Patterns of Adjustment under the Age of Finance: The Case of Turkey as a Peripheral agent of New-

Imperialism

A. Erinç YeldanUniversity of Massachusetts, Amherst

Bilkent University, Ankara

“In these papers all needless matters have been eliminated ... There is throughout no statement of past things wherein memory may err,

for all the records chosen are exactly contemporary, given the knowledge of those who made them.”

-Bram Stoker, Dracula, 1897

With the completion of capital account liberalization in 1989, Turkey is trapped into

• high real rates of interest and

• an overvalued exchange rate (cheap foreign currency)

Inflation of Producer Prices and The Interest Rate on GDIs

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0 Inflation Rate (Producer Prices)Nominal Interest Rate on GDIsReal Interest Rate on GDIs

1994 crisisWeak

Coalition Governments

Contagion of Russian

and Brazilian

Crises

2001 Crisis

Inflation Targeting,

Flexible Exchange

Rates

Real Exchange Rate Index (TL/$)(Deflated by Fixed 1987 WPI)

0.0

25.0

50.0

75.0

100.0

125.0

150.0

Jan.8

2

Jan.8

3

Jan.8

4

Jan.8

5

Jan.8

6

Jan.8

7

Jan.8

8

Jan.8

9

Jan.9

0

Jan.9

1

Jan.9

2

Jan.9

3

Jan.9

4

Jan.9

5

Jan.9

6

Jan.9

7

Jan.9

8

Jan.9

9

Jan.0

0

Jan.0

1

Jan.0

2

Jan.0

3

Jan.0

4

Jan.0

5

Jan.0

6

Financial Liberalization

Completed

Worsening of macroeconomic fundamentals led by capital inflows: The Frenkel-Taylor cycle

Rise in the domestic interest rate:

Stimulate capital inflows

Domestic currency appreciates

Imports expand, current account deficit widens

To finance the foreign deficit, invite even more capital inflows, raise the interest rate

The 2000 Dis-Inflation Programme

From Speculative-led Growth to IMF-led Crisis...

Stanley Fischer

With the implementation of a more stringent fiscal policy,

the crisis might perhaps have been alleviated.

Unfortunately, the fiscal policy had not been strong

enough, and the current account deficit widened ...

Realization TargetA B A/B

Revenues 33,756.4 32,585.5 103.6Expenditures 46,602.6 46,713.3 99.8Personnel Exp 9,982.1 9,899.8 100.8Investment Exp 2,472.3 2,351.7 105.1Interest Exp 20,439.9 21,132.3 96.7Transfers to the SEEs 885.9 594.6 149.0Source: Ministry of Finance.

2000

Developments in the Central Budget under the 2000 Dis-Inflation Programme (Fixed 2000 Prices, Trillions TL)

Annual Volume of Banking Credit Flows From Abroad (Millions US$)

0

50,000

100,000

150,000

200,000

250,000

1997 1998 1999 2000

Adjustment Mechanisms after the 2001 Crisis and the Main Features

of the IMF Programme

2002 2003 2004 2005 2006

GNP Real Growth Rate 3.0 5.0 5.0 5.0 5.0

Non-Interest Budget balance / GNP (%) 6.5 6.5 6.5 6.5 6.3

Inflation Rate 35.0 20.0 12.0 8.0 5.0

Nominal Rate of Interest on Domestic Debt 69.6 46.0 32.4 27.4 23.9

REAL Rate of Interest on Domestic Debt 25.6 21.7 18.2 18.0 18.0

Source : IMF, 2001 Turkey Country Report (www.imf.org )

Macroeconomic Targets of the Current IMF Programme

Inflation is on a falling trend, yet the real interest rate proves to be inertial...

Inflation and Real Interest Rates (WPI1994 =100)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Apr.03 Jul.03 Oct.03 Jan.04 Apr.04 Jul.04 Oct.04 Jan.05 Apr.05 Jul.05 Oct.05 Jan.06 Apr.06 Jul.06 Oct.06

Real Interest Rate of TotalDomestic Debt Stock (Treasury)

Inflation Rate (Producer Prices)

Large scale of Capital Inflows lead to currency Mis-alignment...

Real Bilateral and the Trade Weighted Rates of Foreign Exchange

0

20

40

60

80

100

120

140

160

Real Bilateral Exchange Rate (TL/US$)

Trade weighted Exchange Rate (CB data)

Ratio of Current Account Balance to GNP

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

The current account deficit problem emerges not because of its sheer size, but because of the mode of financing

Composition of Foreign Debt (Millions $)

118,508

130,206

145,022

162,240170,062

206,471

113,619

0

50,000

100,000

150,000

200,000

250,000

2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4

Total Foreign debt

Public Sector + CB Foreign Debt

Private - Non-Financial Sector Foreign Debt

Private Financial Sector For. Debt

Dilemmas of Turkish adjustment:

Economic growth relies on foreign capital inflows, which necessitate high real interest rates domestically;yetHigh real interest rates aggrevate the problem of debt management

jobless growth and declining real wages...

Total (Open + Disguised) Unemployment Rate (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Disguised Unemployment rate (%)

Open Unemployment rate (%)

Labor Participation Rate and Total Unemployment (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.019

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

Un

emp

loym

ent

(%)

45

46

47

48

49

50

51

52

53

54

Par

tici

pat

ion

Rat

e (%

)

Total Unemployment Rate (%)

Labor Participation rate

Turkey: Labor Productivity and Real Wages, 2000-2006

40

60

80

100

120

140

160

180

2000.I 2000.III 2001.I 2001.III 2002.I 2002.III 2003.I 2003.III 2004.I 2004.III 2005.I 2005.III 2006.I 2006.III

Labor Productivity (per hour worked)

Real Wage Earnings per Labor Employed (per hour)

USA: Labor Productivity and Real Wages, 2000-2005

90

95

100

105

110

115

120

2000 2001 2002 2003 2004 2005

USA Median real hourly wages

USA Labor Productivity - Output per hour in thebusiness sector

Source: EconomicPolicy Institute

Wages and Producticity in the US Manufacturing (1950-1998)

Source: "The New Face of Capitalism: Slow Growth, Excess Capital and A Mountain of Debt" Monthly Review, editors, 2002. (www.monthlyreview.org/0402.editr.htm)

Hourly average product of labor

Hourly real wages

0

200

400

600

800

1000

1200

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Value added per Labor

real wages

Productivity and Real Wages in Turkish Manufacturing, 1950-2005

Public policy became synonymous to populism and waste.

“Good-bye Budget deficits,

hello democracy deficit...”

Excerpts from Morgan Stanley Economic Forum on Turkey, March 4, 2003

“the latest parliamentary decision to reject the much-debated ‘war motion’ is such a risk that will no doubt disturb the fragile equilibrium...(Turkey) is unlikely to get the promised $24 billion that would ease pressure on the domestic debt market...”

“what happens if the parliament does not altogether vote for the economic reforms, arguing that 80% of the Turkish population is against the IMF program?”

Lessons

“ the argument that ‘this time things are different’ is a statement that can only be made by fools that fail to take any lessons from history...”

Kenneth Rogoff, 2005