Turkey's Troubled Water

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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On November 15, Horst Kohler, the Managing Director of the IMF, acknowledged that, despite a "strong implementation" of the IMF program, Turkey's financing gap may have increased by up to an additional $10 billion. He tenuously and untenably attributed this massive failure of the IMF to the September 11 events. He intended to recommend to the Fund a new (the fourth since 1998) stand-by arrangement to be negotiated in Ankara in December. Many regarded this as an American-inspired prize in recognition of Turkey's pivotal role in the anti-terror global coalition.

Its much criticized obstruction of a settlement in Cyprus and its oft-derided sabotage of the creation of the European ex-NATO Rapid Deployment Force were all but forgotten. Issues like its poor human rights record (bombastic sounding constitutional amendments notwithstanding), the suppression of the Kurdish minority, the pernicious role in state affairs (and in criminal affairs) of its military, police, and bloated bureaucracy, and its rising Islamist sentiment were relegated to the backburner. The Copenhagen criteria for the commencement of membership talks with Turkey have been effectively suspended.

Emboldened by new stature, Bulent Ecevit, the Turkish prime minister, threatened the EU with annexation of the Turkish Republic of Northern Cyprus (TRNC) should the Greek populated south become a full member. Turks overwhelmingly long to belong to the EU but such grandstanding does their cause no good. Ecevit's diatribe was intended for internal consumption by the virulently nationalist allies in his shaky left-right coalition.

A widening financing gap was only the latest in a series of bad news. That same week, Balfour Beatty of the UK and Impregilo of Italy pulled out of the controversial $1.6 billion Ilisu hydro-electric dam - together with the export credit guarantees their governments were supposed to offer. They cited human rights and environmental considerations. The Turkish government vowed to press ahead with this flagship project, but its strained finances cast it in doubt. Turkey was forced to internationally issue the equivalent of almost a billion US dollars (partly in Euros) in 5 year bonds (with a yield of over 11%) in the last 30 days alone.

It all started at the end of last year. A banking meltdown in November was narrowly averted with $7.5 billion in IMF funds. The government, unable to repay its monstrous domestic debt, resorted to eroding it (to 80% of GDP) and to preventing a run on the fast dilapidating lira through a debilitating devaluation in February. Foreign investors fled its collapsing capital markets and drew $5 billion, c. 25% of Turkey's foreign exchange reserves, on February 19th alone. Important privatizations failed to attract a single bidder. The stock exchange rose by a dizzying 650% until March 2000 and then crushed by 63% in a few days and the current account worsened by 3% of GDP. Yields on one month treasury bills shot up to 144%, overnight inter-bank rates touched 9000% briefly.

Structural reform stalled and the Prime Minister and the President publicly fell out over suspiciously under-investigated corruption charges. Industrial production crumbled by 9.2% in the year to September and GDP shrank by more than 9% (though it is expected to recover next year). At least 600,000 workers lost their jobs (adding 3% to the official 6% unemployment rate and to an equal number of unemployed). The Turkish lira halved against the US dollar. Turbulence-prone Turkey experiences now its worst recession in 60 years.

The inevitable IMF cum World Bank rescue package signed in May (initially at $15.7 billion) was coupled with (partly successful) pressure to reform the banks, phase out farm subsidies, and introduce market based regulation and competition through accelerated privatization. Turkey's central bank has adopted inflation targeting. Political appointments to Turk Telekom have been reversed. Over-generous wage settlements have been checked. State as well as private banks have been recapitalized, merged, or closed and a dragnet scheme of deposit insurance has been introduced. More than $7 billion of short term state obligations were swapped in June for much longer maturities (though some of the new bonds were linked to the exchange rate of the US dollar). Still, the IMF's projection of a mere 5.5% decline in GDP looks inane. And government bond auctions continue to end with crippling yields (a real interest rate of 18% - or more than 90% nominally in October).

But this externally imposed ambulatory regime failed to gain the support of opportunistic, populist, and venal Turkish politicians, or of the Turkish people. The private sector oriented technocrat (formerly with the World Bank) in charge of implementing the reforms, the Minister of Economy, Kemal Dervis, was continually sniped at and scapegoated. And though one of the IMF's most vocal critics was sacked in July (an event followed by the release of a delayed IMF loan tranche) - many call for early elections of which the likes of Tansu Ciller and Suleyman Demirel (two discredited politicians) or the thinly veiled Islamist Justice and Development Party may yet benefit. The distrust of the current government translates to a mistrust of its economic policies and to the exacerbation and prolongation of the economic crisis.

Turkey's economy is a hybrid of modern industry (29%), trade, and services (56%) with primitive agriculture (40% of the workforce but only 15% of GDP), of state ownership (mainly of infrastructure and industry) with a thriving and vibrant private sector (mainly textiles). Income inequality is great and GDP per capita is c. $2000 in current exchange rates. Despite the fact that it enjoys a robust investment rate of 25% of GNP and a merchandise trade which amounts to 50% of its GNP - Turkey was rated a poor 86 in the 1999 UNDP Human Development Index. Adult female illiteracy is higher than Albania's (at 25%), and infant mortality (38 per 1000) is almost African. Less than 35% of the roads are paved.

More than a million Turks work abroad and their remittances are of crucial importance to the foreign exchange reserves of the country and to its economy. More than 40% of the government's budget is used to defray the domestic debt. This leads to consistent fiscal deficits of 10% of GDP (though the budget sports a primary surplus). Turkey has consistently been on the verge of hyperinflation, with double digit inflation the norm (though recently it dropped below 40%).

Yet, Turkey's fate is determined not in Ankara or Brussels, but in Washington. Should the coalition attack Iraq, or isolate Syria, or fail to coerce Israel (Turkey's improbable ally in the region) to accommodate Palestinian needs - Turkey will be the first and foremost to suffer the consequences. An oil-rich and trouble stirring Kurdish state in Iraq, a water dispute with Syria, a wave of Islamist anti-Israeli zeal - could all undo a year's worth of economic overhaul. The military is likely to re-assert itself in any such crisis and the EU will keep mum, averse to jeopardizing the US-led grand coalition.

Moreover, the likes of Iraq are Turkey's neighbors and natural trade partners. It has a full time Ambassador in Baghdad, another border crossing is being negotiated, and dozens of Turkish business delegations visit Iraq (Turkey's erstwhile second largest trade partner) regularly. "The Economist" quotes Turkey as saying that "it has forfeited over $40 billion in trade because of the UN's continuing sanctions against Iraq." Naturally, the US is no too thrilled about Turkey's gravitation towards its arch enemy.

IFI's like the IMF and the World Bank are bound to play an inordinate and much resented role in Turkey's affairs in the foreseeable future. The World Bank, for instance, has pledged in excess of $5 billion and disbursed more than $2 billion. But most of this money goes towards disaster relief or support of IMF programs - and not to long term development projects. Ordinary Turks do not benefit from the World Bank's activities and believe, however erroneously, that they directly harmed by the IMF policies. Should Turkey also find itself the victim of US geopolitics, a wave of xenophobia and a backlash against liberalism and market economy might well ensue.

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