Monetary Policy Debates in the Age of Deglobalisation: the Turkish Experiment-II

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Hasan Cömert & T. Sabri Öncü
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By Hasan Cömert & T. Sabri Öncü

This article first appeared in the Economic & Political Weekly on 18 March 2023.

This article is the second in a series of articles on monetary policy debates in the age when deglobalisation became a buzzword. Here, we begin our discussion of the ongoing economic experiment in Turkey as an example to elaborate on these debates. In the third article, we will turn our attention to the post-2018 Turkish currency crisis phase of the experiment by focusing on macroprudential measures, capital controls and central bank independence, as promised in the first article.

Introduction

In the first article of this series, Öncü and Öncü (2022) established a link between the imperialist–liberalist hegemonic mode cycles of Karatani (2012) and their globalisation–deglobalisation cycles, and relying on the observations of Rodrik (2022), among others, argued that the ongoing globalisation—the current imperialist phase that started in the early 1990s—had not ended yet. They then demonstrated with examples from the last 20 years how the word deglobalisation had come to dominate the prevailing rhetoric and defined the age of deglobalisation as the age in which deglobalisation became a buzzword.

With this second article of the series, we turn our attention to the “deglobalising” country Turkey where with the ongoing monetary policy experiment that started after the currency crisis of August 2018, almost every citizen is now well-informed about, if not an expert on, monetary policy. We all are hotly debating whether the Central Bank of the Republic of Turkey (CBRT) should be independent, whether the macroprudential measures taken by the CBRT and Banking Regulation and Supervision Agency (BRSA) are appropriate, whether the country needs capital controls to protect the Turkish lira, and the like, irrespective of our occupations.

To set the stage for our discussion of the post-2018 currency crisis phase of the experiment in the next article, we will go back to 1980 and briefly summarise what happened along the way to the currency crisis of August 2018 in this article.

From 1980 to 1994 Crisis

As summarised in Öncü (2019, 2022), the Bretton Woods International Monetary System – negotiated at the 1944 Bretton Woods Conference and lasting from 1947 to 1971 – was a system in which the United States (US) would fix the price of gold at $35 per ounce, and the rest of the world would tie their currencies to the dollar in some adjustable window. The Bretton Woods System was based on Keynesian principles of government intervention.

Two institutions that came out of the Bretton Woods Conference, created as overseers of the Keynesian principles based Bretton Woods Monetary System, were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which soon came to be called the World Bank. While the original task of the IMF was to assist for the countries to fix their currencies to the dollar by providing short-term loans during temporary balance of payment deficits, the original task of the World Bank was to provide long-term loans for the reconstruction of the countries devastated by World War II and for others so that they can “develop.”

When the Bretton Woods System collapsed in 1971, a free-market principles based economic programme called the neo-liberal economic programme (re-)surfaced and started to spread around the globe after what Harvey (2005) called the Deng-Volcker-Thatcher-Reagan Revolution of 1978–80. And, then, the formerly Keynesian revolutionaries IMF and World Bank transformed themselves into free-market revolutionaries to become overseers of the neo-liberal programme.

The 1978–80 neo-liberal revolution arrived in Turkey with the balance of payments crisis of 1979. The following year, the government prepared a “stabilisation” programme approved by the IMF on 24 January 1980—the implementation of which the Turkish military guaranteed with the coup d’état of 12 September 1980—and an ambitious programme of economic liberalisation and market-led adjustments started (Boratav and Yeldan 2006).

Included in this ambitious programme was the full liberalisation of the standard components of the balance of payments accounts that record the economic transactions of an economy with the rest of the world. Back then, these components were the current account and the capital account.

While the current account consisted of real transactions comprising trade in goods and services, and income and unrequited transfers, the capital account consisted of financial transactions. Then, in 1993, the IMF renamed the capital account as the financial account to differentiate the real and financial forms of capital and created a new account to move the capital transfers part of the unrequited transfers [“a transfer of money by a government for which no compensation is expected in return” – Ed] in the current account to this new account. The IMF called this new account the capital account and, to the capital transfers, added the acquisition or disposal of non-produced, non-financial assets. Thus, the standard components of the balance of payments became the current account, the capital account and the financial account (IMF 1993). Because of this, we hope that when we freely switch between the “capital account” and “financial account” to refer to the same account, the readers would put the blame not on us, but on the IMF.

The first notable step towards full liberalisation of both the current account and the capital account in Turkey came in 1981. In 1981, the government enacted a capital market law that gave way to the establishment of the Capital Markets Board (CMB) as the main regulatory body to regulate and supervise the Turkish securities market a year later.

The second notable step came in 1984. This year saw not only the start of the gradual trade liberalisation but also the publication of the regulations for the establishment and functions of securities exchanges in the Official Gazette, which gave way to the Istanbul Stock Exchange, formally inaugurated at the end of 1985.

