Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Turkey's Central Bank Defied the Textbook
Transcript
- Lucas: So, Luna, what if I told you that hiking interest rates to fifty percent — a level that would terrify most finance ministers — might actually be one of the most productivity-positive things a central bank can do? Luna: I'd say you've been spending too much time in the theoretical economics wing. But go on. Lucas: Okay, so look at Turkey. For years, the orthodoxy under President Erdogan was the opposite: cut rates to fight inflation, which, as every econ 101 student knows, is backwards. By 2023, inflation was running at nearly sixty-five percent, annualized. The lira had lost so much value that people were converting their savings to gold or dollars just to preserve wealth. Luna: Right, that was the whole 'interest rates cause inflation' doctrine. But then they actually pivoted, didn't they? Lucas: They did. In mid-2023, Erdogan appointed Hafize Gaye Erkan, a former Goldman Sachs executive and the first woman to run the central bank. And she did the unthinkable — she hiked the policy rate from eight and a half percent to fifty percent over the next several months. The market reaction was initially skeptical, but the policy held, and by August of 2026, inflation had fallen to around thirty percent, and it's still dropping. Luna: Thirty percent is still high, but the trajectory is remarkable. So how does that connect to productivity? Lucas: Here's the thing: when money is cheap, businesses get sloppy. They borrow to expand, they hold excess inventory because carrying costs are negligible, and they fund projects with fuzzy return expectations. But when the policy rate hits fifty percent, the cost of capital becomes this stark, unavoidable signal. Every investment has to justify itself against that hurdle rate. Luna: So it forces discipline. Like a corporate diet. Lucas: Exactly. And the data out of Turkey supports that. A 2025 study from the Turkish central bank itself found that total factor productivity — the efficiency with which labor and capital are combined — grew by about two percent in 2024, the first meaningful increase in years. Firms that had been hoarding cash or sinking money into speculative real estate suddenly had to redirect capital into actual productive capacity, just to survive. Luna: But isn't that a painful adjustment? I mean, high rates also crush small businesses that can't access credit, right? Lucas: Sure, it's painful. Small and medium enterprises without strong balance sheets took a hit, and that's a real cost. But look at the bigger picture: before the pivot, the lira was in freefall, and inflation was eroding real incomes. Businesses couldn't plan beyond a few months. Now, even with high rates, there's more certainty, and they're making longer-term bets. Luna: So the productivity gain isn't just about capital discipline — it's also about restoring basic economic predictability. Lucas: Precisely. And there's this fascinating sectoral shift. Textile manufacturers, for instance, which had been coasting on cheap lira exports, suddenly had to automate or upgrade machinery. The Turkish Machinery Foundation reported a thirty-five percent jump in domestic machine tool orders in 2025. That's not just spending; it's investment in efficiency. Luna: That's the kind of concrete number our listeners can bring to a dinner party. But I want to push back a bit — isn't this just basic textbook policy? I mean, higher rates forcing efficiency is not exactly a novel idea. Lucas: You're right, but the novelty is that it happened in Turkey, against the political grain. And more importantly, the textbook usually tells you that disinflation is costly — you get a recession, high unemployment. The fact that Turkey managed to tame inflation while actually seeing a productivity uptick is a counterexample worth studying. Luna: So it's not just about the policy itself, but the context. That makes sense. Lucas: Right. And there's another subtle channel: the labor market. With rates high, companies can't afford to keep underutilized workers on the payroll. They've had to train and redeploy staff into more revenue-generating roles. The Istanbul Chamber of Industry has reported a noticeable shift toward upskilling programs, because labor costs are now a bigger share of total costs when capital is expensive. Luna: So high rates are forcing firms to treat human capital as a true investment rather than a fixed cost. Lucas: Exactly, and that's a long-term productivity driver. But let's be clear — I'm not saying fifty percent rates are a magic bullet. There are huge downsides: the housing market is in a slump, and public debt service costs have ballooned. But the productivity angle is the part that gets overshadowed. When we talk about monetary policy, we usually focus on inflation and output, not on the structural efficiency gains that come from forcing capital discipline. Luna: It's almost like a Darwinian filter for businesses — only the fittest survive, and the survivors are more productive. Lucas: That's a brutal but accurate framing. And actually, this connects to something we touched on in an earlier episode about the post office and the gig economy — how constraints can be generative. When you can't waste resources, you find creative ways to do more with less. Luna: And speaking of constraints — we're a small show, and we don't have a big corporate budget. We rely on listeners who find value in these conversations. If today's episode made something click, and you want to help us keep going ad-free, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it genuinely makes a difference. Even a single coffee helps cover our editing costs and keeps the lights on. We don't do ads, and that's only possible because of that kind of support. Luna: And we're back to Turkey — so, what's the takeaway for other emerging markets? Lucas: The takeaway is that credibility is a productive asset. When a central bank commits to a hard policy and sticks with it, even at great political cost, it creates a foundation for long-term investment. Argentina is watching closely, as is Nigeria. They've both had bouts of unorthodox policy, and they're seeing the Turkish experiment as a potential template. Luna: But it's not just about the policy — it's about the execution. Turkey had to endure a lot of pain before the pivot. Lucas: Absolutely. And I think that's the honest conclusion: there's no shortcut. The productivity gains came only after years of disorder. But the fact that they did come suggests that even the most broken economic frameworks can be rebuilt, and the rebuilding itself can force a more efficient economy. Luna: So maybe the real productivity lesson is: sometimes you have to break things to fix them. Lucas: That's a good note to end on. Though, I'd add one more thing — the next time you hear about a central bank hiking rates, don't just think about the pain. Think about the potential for efficiency gains down the road. It's a counterintuitive, but powerful, economic lever.