price stability-oriented monetary policy, accompanied by tight monetary policy, resulted in low inflation at the expense of high employment. In other words, by political choice, the Central Bank was granted independence and reducing inflation was given priority at the expense of unemployment.

Apart from the unemployment expenses of disinflation, the economic policy that can be summarized as “high interest/low exchange rate”, which is criticized even by mainstream commentators, created attractive money-making opportunities for foreign capital. The CBRT, in pursuit of low inflation, keeps interest rates high to attract foreign capital. Foreign capital inflow leads to the appreciation of domestic currency, thus cheapening import goods, decreasing inflation and increasing national income. Yet, on the other hand, this process brings about huge balance of payments deficits and damage to the international competitiveness of the country; the sustainability of growth gets dependent on continuous inflows of foreign capital (Cansen, 2008). It should be underlined that especially between 2002 and 2006, international finance capital, benefiting from this policy, achieved remarkable profit rates over world averages, mostly in two digits (Bağımsız Sosyal Bilimciler, 2008: 119).


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CONCLUSION

Central banks are multi-functional institutions; their scope of functions is not restricted to the management of money, a critical dimension of capitalist production relations, thus deserving more than an economic analysis. Central banks have assumed different duties in the course of their historical evolution in line with class struggles, economic policy preferences of the States and international currency systems. When looked at from the perspective of historical context, central bank independence and the evolution of the CBRT gains meaning. Accordingly, central banks of the Gold Standard period were institutions that ensured the convertibility of national currency into gold via views and practices favoring the free market. The Central Bank of the Republic of Turkey was founded based on principles of the Golden Standard period, even though it ended, and the CBRT implemented a “strong currency” policy for a long time. The CBRT Law, which was amended in 1970, in line with the emphases of the Bretton Woods period on the developmental or welfare state, was entrusted with supporting the development of the country under planning. Capitalism’s exit from crisis in the 1980s was marked by the fight

against inflation along with the strengthening of finance capital. The State’s role in the economy and the structure of the public administration were redefined in the context of neoliberal reforms and, independent central banks that focused on price stability played a key role in the hegemonic struggle. The ideological foundations of the arguments for the independence of a central bank, which is presented as a technical institution that adopts policies in everybody’s interest, should be carefully examined. New Classical Macroeconomics bases its arguments on a number of unrealistic assumptions, such as the markets’ tendency to equilibrium, rational expectations of economic agents and the existence of a “natural” unemployment that cannot be permanently reduced by State intervention. On the other hand, Public Choice School seeks to isolate the management of the economy from politicians as much as possible, maintaining that they pursue their self-interest. However, even though central banks appear to have been freed from political intervention via independence reforms, price stability-oriented monetary policy is, in essence, a political choice. In fact, the fight against inflation is in favor of finance capital and is conducted mostly at the expense of unemployment. Turkey experienced a disinflation process that gained pace with the 2001 reform, though not only due to central bank independence. However, despite high growth, the said process had an adverse effect on unemployment. Moreover,


international finance capital gained huge returns over world averages thanks to the CBRT’s high interest rates. In a period, during which State interventions in favor of capital are

seen very clearly, neoliberal hegemony gives prominence to independent central banks, which are “economic” institutions that fulfill the requirements of the markets, in order to ensure and enhance its legitimacy. In a parallel manner, a structure, where politics and economics are separated and the reflection of democratic elections in the economic policy is somehow prevented by legal restrictions, is constructed; the administrative device is being marketized via reforms presented under the heading ‘governance”. In this process, it is important to keep in mind that central bank independence is primarily a political choice that reflects the profits of finance capital and that losers of anti-inflation policies do exist. It is also necessary to draw attention to the context of the CBRT’s inclination towards the fight against inflation with the independence reform, which has financed country development in its history.

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Central Bank Independence and the Central Bank of the Republic of Turkey

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