Turkey: Here We Go Again

This article was first published in Forbes Global, July 9, 2001.
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Even though Turkey and Indonesia are very different countries, they do havesomething in common: long histories of bad money. When Turkey joined theInternational Monetary Fund in 1947, 2.8 Turkish lira would fetch one U.S.dollar. Now it's 1.2 million lira. That's a depreciation of 429,000 timesagainst the dollar. The Indonesian rupiah is even worse off. SinceIndonesia's independence in 1949, the rupiah has depreciated more than 2.9million times against the dollar.

The two nations share another dubious distinction. They are both economicprotectorates of the International Monetary Fund (IMF) and its misbegottenmicromanaging. This micromanaging has failed to stabilize their currenciesand economies and has pushed Indonesia to the brink of chaos.

To encourage exchange-rate stability, the fund had Indonesia float therupiah in August 1997--and the rupiah since has lost 78% of its valueagainst the dollar. Among other things, the collapse of the rupiah destroyedthe balance sheets of countless private businesses that were laden withdollar-denominated debt. It also left Indonesia's banking system insolvent.Forced to recapitalize the banks, Indonesia has seen its public debt jumpfrom 30% of gross domestic product before the crisis to 120%. Consequently,Indonesia is in a debt trap, with an incredible 35% of governmental revenuesgoing to pay interest on the debt.

That's not all. The IMF also requires Indonesia to completely overhaul itsgovernmental operations and restructure its economy, something the fundknows little about. Needless to say, little popular support exists for this.The only result is an unstable political environment in Jakarta. Amidlawlessness and separatist rebellions, President Abdurrahman Wahid facespossible impeachment. And a restive military eyes a power grab.

The IMF's quasi-revolutionary reform program was designed by bureaucrats inWashington, D.C., and imposed on Indonesia from the top down. History hasshown that reform programs that resulted in major economic transformationshave been from the bottom up. All were homegrown and pushed through by localleaders, whatever you may think of them: Pinochet in Chile, Thatcher in theU.K., Reagan in the U.S. and Deng in China.

Unfortunately, the IMF used the same cookie cutter to design the Turkishprogram that it did for Indonesia's. Sure enough, the floating of the liraon Feb. 22 has led to a lira devaluation of 43% against the dollar. Thecollateral damage has been enormous. Balance sheets are tattered; manybusinesses and banks have crumbled. The economy is contracting rapidly, andthe government is in a debt trap even more viselike than Indonesia's.

Turkey's latest agreement with the IMF, signed on May 15, gives it $8billion more from the fund, bringing the total to $19 billion. To get thatmoney, Turkey must impose on its population a batch of changes dictated inexcruciating detail half a world away, ranging from massive privatizationsto subsidy cuts. Some of the IMF's mandates have actually required Turkey toamend its constitution.

Turkey's new economic czar, Kemal Dervis, remains popular, but the fund'stop-down dictates do not garner the same support. Not surprisingly, itsprogram is roiling Turkey's political waters. The removal of tobaccosubsidies required the forceful hand of Prime Minister Bulent Ecevit. Thecost was high: His political coalition has begun to unravel. Yuksel Yalova,the state minister for privatization who attempted to delay the subsidyremoval bill, subsequently resigned. Most recently, Sadettin Tantan, theinterior minister and leader of Turkey's anticorruption drive, quit thecabinet. Turkey's powerful military is primed to take over.

With luck, Turkey won't sink as deep as Indonesia, where even the IMF hastemporarily thrown in the towel. For one thing, there is grassroots supportbuilding for a Turkish currency board, which would lock the lira to theeuro. Dervis won't rule out either a board or scrapping the lira altogetherand installing the euro as the national currency. And since Turkey occupiesa vital strategic position as a NATO staging area, maybe the IMF will wiseup and let the Turks initiate their own sound-money strategy. That's a bigmaybe.

Steve H. Hanke

Steve H. Hanke is a professor of applied economics at The Johns Hopkins University in Baltimore, chairman of the Friedberg Mercantile Group, Inc. in New York, and an adjunct scholar at the Cato Institute.