TURKEY - The Economic Dangers.

Foreign money has been pouring into Turkey rapidly, fuelling an economic expansion that has investors and analysts praising the country's policies. But those who remember a similar excitement about Argentina in the early 1990s, which was followed by one of the most disastrous collapses in Latin American history, should be wary. This was one of the warnings in an article published on Dec. 4 by the IHT, written by Erinc Yeldan, a professor in the department of economics at Bilkent University in Ankara, and Mark Weisbrot, co-director of the Centre for Economic and Policy Research in Washington.

"The parallels [in Turkey] are striking", they wrote, noting that Argentina's growth in the early 1990s was also spurred by foreign capital inflows, "and it also led to an overvalued currency that helped destroy the country's manufacturing base". Even during Argentina's growth years, "when it was the poster child of the International Monetary Fund, there was little job creation".

Turkey's economy actually shrank in 1998-2001, with a 9.5% plunge in 2001. In response to the crisis, Ankara borrowed heavily from the IMF - $31.8 bn between 1999 and now - and adopted a set of IMF-guided policies advocated by the IMF. "These policies brought about very high real interest rates, reductions in the government's fiscal authority and spending, an increase in foreign borrowing, a floating exchange rate and a rise in the local currency. They also resulted in privatization of state-owned industries (and consequent unemployment), and a removal of agricultural and other subsidies".

The Turkish economy grew by an average of 7% annually in 2002-03, and is expected to have grown at the same rate in 2004. Inflation, which was at 68.5% in 2001, has been brought to a projected 11.4% for 2004. But beneath these numbers, a crisis looms. The expansion has been driven by a huge inflow of capital from abroad, $10.9 bn in 2003 (4.6% of the economy) and $12.5 bn in the first eight months of 2004. "These are overwhelmingly speculative, short-term inflows - not direct investment, for example, which would expand the country's productive capacity and create jobs. Foreign direct investment has in fact fallen since 2000".

Turkey, the authors warned, "is very vulnerable to a serious economic downturn when the inflow of foreign money goes dry. These kinds of massive speculative capital inflows have a habit of reversing themselves, as they did in Asia in 1997, setting off...a regional depression. In such situations, investors eventually begin to worry about the sustainability of such borrowing and debt. Any number of external events could trigger such an exodus from Turkey". If world interest rates rise, "as they undoubtedly will from their current historic lows", safe assets like US Treasury securities will become attractive. The influx of speculative money from abroad has pushed the Turkish lira to an overvalued level. This, too, is "a bubble waiting to burst". It has devastated traditional Turkish industries that are typically labour-intensive by making imports artificially cheap, thus aggravating the unemployment problem.

The lira had risen 139% against the dollar in 2000-2003. The public debt is 70% of the GDP. To sustain it, the IMF has Ankara running a primary (excluding interest) budget surplus of 6.5%. This is extremely high (compared to 3% for Argentina and 4.25% for Brazil), and prevents the government from making investments in human capital and infrastructure.

Another devastating part of the IMF programme is high interest rates: The Treasury's debt instruments - the leading assets in the Turkish financial markets - carry an interest rate of 26%, still very high at 15% in inflation-adjusted terms, compared to 2% in the US. This is why businesses in Turkey are reluctant to borrow and invest in productive capacity. "In short, the policy makers have created an economy that runs on a speculative bubble..." Since 2000, the unemployment rate has risen by almost 4% to 10.5%, and real wages have actually fallen.

The authors said that, as Turkey and the EU continue talks on the possibility of EU accession, Ankara "should re-examine its unsustainable economic policies of the last five years". Continuing these IMF-backed policies in hopes of garnering credibility with the EU may be dangerous. "Ironically", the authors concluded, "such policies could lead to an economic failure that would actually doom Turkey's chances for membership".