TIME EUROPE
July 17, 2000 VOL. 156 NO. 3
Keep The Change ...
After years of spiraling inflation, the Turkish government has at last begun to tackle the problems at the heart of the economy. If the reforms succeed, they will also alter the political landscape
By ANDREW FINKEL Istanbul
At the end of the month, Inci Ozyilmaz, a 25-year-old with a degree in mathematics, is expecting to collect a cool 350 million. She is not a member of Turkey's dotcom new-rich. Nor has she won the lottery. Rather Ozyilmaz, who works in an Istanbul branch of a large commercial bank, will simply be collecting her monthly wages which, when converted from Turkish lira to dollars, come to just under $575.
Around the corner from where she works, a Big Mac goes for 1,400,000 TL, enough, when Ozyilmaz was back at high school, to take the whole school out to lunch. The year she was born, it would have bought the shop. About half Turkey's 65 million population are younger than Ozyilmaz. They have never seen single-digit inflation. "It makes a big difference to their expectations — their attitude toward risk, their ability to plan for the future," according to Cem Behar, a demographer at Istanbul's Bosphorus University. There is still no such thing as a house mortgage in Turkey. It would be near impossible to calculate the interest rate.
Turkey has grown used not just to inflation but to wobbly government coalitions unable to plan more than a few months ahead. The current three-party alliance is celebrating its first birthday and despite the odd hiccup is proving relatively solid. At the start of the year it entered into a $4-billion standby agreement with the imf, as profound in its implications as the sheaf of economic reforms associated with Turgut Ozal in the 1980s. Then, government opened up the private sector, removed trade barriers and introduced competition. Unfortunately, the one thing the government neglected to reform was itself.
The current administration promises to bring down the rate of consumer price rises from 64.7% in 1999 to 25% by the end of this year — though analysts would be delighted if they achieved 35% — and to get down to single-digit increases by the end of 2002. The ministries and Central Bank have a detailed plan to remove the burden of an inefficient state sector by shrinking its day-to-day role in the economy, but strengthening it as a regulatory force.
If the reforms succeed, few expect the implications can be confined to the economy. Last December, the European Union accepted Turkey as a full candidate for accession. To grab this carrot, Ankara must adopt a much broader agenda of political change. Ahmet Necdet Sezer, the Turkish President, who took office on May 16, is a constitutional court judge who strode into the public eye by demanding Turkey rid itself of its "bad boy" image of a state that still restricts freedoms and just isn't democratic enough.
Economically, Turkey has gone a long way to integrating itself into Europe. A customs union with the E.U. means that its goods compete at home and abroad on an equal footing. Even with inflation, it is Europe's fastest-growing market for credit cards — and for mobile phones. Last year, Istanbul's stock exchange grew faster in dollar terms than any other market in the world. A large industrial base and young consumers coming on tap all the time make Turkey a potential dynamo of a region extending from the Balkans to the Middle East and Central Asia. Its economy now rates among the world's top 20. It is also one of the world's most peculiar.
Back in the 1970s when opec was ratcheting up the price of oil, most nations suffered the trauma of inflation. Turkey developed an addiction. Israel, Brazil and other countries printed money to finance infrastructure and growth, but they were forced to react when prices shot through the roof. For years Turkey has only feathered the brakes. The average rate of inflation in the past decade is 73.7%. Economists scratch their heads over how Turkey sustained what the textbooks declared unsustainable — long-term chronic inflation.
Over the years, ordinary Turks have grown expert in hedging, keeping one eye on bank interest rates and the other on the exchange rates posted in the little foreign exchange shops that sprouted like news- stands on every other corner. "Turkey developed a whole Ôtechnology' for dealing with the effects of inflation rather than tackling the problem itself," said Gazi Ercel, governor of Turkey's Central Bank. His job now is no less than to change a national psychology that expects prices to go up and up. First, the lira's devaluation against major currencies will be pegged to inflation forecasts rather than past performance. The result may be a temporarily overvalued lira, but this will make for cheaper imports and push prices down.
This strategy will only work if accompanied by much wider reform. In the past, governments allowed political priorities to keep them from getting their fiscal house in order. The Turkish economy has its famous "black holes" — loss-making public banks, a subsidized agricultural sector — and, despite the young work force, a bankrupt social security fund. The government had to borrow to meet those obligations and paid a large risk premium to do so. That fueled inflation, kept interest rates high and led to ever more expensive borrowing. The first signs that the market is taking the reform strategy seriously is that interest rates immediately tumbled by nearly two-thirds to just over 30%. "As interest rates fall, the economy picks up, taxes increase, interest rates fall still further and confidence increases," explains Akat.
