by Elif Karacimen
The recent crisis triggered in the U.S. has attracted much attention from economists regarding the vulnerabilities of developed economies. Nevertheless, the heavy burden the crisis imposes on developing countries seems to have been ignored. Apart from ignoring the fragility of the developing countries to the global crisis, many mainstream economists even suggested that the recent crisis might turn into an opportunity for these economies. This is a widely expressed argument also in Turkey. The Turkish Prime Minister Recep Tayyip Erdogan said in a press conference held at the end of September that “no one should doubt that Turkey will get over current global economic crisis with minimum damage. I believe that Turkey will turn it into an opportunity.”
The argument of transforming crisis into an opportunity for the developing countries stems mainly from the belief that international investors, who have lost money in developed country financial markets, would prefer to invest in emerging market economies, like Turkey, to compensate for their losses.
However the reality for the Turkish economy is that there are many characteristics of its economy that makes it extremely vulnerable to the current crisis. The most important of them is the substantial current account deficit (about 6 % of the GDP), which makes the Turkish economy more vulnerable to the global crisis than many other developing countries. This is because is of ever-increasing difficulty in funding the deficit. Private sector borrowing and short term money flows are the two main channels through which the deficit has been financed. Nevertheless, the current crisis has obstructed both of these channels.
The private sector debt rose by 342 percent, from $43.1 billion to $190.5 billion between 2002 and mid-2008. It is obvious that as the crisis intensifies the private sector will find it very difficult to service its short term debt.
The reversal of the capital flows is another major threat to the funding of the current account deficit and also to the growth of the economy. Within the context of the IMF-led economic programs, maintenance of capital inflows became an inevitable condition of the economic growth. The economy achieved high growth rates after the 2000-2001 financial crises (6% on average between 2002 and 2007) due to the large international capital inflow. High interest rates attracted the capital flows and in turn the abundance of foreign currency led to appreciation of the Turkish lira. An overvalued exchange rate stimulated the imports of consumption and investment goods. But as world liquidity diminished foreign investors began to withdraw their money out of the country, and so maintenance of this import driven growth and also funding the large current account deficit have become impossible.
As a result, given the vulnerable characteristics of the Turkish economy, it is not reasonable to expect that Turkey can transform the crisis moment into an opportunity by attracting international capital inflows.
Thursday, 27 November 2008
Monday, 24 November 2008
A 1989 moment?
by Costas Lapavitsas
The current crisis is a regime break for the global economy, irrespective of its eventual resolution. For more than two decades the premise of economic policy-making has been ‘private good - public bad’, always favouring market solutions to state-based interventions. This has now been damaged beyond repair. Policy-making can be expected to put fresh stress on the public though the form this will take is not yet clear.
Keeping the proportions, the crisis has analogies with the collapse of the Eastern Bloc in 1989-1991. After the fall of the Soviet Union the credibility of socialist ideas and policies received a body blow. The best that the Left could do was call for ‘anti-capitalist’ policies or ‘resistance’ to the neo-liberal onslaught. This is likely to change, though a lot will depend on whether the Left can put forth innovative ideas and proposals.
There are several reasons why this crisis might lead to such profound change, four of which immediately come to mind. The first is its sheer magnitude. Global losses for banks already stand around $650bn. In the USA alone 17 major financial institutions have failed so far. By the time the crisis is over the cost for the USA is likely to run to several percentage points of GDP, perhaps in double digits. In other economies, for instance, the UK, Ireland and Iceland, things could be even worse. And that is without counting the social cost of the coming global recession.
Second, the crisis has been created by private finance at the heart of developed countries. It has nothing to do with bumbling state intervention, or war, drought and other external shocks. And nor is it the outcome of corruption or cronyism, the favourite bogeys of neo-liberals when it comes to financial crises in developing country. The crisis arose because freely competitive, private financial institution in developed capitalist countries proved to be inherently inefficient in organising society’s financial affairs.
