Wednesday, 24 December 2008
Since the financial crisis deepens, governments all around the world have started to search for alternative measures to mitigate its effects. As can be remembered, the first comprehensive recovery plan (amounted at 700 billion dollars) came from the United States in October. The U.S. is followed by the European governments and national recovery plans were declared by the Head of States and Governments of the EU member countries. Accordingly, Gordon Brown’s England declared 500 billion pounds worth recovery plan. Merkel’s Germany put into force approximately 500 billion euro worth emergency measures. French President who recently declared the “end of Laissez-faire” opened an economic packet at an amount of 320 billion euro. In short, the first reaction to the financial crisis in the developed countries was very quick, and the leaders in those countries, gave the signal that they would do whatever necessary in order not to allow the bankruptcies to spread over the entire system.
In retrospect, we understand that the abovementioned measures were the “first recovery plans” aiming at bailing-out the financial system. Recently “second recovery plans” have been put on the agenda in the U.S and in the EU in order to stimulate the economic growth in the real sector. In this regard, the European Commission declared a Communication to the European Council named as “A European Recovery Plan.” The Commission proposed an immediate budgetary impulse amounting at 200 billion euro (1.5% of GDP). The U.S. also pledged 800 billion dollars to bolster markets for loans to homebuyers, small businesses and consumers. According to International Herald Tribune, “the government has taken on at least 7 trillion in direct and indirect financial obligations over the past year.”
The second recovery plans mainly concentrate on keeping the credit channels open to SMEs, on stimulating the domestic demand, and on harnessing the economic growth. Most probably, as the crisis deepens, more ‘recovery plans’ would be declared in the following months.
I. Turkey and the IMF
The abovementioned issues reflect just one side of the coin. There is another side, which is in fact as important as the former. How would the emerging markets be affected from the crisis? How big would the impacts of the crisis be on those economies? As a matter of fact, these are the questions being asked frequently in Turkey nowadays with particular reference to Turkish economy.
In Turkey, the debates mainly turn around the agreement with the IMF. People question whether Turkey should conclude a new Stand-by Agreement with the IMF. The old Stand-by Agreement ended as of the end of August 2008 (refer to the following table). The proponents argue that Turkey’s undeniable success over the 2002-2006 periods partly came out of the ‘anchor’ role of the IMF. They also point out that Turkey needs external credit channels in order to finance her current account deficit and to stimulate economic growth. In this regard, they claim that IMF acts as an important actor in keeping these channels open.
On the other hand, the opponents underline the incompatibly of the visions of the Turkish government and the IMF. They also underscore the unsuccessful recipes offered by the IMF at the previous crises. In short, discussions on the crisis have entered somewhat a vicious cycle in Turkey, partially thanks to the fragile domestic environment. In this comment I shall argue that an agreement with IMF is neither compulsory, nor adequate for Turkey. In order to show why it is so, I will first diagnose the possible channels thorough which the crisis may affect Turkey, and discuss the possible solutions; then I will try to analyze the agreement with IMF considering this perspective.
II. Diagnosing the Sources
- Foreign Trade Channel: Throughout the last six years, export has been one of the engines of the growth in Turkish economy. However, due to the crisis Turkey’s conventional export markets face with recession risks. As can be seen from the following table, EU member countries are amongst the most important export destinations for Turkish firms. According to the latest OECD Report the Eurozone would contract in 2009. This situation would inevitably affect Turkey negatively.
- Foreign Credit Channel: The typical symptom, as well as the consequence of the crisis, is the contraction in financial sector all around the world. Over the last six years the global liquidity conditions enabled Turkish banks to exploit the profit opportunities amply. The Turkish industry also benefited from those good weather conditions. However, once the climate changed, both the external and internal finance channels reacted negatively. As a consequence, the conditions for the Turkish industrialists, especially for the SMEs, became harsher now. Most of the banks are acting reluctantly while extending new credits. The pressures over the key industries like automobile and textile etc… have increased. So the problem has turned out to be a ‘growth problem’ for Turkey.
- Coordination and Expectations Channels: In fact, the coordination and expectations management problems lie at the heart of the problem in Turkey. The solutions to the abovementioned problems and possible others can only be provided by managing the expectations, i.e. improving the ‘confidence’ in the economy. In order to repair the deterioration of confidence among different parts of society, there are three sine qua non.
- Increasing confidence among real sector: In order to stimulate growth, the real sector is the key player in the economy. Turkish government has to declare an economic recovery plan not to allow the key sectors to cut-off their production capacity, and to fire workers.
- Confidence among the financial sector: In crisis conditions, the availability of credit is not less important than the availability of oxygen. Hence, it is of vital importance to establish a ‘fund’ with the contribution of private sector banks, international organizations and government budget. Whether it would be used or not, the existence of this fund would contribute to improvement of the confidence in the economy per se.
- Confidence among the individuals: One of the typical characteristics of crises is their ‘contagious’ nature. Especially, it becomes vitally dangerous when it starts to affect the thoughts of ordinary people. In order not to permit ordinary savers to plunge into bank-run psychology, a cover for bank deposits would be beneficial. There always occurs asymmetric information risks associated with deposit guaranties, however, it should be kept in mind that it is not possible to solve the extraordinary problems with conventional rhetoric.
III. IMF: Neither Compulsory, Nor Adequate
When we approach the IMF case within the abovementioned framework, we can conclude that a possible agreement with IMF is neither compulsory, nor adequate. It is not compulsory, because, if the Turkish government immediately completes the recovery plan, on which it is already working, and increases the confidence among the three parts of the society by establishing coordination mechanisms, agreement will be like a fringe benefit for Turkey. Moreover, this strengthens Turkey’s hand on the negotiation table with the IMF.
A possible agreement with the IMF is not also adequate, because if Turkish government does not achieve enough coordination and manage the expectations, just signing an agreement with IMF under these conditions may exacerbate the situation due to IMF’s insistence on primary surplus and rigid budgetary concerns. In summary, there is a long list ahead of Turkey to take guard against financial crisis. At the top of the list confidence building measures take priority. Agreement with IMF would make sense if it is concluded within the abovementioned context.
Mustafa Kutlay
Is Turkey Drifting Away from the West? An Economic Interpretation (1/2)
