Themes > Current Issues
03.03.2001
Jayati Ghosh
Until a few weeks ago,
Kemal Dervis was simply a senior employee of the World Bank, a Turkish
economist who had been working with the Bank for the past two decades.
Now he is probably the most powerful man in Turkey, brought in as an
extra-constitutional super Minister invested with sweeping powers over
all economic and financial matters, over the heads of the democratically
elected politicians supposedly in charge.
This is the latest desperate move on the part of the Turkish Prime Minister, Bulent Ecevit, to placate financial markets and stem the panic and capital flight that began in late February. Turkey is no stranger to economic crisis, which have erupted with even greater frequency and intensity under the liberalised economic regime which was first ushered in by the government of Turgit Ozal in the early 1980s.
But this particular crisis is still quite remarkable, on several counts. To begin with, it must be remembered that the Turkish economy has been under almost continuous IMF supervision for several decades now, with no fewer than seventeen IMF programmes introduced in the country. The latest one, accompanying a loan of $ 10 billion for three years, began in December 2000 in the midst of yet another episode of capital flight.
Perhaps no other country, with the exception of the Philippines (another IMF basket case) has had so much direct control of its economy by the multilateral lending institutions. To that extent, it is no longer possible for the IMF and World Bank to argue that they are forced to come in and respond to crises : the crises that keep occurring are very much a result of the IMF policy packages and their manner of implementation.
But that is not the only reason that this particular financial crisis in Turkey is significant. Two other aspects of it hold important - and disturbing - implications for other developing countries seeking to make their economic expansion programmes dependent upon international capital. The first is the extremely trivial nature of the cause of the crisis.
It is true that the rate of inflation in Turkey just before the latest crisis was high, at more than 30 per cent, but it had come down considerably from nearly 70 per cent in the previous decade and year. Turkey had become one of the quintessential "good boys" among emerging markets, offering major incentives for foreign capital, offering up major state assets for privatisation, setting up a currency peg along Argentine lines which linked the Turkish lira to the US dollar, and imposing high interest rates as part of a deflationary package.
Financial markets were actually pleased with this performance, and created a mini-boom in the Turkish stock market, with market indexes rising from around 5,000 in mid 1999 to nearly 20,000 in early 2000. This was despite poor showing of the real economy, which was adversely affected by the major earthquake of 1999 and the inadequate reconstruction thereafter. Industrial production continued to be sluggish and real wages were down, but variables such as these have never really bothered market analysts on the lookout for temporary booms.
By late 1999, financial markets were less attracted to Turkey, shifting their portfolios to other countries at the margin. By now, however, the Turkish economy was so dependent upon foreign capital inflow that even a slowdown affected it badly, and led up to the latest IMF programme which started in December 2000, which was being faithfully adhered to by the government. It is true that the speed of the bank restructuring was not as fast as desired by the IMF, but certainly, in terms of broad economic conditions, there were no surprises in January or February this year.
In fact the crisis was sparked off by something quite different : a simple row between two important political functionaries, a heated argument between the Prime Minister and the President about the control of corrupt bankers on February 23. The Prime Minister may have thrown a public tantrum about it to the press, but still it is hard to imagine that a relatively small incident like that could spark off such a full blown crisis with such far-reaching consequences.
Within hours, the Istanbul stock market fell by 15 per cent, ostensibly because of fears that the political row could jeopardise the economic reform agreement with the IMF. Foreign investors pulled cash out, overnight loan rates shot up to 1,000 percent, and the country's central bank was forced to pump $4.5 billion, or one-sixth of its cash reserves, into the currency markets to defend the value of the Turkish lira against a speculative run. Within two days the main market index fell 18 percent, and another $3 billion in foreign capital was withdrawn. To discourage speculation, the central bank raised the overnight interest rate yet again, to 6,100 percent. The Turkish lira fell more than 35 percent in two days in foreign exchange markets.
Clearly, desperate measures were called for, and they began with important bureaucratic heads rolling, as in the resignation of the Governor of the Central Bank. But nothing seemed to be good enough to satisfy the wrath of international investors, who were now discovering all sorts of other (previously unnoticed) flaws in economic management as the crisis deepened.
