Patterns of Adjustment
under the Age of Finance:
The Case of Turkey as a
Peripheral agent of NewImperialism
A. Erinç Yeldan
University 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
Inflation Rate (Producer Prices)
Nominal Interest Rate on GDIs
Real Interest Rate on GDIs
400.0
350.0
300.0
250.0
200.0
Weak
Coalition
Governments
1994 crisis
150.0
Contagion
of Russian
and
Brazilian
Crises
2001
Crisis
Inflation
Targeting,
Flexible
Exchange
Rates
100.0
50.0
0.0
Ja
-50.0
-100.0
n.9
2
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3
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4
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9
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0
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1
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2
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3
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4
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5
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Ja
n.
82
Ja
n.
83
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84
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85
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86
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87
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88
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89
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90
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91
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92
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93
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94
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96
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97
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98
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99
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00
Ja
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01
Ja
n.
02
Ja
n.
03
Ja
n.
04
Ja
n.
05
Ja
n.
06
Real Exchange Rate Index (TL/$)
(Deflated by Fixed 1987 WPI)
150.0
125.0
Financial
Liberalization
Completed
100.0
75.0
50.0
25.0
0.0
Worsening of macroeconomic fundamentals
led by capital inflows: The Frenkel-Taylor cycle
Rise in the domestic interest rate:
Stimulate capital inflows
Domestic currency appreciates
Imports expand, current account
deficit widens
To finance the foreign deficit, invite
even more capital inflows, raise the
interest rate
The 2000 Dis-Inflation Programme
From Speculative-led Growth to IMF-led
Crisis...
With the implementation of a
more stringent fiscal policy,
the crisis might perhaps
have been alleviated.
Unfortunately, the fiscal
policy had not been strong
enough, and the current
account deficit widened ...
Stanley Fischer
Developments in the Central Budget under the 2000 DisInflation Programme (Fixed 2000 Prices, Trillions TL)
Realization
A
Revenues
Expenditures
Personnel Exp
Investment Exp
Interest Exp
Transfers to the SEEs
Source: Ministry of Finance.
2000
Target
B
33,756.4 32,585.5
46,602.6 46,713.3
9,982.1
2,472.3
20,439.9
885.9
9,899.8
2,351.7
21,132.3
594.6
A/B
103.6
99.8
100.8
105.1
96.7
149.0
Annual Volume of Banking Credit Flows
From Abroad (Millions US$)
250,000
200,000
15 0 , 0 0 0
10 0 , 0 0 0
50,000
0
19 9 7
19 9 8
19 9 9
2000
Adjustment Mechanisms after the
2001 Crisis and the Main Features
of the IMF Programme
Macroeconomic Targets of the Current IMF Programme
GNP Real Growth Rate
Non-Interest Budget balance / GNP (%)
Inflation Rate
Nominal Rate of Interest on Domestic Debt
REAL Rate of Interest on Domestic Debt
2002
3.0
6.5
35.0
69.6
25.6
Source : IMF, 2001 Turkey Country Report (www.imf.org )
2003
5.0
6.5
20.0
46.0
21.7
2004
5.0
6.5
12.0
32.4
18.2
2005
5.0
6.5
8.0
27.4
18.0
2006
5.0
6.3
5.0
23.9
18.0
Inflation is on a falling trend,
yet the real interest rate
proves to be inertial...
Inflation and Real Interest Rates
(WPI1994 =100)
40.0
35.0
Real Interest Rate of Total
Domestic Debt Stock (Treasury)
30.0
Inflation Rate (Producer Prices)
25.0
20.0
15.0
10.0
5.0
0.0
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
Large scale of Capital Inflows lead to
currency Mis-alignment...
Ja
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6
Real Bilateral and the Trade Weighted Rates
of Foreign Exchange
160
140
120
100
80
60
40
Real Bilateral Exchange Rate (TL/US$)
20
Trade weighted Exchange Rate (CB data)
0
Ratio of Current Account Balance to GNP
4.0
2.0
0.0
1990
-2.0
-4.0
-6.0
-8.0
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 $)
250,000
Total Foreign debt
Public Sector + CB Foreign Debt
206,471
Private - Non-Financial Sector Foreign Debt
200,000
Private Financial Sector For. Debt
170,062
162,240
145,022
150,000
130,206
118,508
113,619
100,000
50,000
0
2000Q4
2001Q4
2002Q4
2003Q4
2004Q4
2005Q4
2006Q4
Dilemmas of Turkish adjustment:
Economic growth relies on foreign capital
inflows, which necessitate high real
interest rates domestically;
yet
High real interest rates aggrevate the
problem of debt management
jobless growth and declining real
wages...
Total (Open + Disguised) Unemployment Rate (%)
20.0
18.0
Disguised Unemployment rate (%)
16.0
Open Unemployment rate (%)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Labor Participation Rate and Total Unemployment (%)
20.0
54
Total Unemployment Rate (%)
18.0
53
Labor Participation rate
16.0
52
12.0
50
10.0
49
8.0
48
6.0
47
4.0
2006
2005
2004
2003
2002
2001
45
2000
0.0
1999
46
1998
2.0
Participation Rate (%)
51
1997
Unemployment (%)
14.0
Turkey: Labor Productivity and Real Wages,
2000-2006
180
Labor Productivity (per hour worked)
160
Real Wage Earnings per Labor Employed (per hour)
140
120
100
80
60
40
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
USA: Labor Productivity and Real Wages, 2000-2005
120
USA Median real hourly wages
115
USA Labor Productivity - Output per hour in the
business sector
110
105
100
95
90
2000
2001
2002
2003
Source: EconomicPolicy Institute
2004
2005
Wages and Producticity in the
US Manufacturing (1950-1998)
Hourly average
product of labor
Hourly real
wages
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)
Productivity and Real Wages in Turkish
Manufacturing, 1950-2005
1200
Value added per Labor
1000
800
600
400
real wages
200
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
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