The third notable step came in 1989. The government issued a decree—Decree No 32 on the Protection of the Value of Turkish Currency, 7 August 1989—to almost fully liberalise the capital account in one step. The decree allowed non-residents to maintain Turkish lira accounts in domestic banks and trade any domestic security registered with the CBM. Further, it allowed residents to hold foreign currency accounts in the domestic banks without restrictions, notwithstanding the partial trade liberalisation of 1984 permitted some foreign currency accounts at the domestic banks earlier.

The last notable step came in 1990, which took the partial current account liberalisation of 1984 to almost full convertibility so that Turkey had achieved almost full convertibility for both the current and capital accounts by the end of 1990. It, therefore, comes as no surprise that, although Michel Camdessus, the then managing director of the IMF, called the December 1994 Mexican peso collapse the “first financial crisis of the 21st century” (Heath 2015), the actual “first financial crisis of the 21st century” was the January 1994 Turkish lira collapse. From 1 January 1994 to 6 April 1994, the Turkish lira devalued 73% against the US dollar.

From 1994 Crisis to 2001-02 Crisis

Irrespective of whether the Turkish Rakı Crisis or the Mexican Tequila Crisis of 1994 was the “first financial crisis of the 21st century,” both took place shortly after the start of the last globalisation phase Öncü and Öncü (2022) identified. Then came the Southeast Asian crisis of 1997, followed by the Russian crisis of 1998 and the Brazilian crisis of 1999, all exacerbating financial outflows from developing countries, including Turkey. Furthermore, in August 1999, a devastating earthquake hit the industrial heartland of Turkey, pushing her into a deep recession in a high inflation-rapid lira depreciation environment. Teetering on the brink of another crisis, Turkey went to the IMF for the umpteenth time as a pre-emptive measure in December 1999 to launch another “stabilisation” programme based on a crawling currency peg to bring down inflation and control the accumulating public debt (Akyüz and Boratav 2003).

However, since all such programmes inevitably fail one day, after the start of a banking crisis in November 2000, followed by a political crisis in early 2001, the peg broke in February 2001. In March 2001, after a capital exodus through the wide-open capital account, the lira lost about 50% against the dollar, and, in addition to the banking and currency crises, the balance of payments problems started. The then governing coalition went to the IMF one more time for another “stabilisation” programme with which the second and higher wave of the neo-liberal transformation of the Turkish economy—again dictated and overseen not only by the IMF but also by its sister Bretton Woods Institution, the World Bank, as is always the case — took off.

Irrespective of whether the Turkish Rakı Crisis or the Mexican Tequila Crisis of 1994 was the “first financial crisis of the 21st century,” both took place shortly after the start of the last globalisation phase Öncü and Öncü (2022) identified. Then came the Southeast Asian crisis of 1997, followed by the Russian crisis of 1998 and the Brazilian crisis of 1999, all exacerbating financial outflows from developing countries, including Turkey. Furthermore, in August 1999, a devastating earthquake hit the industrial heartland of Turkey, pushing her into a deep recession in a high inflation-rapid lira depreciation environment. Teetering on the brink of another crisis, Turkey went to the IMF for the umpteenth time as a pre-emptive measure in December 1999 to launch another “stabilisation” programme based on a crawling currency peg to bring down inflation and control the accumulating public debt (Akyüz and Boratav 2003).

However, since all such programmes inevitably fail one day, after the start of a banking crisis in November 2000, followed by a political crisis in early 2001, the peg broke in February 2001. In March 2001, after a capital exodus through the wide-open capital account, the lira lost about 50% against the dollar, and, in addition to the banking and currency crises, the balance of payments problems started. The then governing coalition went to the IMF one more time for another “stabilisation” programme with which the second and higher wave of the neo-liberal transformation of the Turkish economy—again dictated and overseen not only by the IMF but also by its sister Bretton Woods Institution, the World Bank, as is always the case—took off.

From 2001-02 Crisis to GFC

However, the coalition government collapsed shortly after and an early election in November 2002 during this economic turmoil led to the now 20-year reign of the Justice and Development Party (AKP). Assuming the ownership of this transformation programme, the AKP administration has deepened it more than intended.

This second wave of the neo-liberal transformation, implemented under the name of “structural reforms” as usual, reduced the state involvement in the economy and increased the influence of supposedly autonomous institutions under the surveillance of the AKP. Privatisations of public institutions—one (if not the most important) of the requirements of this transformation—gained momentum, unlike in the first wave, without serious social opposition and with mass layoffs.

Thanks to massive financial inflows, most developing economies experienced stability and high growth between 2002 and 2007, and the Turkish economy was no exception. The resulting appreciation and stable behaviour of exchange rates served as an implicit currency peg and stabilised the prices of imported goods (Benlialper and Cömert 2016). The inflation rate decreased from 54% in 2001 to 8.5% in 2004, remaining relatively low until recently. However, the unemployment rate remained stubbornly high, around 9%, during the period.

Although the global financial crisis (GFC) of 2008–09 affected advanced countries deeply, developing countries performed relatively well during this period. Most developing countries did not experience significant turmoil (Cömert and Çolak 2018). The slowdown in financial flows was not as large as the ones experienced in the 1980s and 1990s in terms of both magnitude and duration. The main channel through which the GFC transmitted to developing economies was the trade channel (lower exports) due to sharp declines in the demand for their goods by advanced economies (Cömert and Çolak 2018). As a result, the majority of developing countries weathered the global storm with relatively minor financial sector damages without large gross domestic product (GDP) growth collapses.