Now, in what may be a final attempt to stem the flow of blood, a most extraordinary announcement has been made by the 75-year old Prime Minister. A World Bank economist known to be "market-friendly", Kemal Dervis was brought in from the World Bank to handle economic management. Initially, government officials wanted him to become Governor of the Central Bank, but it is reported that he insisted on a broader portfolio. He will now oversee budget spending, the central bank and regulation of the banking industry and capital markets, having almost complete economic powers and able to overrule all other Ministers.
Already, some Ministers have resigned in disgust at this state of affairs, and the fate of the shaky three party coalition that runs the government also seems uncertain. But that has not deterred either the Prime Minister or the newly appointed Dervis. At the time of writing, the new "super Minister" was back in his recent home, Washington, hoping to negotiate an even larger loan of around $35 billion to prevent or deal with more capital flight.
And in return, it is likely he will promise even more for private international investors. He has already indicated that he favours greater privatisation at more favourable terms for foreigners, more deregulation and private control over crucial infrastructure industries and utility services, more domestic deflation and high interest rates - in short, more of the same medicine which has already been administered to the hapless Turkish economy.
All this may operate to stave off the immediate crisis, or at least bring it to a temporary close. But it is now clear that this will not resolve the basic problem and that another such crisis may recur for equally trivial reasons given the whimsical nature of international finance. It is equally clear, as the example not just of Turkey today but of Mexico, Brazil and Russia yesterday and possibly tomorrow Argentina (which is now facing market problems simply because it has a similar currency board arrangement) that no liberalisation can ever be enough. Each bout of liberalisation will offer only a temporary reprieve, and expose the economy even more to future crises. And when those crises occur, they wil only be contained by further liberalisation and further concessions made to implacable and demanding international capital.
Of course, there would be a natural limit to all this eventually, if only because after a certain point there would be few assets left to sell, or few activities left to liberalise. By then, presumably, material conditions of the people as a whole would have deteriorated to the point where anyway international investors would not be interested.
It has all the elements of a Greek tragedy, except that it is set in Turkey. But what makes it even more tragic is the realisation that all of this is actually avoidable, if only people and their governments see through the huge confidence trick that is currently being played out in the international financial markets.
This is the latest desperate move on the part of the Turkish Prime Minister, Bulent Ecevit, to placate financial markets and stem the panic and capital flight that began in late February. Turkey is no stranger to economic crisis, which have erupted with even greater frequency and intensity under the liberalised economic regime which was first ushered in by the government of Turgit Ozal in the early 1980s.
But this particular crisis is still quite remarkable, on several counts. To begin with, it must be remembered that the Turkish economy has been under almost continuous IMF supervision for several decades now, with no fewer than seventeen IMF programmes introduced in the country. The latest one, accompanying a loan of $ 10 billion for three years, began in December 2000 in the midst of yet another episode of capital flight.
Perhaps no other country, with the exception of the Philippines (another IMF basket case) has had so much direct control of its economy by the multilateral lending institutions. To that extent, it is no longer possible for the IMF and World Bank to argue that they are forced to come in and respond to crises : the crises that keep occurring are very much a result of the IMF policy packages and their manner of implementation.
But that is not the only reason that this particular financial crisis in Turkey is significant. Two other aspects of it hold important - and disturbing - implications for other developing countries seeking to make their economic expansion programmes dependent upon international capital. The first is the extremely trivial nature of the cause of the crisis.
It is true that the rate of inflation in Turkey just before the latest crisis was high, at more than 30 per cent, but it had come down considerably from nearly 70 per cent in the previous decade and year. Turkey had become one of the quintessential "good boys" among emerging markets, offering major incentives for foreign capital, offering up major state assets for privatisation, setting up a currency peg along Argentine lines which linked the Turkish lira to the US dollar, and imposing high interest rates as part of a deflationary package.
Financial markets were actually pleased with this performance, and created a mini-boom in the Turkish stock market, with market indexes rising from around 5,000 in mid 1999 to nearly 20,000 in early 2000. This was despite poor showing of the real economy, which was adversely affected by the major earthquake of 1999 and the inadequate reconstruction thereafter. Industrial production continued to be sluggish and real wages were down, but variables such as these have never really bothered market analysts on the lookout for temporary booms.