Third, the crisis was caused primarily by the advance of finance to private individuals rather than to corporations or small businesses. Since the 1980s, big business has relied less on banks and more on open markets to obtain finance. Banks have turned to lending for mortgages and consumption as well as commissions from mediating financial transactions. Meanwhile, the withdrawal of public provision in housing, pensions, health, education and consumption has driven people into the arms of finance. The costs have been enormous. In the USA alone, close to 20% of disposable income was paid to financial institutions as interest and other charges in 2005, 2006 and 2007. But these costs are likely to be dwarfed by the impact of the crisis on working people.
Fourth, the only factor preventing complete disintegration of the financial system has been global state intervention. Liquidity provision by central banks has been limitless, running into trillions of dollars. Indeterminately large sums of public money have been committed to nationalising (partly or fully) commercial banks, insurance companies and mortgage providers in the USA, the UK and across Europe. Hundreds more billions of dollars are likely to be eventually committed to cleaning up the balance sheets of banks.
The crisis, then, has destroyed the conceit that freely competitive capitalist activity is the most efficient, or even the only, way of organising economic life. Once its sharp phase is over there will be debate on how to rebalance private and public in the economy. The Left should make definite proposals to replace private and individual with public and collective mechanisms in finance and more generally across the economy. A start could be made with housing, pensions, education and health. And, you never know, socialism might be mentioned again.
The current crisis is a regime break for the global economy, irrespective of its eventual resolution. For more than two decades the premise of economic policy-making has been ‘private good - public bad’, always favouring market solutions to state-based interventions. This has now been damaged beyond repair. Policy-making can be expected to put fresh stress on the public though the form this will take is not yet clear.
Keeping the proportions, the crisis has analogies with the collapse of the Eastern Bloc in 1989-1991. After the fall of the Soviet Union the credibility of socialist ideas and policies received a body blow. The best that the Left could do was call for ‘anti-capitalist’ policies or ‘resistance’ to the neo-liberal onslaught. This is likely to change, though a lot will depend on whether the Left can put forth innovative ideas and proposals.
There are several reasons why this crisis might lead to such profound change, four of which immediately come to mind. The first is its sheer magnitude. Global losses for banks already stand around $650bn. In the USA alone 17 major financial institutions have failed so far. By the time the crisis is over the cost for the USA is likely to run to several percentage points of GDP, perhaps in double digits. In other economies, for instance, the UK, Ireland and Iceland, things could be even worse. And that is without counting the social cost of the coming global recession.
Second, the crisis has been created by private finance at the heart of developed countries. It has nothing to do with bumbling state intervention, or war, drought and other external shocks. And nor is it the outcome of corruption or cronyism, the favourite bogeys of neo-liberals when it comes to financial crises in developing country. The crisis arose because freely competitive, private financial institution in developed capitalist countries proved to be inherently inefficient in organising society’s financial affairs.
Third, the crisis was caused primarily by the advance of finance to private individuals rather than to corporations or small businesses. Since the 1980s, big business has relied less on banks and more on open markets to obtain finance. Banks have turned to lending for mortgages and consumption as well as commissions from mediating financial transactions. Meanwhile, the withdrawal of public provision in housing, pensions, health, education and consumption has driven people into the arms of finance. The costs have been enormous. In the USA alone, close to 20% of disposable income was paid to financial institutions as interest and other charges in 2005, 2006 and 2007. But these costs are likely to be dwarfed by the impact of the crisis on working people.
Fourth, the only factor preventing complete disintegration of the financial system has been global state intervention. Liquidity provision by central banks has been limitless, running into trillions of dollars. Indeterminately large sums of public money have been committed to nationalising (partly or fully) commercial banks, insurance companies and mortgage providers in the USA, the UK and across Europe. Hundreds more billions of dollars are likely to be eventually committed to cleaning up the balance sheets of banks.
The crisis, then, has destroyed the conceit that freely competitive capitalist activity is the most efficient, or even the only, way of organising economic life. Once its sharp phase is over there will be debate on how to rebalance private and public in the economy. The Left should make definite proposals to replace private and individual with public and collective mechanisms in finance and more generally across the economy. A start could be made with housing, pensions, education and health. And, you never know, socialism might be mentioned again.
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