Worldly Philosopher: The IMF is Wrong About Turkey, Again
This week's Worldly Philosopher, Ozlem Omer, discusses the flaws in the latest IMF policy recommendations for Turkey.
The IMF is the master at providing shallow or inappropriate one-size-fits-all policy recommendations for developing countries that fail to address the underlying causes of economic under-performance.
The December 2014 IMF Report is no exception. In it, the IMF warns Turkey that its persistent and large external debts make the country vulnerable to foreigners' willingness to lend - even though the Turkish economy has been growing 6% per year since 2010. The report criticizes Turkey's high inflation and foreign exchange rates, low interest rates, low levels of domestic savings, high external deficit, and, of course, increasing levels of private external debt. It predicts Turkey will likely face a dangerous reversal of capital flow. If foreign pension funds, rich foreign investors, and other countries stop lending money in Turkey, the nation could experience economic and social shocks exceeding the fallout from the 2009 recession.
The IMF suggests Turkey "curb its current account deficit and reduce the external deficit by boosting savings without decreasing investment—and lowering inflation to preserve competitiveness." In short, it calls for Turkish austerity.
Wrong advice.
The IMF ignores how unemployment and corruption drive economic actors to poorly allocate resources and wealth. Professors Korkut Boratav and Lance Taylor (Shaikh, 2007, pp: 126) assert that the IMF's shallow analysis may be a justification for its own neo-liberal recipes imposed on Turkey since the 1980's – the same policies that contributed to Turkey's current economic fragility.
For example, the IMF enforced current and capital account liberalization and inflation targeting, which made it difficult for Turkey and other developing countries - such as the Asian Tigers - to sustain growth. As a direct result of IMF's advice to free up capital flows savings decreased by half in the last 15 years while external debt increased (Boratav). Unlimited capital inflows create problems when cheap foreign money results in low domestic savings.
While the IMF report acknowledges the problem, it ignores its own role in creating it. Turkey now suffers from the threat that hot money inflows will suddenly stop as a direct consequence of the IMF's advice to allow unlimited capital flows in and out of the country.
The IMF should not encourage developing countries to become addicted to abundant external flows. They end. The IMF pushed Turkey to be part of the European Customs Union and use unprotected real exchange rate policies, making Turkey vulnerable to free capital movements.
Free trade doctrines and inflation targeting policies are hammers and screwdrivers in the IMF's limited toolbox. Turkey should not heed the IMF's dangerous advice to "decrease the current deficit and external debt by increasing savings without lowering the investments." Sounds like good advice? NO. Increasing savings this way would decrease income for Turkish households and reduce domestic aggregate demand. As a result, negative growth becomes inescapable.
This IMF-induced austerity program will likely lead to recession. Instead, Turkey should sustain growth and raise competitiveness by:
- Increasing public investments and improving labor market conditions by eliminating corruption and privatization; and
- Providing subsidies to protect infant industries and implement other trade protections,
Pursuing these two policies would reduce Turkey's current account deficit, make Turkey less dependent on foreign lenders and reduce external resource dependence, raise the productivity and employment of the Turkish people, and induce the private sector to make real investments.
The IMF needs to tune-up their mission and dump out its broken tools. It can do so by creating policies that engage all nations in a web of cooperative economic organizations dedicated to inclusive growth and full employment.