By late 1999, financial markets were less attracted to Turkey, shifting their portfolios to other countries at the margin. By now, however, the Turkish economy was so dependent upon foreign capital inflow that even a slowdown affected it badly, and led up to the latest IMF programme which started in December 2000, which was being faithfully adhered to by the government. It is true that the speed of the bank restructuring was not as fast as desired by the IMF, but certainly, in terms of broad economic conditions, there were no surprises in January or February this year.
In fact the crisis was sparked off by something quite different : a simple row between two important political functionaries, a heated argument between the Prime Minister and the President about the control of corrupt bankers on February 23. The Prime Minister may have thrown a public tantrum about it to the press, but still it is hard to imagine that a relatively small incident like that could spark off such a full blown crisis with such far-reaching consequences.
Within hours, the Istanbul stock market fell by 15 per cent, ostensibly because of fears that the political row could jeopardise the economic reform agreement with the IMF. Foreign investors pulled cash out, overnight loan rates shot up to 1,000 percent, and the country's central bank was forced to pump $4.5 billion, or one-sixth of its cash reserves, into the currency markets to defend the value of the Turkish lira against a speculative run. Within two days the main market index fell 18 percent, and another $3 billion in foreign capital was withdrawn. To discourage speculation, the central bank raised the overnight interest rate yet again, to 6,100 percent. The Turkish lira fell more than 35 percent in two days in foreign exchange markets.
Clearly, desperate measures were called for, and they began with important bureaucratic heads rolling, as in the resignation of the Governor of the Central Bank. But nothing seemed to be good enough to satisfy the wrath of international investors, who were now discovering all sorts of other (previously unnoticed) flaws in economic management as the crisis deepened.
Now, in what may be a final attempt to stem the flow of blood, a most extraordinary announcement has been made by the 75-year old Prime Minister. A World Bank economist known to be "market-friendly", Kemal Dervis was brought in from the World Bank to handle economic management. Initially, government officials wanted him to become Governor of the Central Bank, but it is reported that he insisted on a broader portfolio. He will now oversee budget spending, the central bank and regulation of the banking industry and capital markets, having almost complete economic powers and able to overrule all other Ministers.
Already, some Ministers have resigned in disgust at this state of affairs, and the fate of the shaky three party coalition that runs the government also seems uncertain. But that has not deterred either the Prime Minister or the newly appointed Dervis. At the time of writing, the new "super Minister" was back in his recent home, Washington, hoping to negotiate an even larger loan of around $35 billion to prevent or deal with more capital flight.
And in return, it is likely he will promise even more for private international investors. He has already indicated that he favours greater privatisation at more favourable terms for foreigners, more deregulation and private control over crucial infrastructure industries and utility services, more domestic deflation and high interest rates - in short, more of the same medicine which has already been administered to the hapless Turkish economy.
All this may operate to stave off the immediate crisis, or at least bring it to a temporary close. But it is now clear that this will not resolve the basic problem and that another such crisis may recur for equally trivial reasons given the whimsical nature of international finance. It is equally clear, as the example not just of Turkey today but of Mexico, Brazil and Russia yesterday and possibly tomorrow Argentina (which is now facing market problems simply because it has a similar currency board arrangement) that no liberalisation can ever be enough. Each bout of liberalisation will offer only a temporary reprieve, and expose the economy even more to future crises. And when those crises occur, they wil only be contained by further liberalisation and further concessions made to implacable and demanding international capital.
Of course, there would be a natural limit to all this eventually, if only because after a certain point there would be few assets left to sell, or few activities left to liberalise. By then, presumably, material conditions of the people as a whole would have deteriorated to the point where anyway international investors would not be interested.
It has all the elements of a Greek tragedy, except that it is set in Turkey. But what makes it even more tragic is the realisation that all of this is actually avoidable, if only people and their governments see through the huge confidence trick that is currently being played out in the international financial markets.
© MACROSCAN 2001