Is Turkey ready to survive the global financial crisis?

[Prof. Dr. Mukerrem Hic]

Turkey experienced a severe economic crisis in 2001, when the
coalition government led by Bulent Ecevit was in power. To come out of
this crisis, a stand-by agreement with IMF was signed. It called for
stability measures to prevent budget deficit and inflation, measures
to strengthen the financial structure of Turkish banks, and measures
such as privatization, easing the restrictions on direct (foreign)
private investments (DPIs) as required for the practice of market
economy and entry into globalization. Many “experts” argue that
because of all these precautions, Turkey will not be affected by the
global financial crisis.

Between 2002 to 2007 the AKP government, which wisely continued with
the program, found a suitable world environment of increased flow of
DPIs, mostly from developed countries. The AKP government, however,
chose a wrong globalization strategy of relying too much on foreign
financial flows (hot money) by implementing very high real interest
rates. This caused voluminous flow of financial funds into Turkey,
which in turn kept the Turkish Lira over-valued and foreign currency
under-valued. This uninterrupted flow of money enabled Turkey to
finance the rising current account deficit brought by rising prices of
petroleum and by the over-valued currency.

All throughout this period, the main opposition party, CHP, criticized
and attacked the principle of privatization, an outdated economic
stand. Instead they should have concentrated their criticism on the
corruption in administering privatization cases. CHP also seems
uncomfortable with the idea of DPIs, particularly with the purchase of
Turkish banks by foreign investors, even though undisciplined and
corrupt Turkish investors and their banks were the main reason behind
the 2001 crisis.

However, as a result of AKP's over-valued currency practices, Turkish
exporters became less competitive in the global economy. Even though
export volume increased between 2002 and 2007, increases in exports
lagged much behind the increase in the volume of imports, hence
continuously increasing the current account deficit. This went largely
unnoticed since the increasing DPI flow was used to finance the
deficit. As a result of this “addiction” on DPIs, Turkey is very
vulnerable today to any foreign financial shocks and certainly cannot
be isolated from the ongoing financial crisis.