World Bank's whirling dervishes

The appointment of a senior World Bank employee as Turkey's new extra-constitutional "super Minister" of economic affairs gives some idea of the demands now made of "emerging markets" by international capital.

UNTIL a few weeks ago, Kemal Dervis was simply a senior employee of the World Bank, a Turkish economist who had been working with the Bank for two decades. Now he is probably the most powerful man in Turkey, brought in as an extra-constitutional super Mi nister invested with sweeping powers over all economic and financial matters, over the heads of the democratically elected politicians who are supposedly in charge.

This is the latest desperate move on the part of Turkish Prime Minister Bulent Ecevit to placate the financial markets and stem the panic and capital flight that began in late February. Turkey is no stranger to economic crises, which have erupted with ev en greater frequency and intensity under the liberalised economic regime which was first ushered in by the government of Turgit Ozal in the early 1980s.

But this particular crisis is still quite remarkable, on several counts. To begin with, it must be remembered that the Turkish economy has been under almost continuous supervision by the International Monetary Fund for several decades now, with no fewer than 17 IMF programmes introduced in the country. The latest one, accompanying a loan of $10 billion for three years, began in December 2000 in the midst of yet another episode of capital flight.

Perhaps no other country, with the exception of the Philippines (another IMF basket case) has had so much direct control of its economy by the multilateral lending institutions. To that extent, it is no longer possible for the IMF and the World Bank to a rgue that they are forced to come in and respond to crises: the crises that keep occurring are very much a result of the IMF policy packages and their manner of implementation.

But that is not the only reason that this particular financial crisis in Turkey is significant. Two other aspects of it hold important - and disturbing - implications for other developing countries seeking to make their economic expansion programmes depe ndent upon international capital.

THE first is the extremely trivial nature of the cause of the crisis. It is true that the rate of inflation in Turkey just before the latest crisis was high, at more than 30 per cent, but it had come down considerably from nearly 70 per cent in the previ ous decade and year. Turkey had become one of the quintessential "good boys" among emerging markets, offering major incentives for foreign capital, offering up major state assets for privatisation, setting up a currency peg along Argentine lines which li nked the Turkish lira to the U.S. dollar, and imposing high interest rates as part of a deflationary package.

The financial markets were actually pleased with this performance, and created a mini-boom in the Turkish stock market, with market indices rising from around 5,000 in mid 1999 to nearly 20,000 in early 2000. This was despite a poor showing by the real e conomy, which was adversely affected by the major earthquake of 1999 and the inadequate reconstruction thereafter. Industrial production continued to be sluggish and real wages were down, but variables such as these have never really bothered market anal ysts on the lookout for temporary booms.

By late 1999, the financial markets were less attracted to Turkey, and shifted their portfolios to other countries at the margin. By now, however, the Turkish economy was so dependent upon foreign capital inflow that even a slowdown affected it badly, an d led up to the latest IMF programme which started in December 2000, which was being faithfully adhered to by the government. It is true that the speed of the Bank-mandated restructuring was not as fast as desired by the IMF, but certainly, in terms of b road economic conditions, there were no surprises in January or February this year.

In fact, the crisis was sparked by something quite different: a simple row between two important political functionaries, a heated argument between the Prime Minister and the President on February 23 about the control of corrupt bankers (story on page 56 ). The Prime Minister may have thrown a public tantrum about it to the press, but still it is hard to imagine that a relatively small incident like that could spark such a full-blown crisis with such far-reaching consequences.

Within hours, the Istanbul stock market fell by 15 per cent, ostensibly because of fears that the political row could jeopardise the economic reform agreement with the IMF. Foreign investors pulled out cash, overnight loan rates shot up to 1,000 per cent , and the country's central bank was forced to pump $4.5 billion, or one-sixth of its cash reserves, into the currency markets to defend the value of the Turkish lira against a speculative run. Within two days the main market index fell by 18 per cent, a nd another $3 billion in foreign capital was withdrawn. To discourage speculation, the central bank raised overnight the interest rate yet again, to 6,100 per cent. The lira fell by more than 35 per cent in a span of two days in the foreign exchange mark ets.

Clearly, desperate measures were called for, and they began with important bureaucratic heads rolling, as in the resignation of the Governor of the central bank. But nothing seemed to be good enough to satisfy the wrath of international investors, who we re now discovering all sorts of other (previously unnoticed) flaws in economic management as the crisis deepened.

NOW, in what may be a final attempt to stem the flow of blood, a most extraordinary announcement has been made by the 75-year old Prime Minister. An economist known to be "market-friendly", Kemal Dervis was brought in from the World Bank to handle econom ic management. Initially, government officials wanted him to become Governor of the central bank, but it is reported that he insisted on a broader portfolio. He will now oversee budget spending, the central bank and the regulation of the banking industry and capital markets, having almost complete economic powers and able to overrule all other Ministers.

Already some Ministers have resigned in disgust at this state of affairs, and the fate of the shaky three-party coalition that runs the government also seems uncertain. But that has not deterred either the Prime Minister or Dervis. At the time of writing , the new "super Minister" was back in his recent home, Washington, hoping to negotiate an even larger loan of around $35 billion to prevent or deal with more capital flight.

And in return, it is likely he will promise even more for private international investors. He has already indicated that he favours greater privatisation at more favourable terms for foreigners, more deregulation and private control over crucial infrastr ucture industries and utility services, more domestic deflation and high interest rates - in short, more of the same medicine which has already been administered to the hapless Turkish economy.

All this may operate to stave off the immediate crisis, or at least bring it to a temporary close. But it is now clear that this will not resolve the basic problem, and that another such crisis may recur for equally trivial reasons, given the whimsical n ature of international finance. It is equally clear, as the example not just of Turkey today but of Mexico, Brazil and Russia yesterday and possibly tomorrow Argentina (which is now facing market problems simply because it has a similar currency board ar rangement) shows, that no liberalisation can ever be enough. Each bout of liberalisation will offer only a temporary reprieve, and expose the economy even more to future crises. And when those crises occur, they will only be contained by further liberali sation and further concessions made to implacable and demanding international capital.

Of course there would be a natural limit to all this eventually, if only because after ar ar a certain point there would be few assets left to sell, or few activities left to liberalise. By then, presumably, the material conditions of the people as a who le would have deteriorated to the point where anyway international investors would not be interested.

It has all the elements of a Greek tragedy, except that it is set in Turkey. But what makes it even more tragic is the realisation that all of this is actually avoidable, if only people and their governments see through the huge confidence trick that is currently being played out in the international financial markets.