But not everyone is keen to see the process gather steam. Turkey's financial sector grew prosperous, and more than a little lazy, lending to the treasury at handsome returns. Ordinary depositors, too, could rely on interest rates of 20-30% in dollar terms. High interest in Turkey meant that industry was not only discouraged from borrowing but could compensate when consumer demand was lean by simply putting money in the bank and racking up better profits from government paper than from its own assembly lines.
Turkish society has paid a high price as well, though it has been more difficult to spot. "If you live with uncertainty, you become shortsighted, even selfish. The incentive for civil society to cooperate just isn't there," says Hasan Ersel, chief economist at Yapi Kredi Bank. And while Turkey's military chiefs of staff warn of the dangers of religious reactionaries to Turkey's secular foundation, no one mentions inflation's effect on political stability. Islamic fundamentalist movements everywhere rail against the un-Islamic practice of charging interest. In Turkey, their audience understands that they are attacking an economy which penalizes wage earners and lavishly rewards investors.
The real cost to Turkey has been the lost opportunity to bring prosperity to its hardworking and entrepreneurial people. Although the economy grew in real terms on average 3.6% for the past 25 years, the Central Bank's projections suggest that it was only in second gear. Per capita income would have been $6,000 — twice the current figure — had there been less than 10% inflation in that period.
Last year the knock-on effect from the Russia crisis, a cyclical downswing and August's horrific earthquake caused gdp to contract by 5%. But the earthquake also seemed to rouse Turkey's rulers from their torpor. The scale of that tragedy had been exacerbated not just by the lack of emergency planning but also by years of political expediency during which tough choices were invariably avoided. Even without that bitter lesson, the government realized this time that with its shaky fiscal situation, it could not borrow its way out of trouble. Now after an intensive legislative program — which increased tax revenue, restarted privatization (a 20% stake in Turk Telecom worth a few billion is now on the block) and even changed the constitution to facilitate foreign investment — Turkey's credit rating has begun edging back up.
Young people in Turkey may still expect prices to change, but they expect their society to change as well. Ozyilmaz has no hesitation about the direction. "Turkey has to get into the European Union," she says. To do that, Turkey needs not just to get its economic affairs in order but to deal with the quality of its democratic institutions. In her mind, the two are related. "How can people be expected to focus on a better democracy, when in their working lives they are running to keep still?" she asks. The good news is that for first time in decades, it appears that her government is being forced to ask itself the same question.
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July 17, 2000
COVER
The Lure of Ecstasy
The elixir best known for powering raves is an 80-year-old illegal drug. But it's showing up outside clubs too, and advocates claim it even has therapeutic benefits. Just how dangerous is it?
Rave New World
It's more than just ecstasy. The youth culture is in thrall to deejays and floats on the relentless beat of electronic music
EUROPE
Putin's Hard 100
The honeymoon's over for Russia's new leader as he battles on military, political and economic fronts
Putin's Chechnya Nightmare
The War the Kremlin Said Was Won
The Haider Effect
Isolated and angry over diplomatic sanctions, Austria threatens to raise the stakes on E.U. enlargement
That's Another Fine Mess
An underage drinking spree sees Euan Blair arrested, and his dad nursing a political hangover
Sun, Sand and Toxic Waste
For the first time ever the European Court of Justice fines an E.U. member state
Europe's Not Up in Arms
A Euro Army is the declared goal, but there's more smoke than firepower
MIDDLE EAST
Why Arafat's in a State
He wants a Palestinian nation, but fears that his people won't forgive him if he makes concessions
The Modern Mullah
One of the architects of Khomeini's revolution has become a guru of Islamic reform in Iran
AFRICA
Fatal Destiny
Experts are meeting in South Africa to combat a plague ravaging the continent — but already there are disputes over the right strategy
Death Row
Kenyans would rather not talk about the disease that is destroying lives and threatening the economy
The Cost Of Living
Pharmaceutical Companies and Drugs
A Distant Mirror
Europe's Black Death is a history lesson in human tragedy — and economic renewal
BUSINESS
Keep the Change
Turkey's government takes on the structural problems at the heart of the country's economy
The Infoanarchist
Could this 23-year-old Irish programmer begin to unravel the Web?
The Data Haven
Closely Guarded Secrets
RELIGION
The Stained Glass Ceiling
Despite stubbornly held conservative attitudes, women are claiming their place in the pulpit
DEPARTMENTS
To Our Readers
Tech Watch
World Watch
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