The geopolitics of economic crises

Turkey’s options are quickly running out. As the economic crisis deepens, even what once would have been seen as a drastic move – like the 625 basis point increase in the Central Bank’s interest rate last week – is considered inadequate. Increasingly, it appears some kind of outside assistance will be required. What form will that take? President Recep Tayyip Erdoğan and the AK Party’s economic management team have, so far, rejected an IMF bailout. Are there any other options?

►Why is Turkey resisting an IMF standby agreement?

One is that the government was so anti-IMF earlier and took so much pride in terminating its relationship with it that it now feels dutybound not to reverse course. Two, it also sees the IMF as part of a network of organizations that have been designed mainly to serve the interests of the US and other capitalist countries in the West. That is not necessarily a wrong diagnosis but the question is whether you can change it given your own linkages to the global economic system and your economic needs.

When we examine the role of the IMF, it not only conducts a “due diligence” study prior to recommending a particular standby agreement. The agreement generally makes a limited amount of funding available to the country implementing a stabilization program, but the fact that the country has agreed to go by IMF rules and that it is being monitored by the IMF, encourage sovereign lenders and commercial actors to have confidence in the country’s determination to achieve economic stability and behave accordingly. So, there seems to be no particular reason to shun the IMF if your economy is in trouble, especially when your economy is integrated into the international economic system in a variety of ways as the Turkish economy is.

►Some economists have suggested Turkey can turn to other sources, a “coalition of the willing”, to help it with a bailout program. Is that an option and what political costs could it incur in the process?

Turkey has indeed been trying to find a formula whereby it will not have to deal with the IMF. Some people talk about the possibility that Turkey could actually develop a program that would resemble a standby agreement with the IMF but it would be one in which the IMF does not take part. Here the question would be whether international actors, the European Union for example, that attaches importance to working with the IMF, would find this sort of formula acceptable. The EU has already expressed interest in ensuring that the Turkish economy does not fall apart but it also recommends that Turkey work with the IMF. If we want to work within traditional networks, a non-IMF option is most difficult if not impossible.

This brings us to what might be called extraordinary solutions, i.e. getting a group of countries that are not major actors in the global economic system to extend support to Turkey. For example Russia which is sometimes mentioned, is in need of economic reform itself; its economy is too small and weak to bail Turkey out. While the Russians might be able to make some loans that would reduce short term pressures on Turkey, they would likely refrain from actions that would threaten the brittle stability of the Russian economy. There has also been news about Qatari support to Turkey but again the needs of the Turkish economy far surpass the means that are available to Qatar. With China, my observation has been that in matters of economy, the Chinese manage to work within the framework of a capitalist system rather successfully. To fancy that the Chinese might bail Turkey out is an unrealistic expectation.

If the Russians would decide to go out of their way and put their own economic well-being under risk to help Turkey, they would expect a high political return. We should always remember that the Russians tend to treat economic and political instruments as part of the same set. At the moment, the interests of Turkey and Russia in Syria are beginning to diverge. If Russia were to extend economic support to Turkey, there would be a political price to pay not only in Syria but probably also with regard to Turkey’s place in the Western Alliance. They would not necessarily announce all their expectations at the beginning, but begin to express new ones later including, among others, how Turkish Straits ought to be managed. I would be extremely skeptical about the possibility of turning to other actors. The only comforting thought is that it is so unrealistic that it is unlikely to happen.

►It looks like Turkey’s choice is between conceding to the IMF and its traditional partners or having to concede political independence to non-traditional partners in return for economic aid. Why is the former choice so distasteful to the Turkish government?

Nobody likes to admit that the policies they have pursued have produced outcomes that are highly problematic and therefore they are compelled to eat their words. I think this is one of the major reasons. The current government, if you examine how it operates, tries to find a formula that is to its liking and hops on it until it discovers that it is not possible to implement; then it moves to something else. I think this latest increase in interest rates is a cogent example.

There are also other serious considerations that fall outside the IMF’s competence but on which the government has to act to muster international support. Turkey is currently perceived to be a not sufficiently democratic country where the rule of law does not fully prevail. While the IMF itself does not get into political questions, its board consists of representatives from member countries. And any agreement and the amount of financial support the IMF provides would be contingent on consensus among a majority of its members, willing to support it. Therefore, we would have these issues – democracy and the rule of law - included indirectly if not explicitly in an agreement.

►Are there any domestic political risks associated with working with the IMF?

Domestically, so far, the government has been able to operate on two levels. At one level, the government is taking - if reluctantly, belatedly and partially- the necessary measures for a stabilization program; at another level, it is maintaining the rhetoric of attacking the variety of instruments that are employed. I think that while there might be some political risk in changing policies, there may be even greater political risk in not doing what is necessary to achieve economic stability. The electoral base of this government depends to a large extent on small and medium enterprises and low to middle income groups. They are beginning to get hurt.