Turkey’s crisis – Financial woes threaten economy

 

Many people are directly feeling the effects of the recession –- and the ramifications reach far beyond the United States.

 

According to the International Labor Organization, the current global financial crisis could cause as many as 20 million people worldwide to lose their jobs and cause extreme poverty to afflict as many as 40 million people. This crisis will test the ability of elected officials to make difficult decisions that their people may not agree with. That is, however, the weakest point in today´s democracies.

 

Take Turkey as an example. It is accustomed to coping with financial crises. When the markets toppled in February 2001, and thanks to an agreement with the International Monetary Fund, the economy recovered. But the worldwide financial turmoil is again jeopardizing Turkey’s economy, and this time the Turkish government seems reluctant to agree to the IMF’s conditions.

 

According to a recent public opinion poll by CNBC-e, more than 60 percent of Turks do not want their government to enter into a new agreement with the IMF. Turkish Prime Minister Recep Tayyip Erdogan strongly agrees –- and has used some inflammatory rhetoric to make his point.

 

Last month, he accused the IMF of “squeezing Turkey’s throat by curbing needed spending” and said the country doesn’t need another IMF program. It may make some Turks feel better to hear their prime minister speak with such attitude. But the way Mr. Erdogan’s government is negotiating with the IMF could bring about a different kind of reality. Truth be told, it´s Turkey rather than the IMF that needs the agreement.

 

Last week, however, IMF spokeswoman Caroline Atkinson said that “there has been no formal request from the Turkish authorities for a program.” Yet prior to that statement, Turkish officials leaked claims to the media either that the IMF would not ratify a loan for the amount that Turkey needs or that an agreement is near. Those reports were then followed by an official statement from the Turkish Treasury confirming Ms. Atkinson´s statement. A responsible government should have foreseen the inevitable nervousness that it would create with such mixed messages. It’s good that the Turkish stock market will be closed this week for a religious holiday.

 

Separately, the government is expecting the Gulf countries to invest $10 billion to $20 billion in Turkey. But that money will either go toward buying land or on the construction business, which has little or no effect on a country’s growth rate. In other words, this is not investment in industry. It does not contribute to the real economy. Mr. Erdogan’s Justice and Development Party (AKP) seems to object to the IMF program because it wants the country’s growth rate to decline.

 

But the IMF program is crucial for Turkey. It commits the country economically to accountability and credibility. It guarantees a continuous flow of money into a market in a time when global liquidity is drying up and investors have almost no appetite for risk. The Turkish government has not shown the expected GCC money as an alternative to the IMF program. But it certainly is keeping it in mind as it negotiates with the IMF –- and its method of negotiation does not fit the mold of credible business dealings.

 

The point of Mr. Erdogan’s harsh rhetoric about the IMF could be that he really believes what he says –- that “the worst of the economic crisis was now past.” Yet U.S. President-elect Barack Obama said that “the economy seems destined to get worse before it gets better.” More, Mr. Erdogan recently said that the global financial crisis will not harm Turkey and proudly noted that on his watch no Turkish bank has gone bankrupt.

 

Technically, Mr. Erdogan bought some time. But the crucial point remains that the IMF is demanding that the Turkish government take control of its budget. The program is meant to focus on the budget on a macro level, but its application will certainly impact the micro level. Given that municipality elections are fast approaching in March, many Turks are debating as to whether the government wants to maximize gain in the elections, which is why it will not accept the IMF demand about budget control.

 

One of the key elements in the success of AKP –- or any Islamic movement –- is they do take care of their supporters. The party has distributed coal to people in the winter, as well as food –- creating a specific kind of relationship between constituents and the government. Over the long term, however, this means of operating actually puts down the people. But it certainly wins elections.

 

Right now, Turks are unsure as to how to judge the AKP’s success in managing the financial storm. On that point, the local elections are critical for the AKP. The party has invested a lot in its establishment, but if it can’t win a significant number of new municipalities, there has to be a political interpretation. It could signal a possible coalition government in the upcoming general elections, which hopefully will turn back the rising power of political Islam in Turkey.