However, the Turkish economy was not as lucky as most other developing economies, as the Turkish economy was among the most adversely affected. For the first time since the 1980s, Turkish exports declined by more than 20% in 2009 (Cömert and Uğurlu 2016). Besides, although there was no large financial flow reversal from the Turkish economy, the size of inflows plummeted considerably. As a result, as opposed to the claims of Turkish politicians, the 2008–09 crisis did not “pass tangentially” to the Turkish economy, and the Turkish economy experienced one of the worst economic downturns, although there was not a full-fledged financial collapse. The Turkish GDP growth declined by 8.53% during the 2008–09 crisis, a decline comparable to (if not worse than) the declines in the 1994 and 2001–02 crises, which were 8.03% and 8.18% in 1994 and 2001–02, respectively (Cömert and Yeldan 2018).

From GFC to 2018 Crisis

After the GFC of 2008–09, many developing countries enjoyed a second wave of financial inflows that helped stabilise (or appreciate) their local currencies and led to another cycle of high credit expansion and high GDP growth. In this period, the Turkish economy attracted a staggering amount of financial inflows (about $265 billion) in only four years (from 2010 to 2013), mainly in the form of portfolio flows and other flows. Although these massive financial inflows boosted the exchange rate stability, the CBRT reserves and GDP growth, the Turkish economy could not avoid the trap of jobless growth. During this period, the unemployment rate remained around 9% on average (Cömert et al 2022).

As explained above, after 2002, the Turkish economy experienced cycles similar to other developing countries. However, as Cömert, Çelik, and Şengül (2022) elaborated and the discussion above implies, the Turkish economic performance was weaker relative to her peers in all periods, except for growth and public debt indicators. In this sense, we can label the relatively high Turkish GDP growth performance a “malignant growth” boosted by large financial inflows without generating solutions to such problems such as unemployment and leading to significant vulnerabilities such as high current account deficits (Cömert et al 2022).

The vulnerabilities accumulated in the Turkish economy in the pre-GFC period have become increasingly evident after 2014 and the economic growth began to slow sharply. In parallel with the geopolitical and domestic political developments after 2016, these vulnerabilities started to shake the economy. Under the government’s pressure, the CBRT tried to address the problems by implementing an active monetary policy. The state banks and BRSA also implemented policies in line with the CBRT to alleviate the pressures on the monetary transmission mechanism.

However, the existing vulnerabilities and domestic geopolitical and political risks decreased the appetite of non-residents for Turkish financial assets and financial inflows fell significantly. Indeed, a sudden reversal of financial flows in August 2018 triggered a signi­ficant exchange rate shock, a currency crisis. Besides, residents also jumped into the wagon and fuelled the demand for foreign currencies, which exacerbated the situation.

In Conclusion

As promised at the outset, we gave a broad-brush summary of the neo-liberal journey Turkey started with the IMF-approved 24 January 1980 “stabilisation” programme and the accompanying 12 September 1980 coup d’état to reach the August 2018 currency crisis. In the third article of the series, we will look at the aftermath of this Turkish Rakı crisis with the objective of shedding some light on the monetary debates of the current age of deglobalisation, unless another Mexican Tequila crisis that deserves more attention occurs by then.

Hasan Cömert ([email protected]) is Associate Professor of Economics at Trinity College, Hartford Connecticut, USA. T. Sabri Öncü ([email protected]) is an economist based in İstanbul, Turkey.

References

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Benlialper, Ahmet and Hasan Cömert (2016): “Implicit Asymmetric Exchange Rate Peg Under Inflation Targeting Regimes: The Case of Turkey”. Cambridge Journal of Economics, Vol. 40, No 6.

Boratav, Korkut and Erinç Yeldan (2006): “Turkey, 1980–2000: Financial Liberalization, Macroeconomic (In)Stability, and Patterns of Distribution,” in External Liberalization in Asia, Post-Socialist Europe, and Brazil, ed. Lance Taylor, Oxford: Oxford University Press.

Cömert, Hasan and Selman Çolak (2018): Can Developing Countries Maintain Financial Stability after the Global Crisis? The Role of External Financial Shocks”, Panoeconomicus, Vol. 65, No 2.

Cömert, Hasan, Duygu Çelik and Z. Oğulcan Şengül (2022): “AKP Dönemi Türkiye Ekonomisinin Performansı: Karşılaştırmalı Bir Analiz,” METU Studies in Development, Vol. 49, No 1.

Cömert, Hasan and E. Nur Uğurlu (2016): “The Impacts of the 2008 Global Financial Crisis on Developing Countries: The Case of the 15 Most Affected Countries,” in The Global South after the Crisis: Growth, Inequality and Development in the Aftermath of the Great Recession, eds. Hasan Cömert and Rex A. McKenzie, Glos and Massachusetts: Edward Elgar Publishing.

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