Pathways Through Financial Crisis: Turkey

Abstract

Turkey's deep financial crisis in 2000-2001 implicated the International Monetary Fund program, adopted in 1999, while the IMF was associated with the successful 2001 recovery program. This article, through studying three critical interventions, finds that the IMF's impact on the policy choices available to Turkey's policymakers varied according to the history of the IMF's engagement with Turkey, the interests of major shareholders in the IMF, and the credibility of Turkey's leaders in the eyes of the IMF. The IMF's engagement substantially affected domestic politics in Turkey by strengthening the voice of economic technocrats within the government. The IMF thus became a contested actor in domestic politics. The crisis had very significant negative economic and social effects, which contributed to a deep political change in 2002. KEYWORDS: Turkish economy, financial crisis, International Monetary Fund. ********** Turkey's long-standing relationship with the International Monetary Fund (IMF) intensified at the end of the 1990s. The Turkish general election of 18 April 1999 ushered into power a new coalition government that, eight months later, sought US$4 billion assistance from the IMF and committed itself to an IMF-approved program of economic reform. Within a year, an economic crisis peaked--in November 2000 and February 2001--and the Turkish economy experienced a real terms contraction of 3.5 percent, with official unemployment doubling to 11.8 percent. (1) From January 2001 to April 2002, borrowing from the IMF increased by $23 billion. In the general election of 3 November 2002, none of the parties (government or opposition) elected in 1999 were returned. Turkey raises two questions about the IMF's interaction with the governments of emerging markets facing financial crises. First, how does IMF participation affect the policy choices available to domestic policymakers? Second, what impact does the IMF's intervention have on domestic politics in the crisis country: which actors are empowered or enfeebled, and what are the lasting consequences for domestic politics? In this study, I focus on Turkey's engagement with the IMF from November 1999 to October 2001, a period that includes three interventions by the IMF. I analyze key decisions associated with these interventions from the perspectives of the Turkish authorities and the IMF, setting out which alternatives were considered and rejected, and why. Through this analysis, I draw more general conclusions about the relationship between the IMF and Turkey. The study is based on primary materials, in the form of published communications between the IMF and Turkey, and on interviews with key decisionmakers and policymakers in Turkey, the IMF, and the G7. (2) Turkey's Engagement with the IMF Turkey's wave of economic liberalization began under the stewardship of economy (then prime) minister Turgut Ozal during 1980-1989. This period displayed twin tendencies: liberalizing reforms (including within IMF programs; see Table 1), combined with increasingly clientelistic distribution of the spoils. The decision to liberalize the capital account in 1989 was particularly significant for Turkey's fiscal position. A new source of capital allowed governments to put off unpleasant choices and delay reform. (3) A further consequence was the rapid expansion of the banking sector. In the second half of 1997, a number of officials in the Turkish economy ministries became alarmed at the direction of Turkey's underlying economic aggregates. Inflation looked set to reach 100 percent by December. At the officials' request, the IMF initiated a Staff-Monitored Program, which was announced in June 1998. The Turkish authorities were keen to move to a full program, but there was no appetite from the IMF's side, given the repeated failure to meet fiscal and structural targets set in the Staff-Monitored Program. In 1998, the poor underlying structure of the economy was further impacted by two negative shocks. …