[A-List] Is Turkey the next Argentina?

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

Is Turkey the next Argentina?  
  
Erinc Yeldan and Mark Weisbrot 
International Herald Tribune  
Saturday, December 4, 2004 

Modernizing economies II

ANKARA Foreign money has been pouring into Turkey at a rapid pace, fueling
an economic expansion that has many investors and analysts praising the
country's policies and reforms. But those who remember a similar excitement
about Argentina in the early 1990s, which was followed by one of the most
disastrous collapses in Latin American history, should be wary. 

The parallels are striking. Argentina's growth in the early 1990s was also
spurred by foreign capital inflows, and it also led to an overvalued
currency that helped destroy the country's manufacturing base. And even
during the country's growth years, when it was the poster child of the
International Monetary Fund, there was little job creation. 

Turkey's economy actually shrank in the years 1998-2001, with a 9.5 percent
plunge in the last year. In response to the crisis, the government borrowed
heavily from the IMF - $31.8 billion between 1999 and the present - and
adopted a set of policies that the IMF advocated. These policies brought
about very high real interest rates, reductions in the government's fiscal
authority and spending, an increase in foreign borrowing, a floating
exchange rate and a rise in the local currency. They also resulted in
privatization of state-owned industries (and consequent unemployment), and a
removal of agricultural and other subsidies. 

Supporters of these policies point to the economic recovery since 2001. The
Turkish economy grew by an average of 7 percent annually in 2002-3, and is
expected to have grown at the same rate in 2004. Inflation, which was at
68.5 percent in 2001, has been brought to a projected 11.4 percent for 2004.


But beneath these numbers, a crisis looms. The expansion has been driven by
a huge inflow of capital from abroad, $10.9 billion in 2003 (4.6 percent of
the economy) and $12.5 billion in just the first eight months of 2004. These
are overwhelmingly speculative, short-term inflows - not direct investment,
for example, which would expand the country's productive capacity and create
jobs. Foreign direct investment has in fact fallen since 2000. The country
is very vulnerable to a serious economic downturn when the inflow of foreign
money goes dry. 

These kinds of massive speculative capital inflows have a habit of reversing
themselves, as they did in Asia in 1997, setting off the Asian financial
crisis and a regional depression. In such situations, investors eventually
begin to worry about the sustainability of such borrowing and debt. Any
number of external events could trigger such an exodus from Turkey: For
example, if U.S. and world interest rates rise, as they undoubtedly will
from their current historic lows, safe assets like U.S. Treasury securities
will become much more attractive. 

The influx of speculative money from abroad has also pushed the Turkish
currency, the lira, to an overvalued level. This, too, is a bubble waiting
to burst. In the meantime it has devastated traditional Turkish industries
that are typically labor-intensive by making imports artificially cheap,
thus aggravating the unemployment problem. The lira had risen 139 percent
against the dollar between 2000-2003. 

The country's public debt is unsustainable at 70 percent of the economy. In
order to sustain it presently, the IMF has the government running a primary
(excluding interest) budget surplus of 6.5 percent. This is extremely high
(compare it with 3.0 percent for Argentina and 4.25 percent for Brazil), and
prevents the government from making necessary investments in human capital
and infrastructure. 

Another devastating part of the IMF program is high interest rates: The
Treasury's debt instruments that are the leading assets in the Turkish
financial markets carry an interest rate of 26 percent, still very high at
15 percent in real, inflation-adjusted terms. Compare this with 2 percent in
the United States - it is easy to understand why businesses in Turkey are
reluctant to borrow and invest in productive capacity. 

In short, the policy makers have created an economy that runs on a
speculative bubble. It would be nice if a majority of the Turkish people at
least got some of the benefits of bubble-driven growth for as long as it
lasts. But unfortunately, this has not been the case. Since 2000, the
unemployment rate has risen by almost 4 percentage points to 10.5 percent,
and real wages have actually fallen. 

As Turkey and the European Union continue talks on the possibility of EU
accession, the Turkish government should re-examine its unsustainable
economic policies of the last five years. Continuing these IMF-supported
policies in hopes of garnering credibility with the EU may be dangerous.
Ironically, such policies could lead to an economic failure that would
actually doom Turkey's chances for membership. 

(Erinc Yeldan is a professor in the department of economics at Bilkent
University in Ankara; Mark Weisbrot is co-director of the Center for
Economic and Policy Research in Washington.)