Is ‘Consensus’ Necessary for Inflation Stabilization? A Comparison of Israel and Turkey

Abstract

By studying two Middle Eastern cases, Israel and Turkey, this study seeks to understand how countries with chronically high inflation achieve permanent stabilization. It is argued that each case of successful stabilization is facilitated by a combination of favourable political conditions. Having an acute crisis is a necessary though not a sufficient condition. It is argued that what politically seems to help most is the creation of 'social and political consensus'. A wide support for stabilization is more likely if the stabilization plan distributes the costs of stabilization more equally. Skilful leaders also help build consensus and they are more important where other conditions are unfavourable. All these conditions were instrumental in the case of Israel, which is a stable and established democracy. The Turkish case demonstrates that if stabilization is initiated without a consensus, it would prove to be a political disaster for the implementing government. However, rapid positive economic results and favourable political changes may later contribute to creating political and social support for stabilization. In fact, for stabilization to be successful, consensus in the medium term is as or even more important than consensus in the short term.