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Interesting Article on Turkey Joining EU

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Is Turkey the next Argentina?

Ironically "The Economist" article doesn't talk much of Turkey's economic problems other than to state its big and poor. Here's a more detailed evaluation of Turkey's economy:
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Foreign money has been pouring into Turkey at a rapid pace, fueling an economic expansion that has many investors and analysts praising the country's policies and reforms. But those who remember a similar excitement about Argentina in the early 1990s, which was followed by one of the most disastrous collapses in Latin American history, should be wary.

The parallels are striking. Argentina's growth in the early 1990s was also spurred by foreign capital inflows, and it also led to an overvalued currency that helped destroy the country's manufacturing base. And even during the country's growth years, when it was the poster child of the International Monetary Fund, there was little job creation.

Turkey's economy actually shrank in the years 1998-2001, with a 9.5 percent plunge in the last year. In response to the crisis, the government borrowed heavily from the IMF - $31.8 billion between 1999 and the present - and adopted a set of policies that the IMF advocated. These policies brought about very high real interest rates, reductions in the government's fiscal authority and spending, an increase in foreign borrowing, a floating exchange rate and a rise in the local currency. They also resulted in privatization of state-owned industries (and consequent unemployment), and a removal of agricultural and other subsidies.

Supporters of these policies point to the economic recovery since 2001. The Turkish economy grew by an average of 7 percent annually in 2002-3, and is expected to have grown at the same rate in 2004. Inflation, which was at 68.5 percent in 2001, has been brought to a projected 11.4 percent for 2004.

But beneath these numbers, a crisis looms. The expansion has been driven by a huge inflow of capital from abroad, $10.9 billion in 2003 (4.6 percent of the economy) and $12.5 billion in just the first eight months of 2004. These are overwhelmingly speculative, short-term inflows - not direct investment, for example, which would expand the country's productive capacity and create jobs. Foreign direct investment has in fact fallen since 2000. The country is very vulnerable to a serious economic downturn when the inflow of foreign money goes dry.

These kinds of massive speculative capital inflows have a habit of reversing themselves, as they did in Asia in 1997, setting off the Asian financial crisis and a regional depression. In such situations, investors eventually begin to worry about the sustainability of such borrowing and debt. Any number of external events could trigger such an exodus from Turkey: For example, if U.S. and world interest rates rise, as they undoubtedly will from their current historic lows, safe assets like U.S. Treasury securities will become much more attractive.

The influx of speculative money from abroad has also pushed the Turkish currency, the lira, to an overvalued level. This, too, is a bubble waiting to burst. In the meantime it has devastated traditional Turkish industries that are typically labor-intensive by making imports artificially cheap, thus aggravating the unemployment problem. The lira had risen 139 percent against the dollar between 2000-2003.

The country's public debt is unsustainable at 70 percent of the economy. In order to sustain it presently, the IMF has the government running a primary (excluding interest) budget surplus of 6.5 percent. This is extremely high (compare it with 3.0 percent for Argentina and 4.25 percent for Brazil), and prevents the government from making necessary investments in human capital and infrastructure.

Another devastating part of the IMF program is high interest rates: The Treasury's debt instruments that are the leading assets in the Turkish financial markets carry an interest rate of 26 percent, still very high at 15 percent in real, inflation-adjusted terms. Compare this with 2 percent in the United States - it is easy to understand why businesses in Turkey are reluctant to borrow and invest in productive capacity.

...cont'd
 

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Is Turkey the next Argentina? cont'd

.....

In short, the policy makers have created an economy that runs on a speculative bubble. It would be nice if a majority of the Turkish people at least got some of the benefits of bubble-driven growth for as long as it lasts. But unfortunately, this has not been the case. Since 2000, the unemployment rate has risen by almost 4 percentage points to 10.5 percent, and real wages have actually fallen.

As Turkey and the European Union continue talks on the possibility of EU accession, the Turkish government should re-examine its unsustainable economic policies of the last five years. Continuing these IMF-supported policies in hopes of garnering credibility with the EU may be dangerous. Ironically, such policies could lead to an economic failure that would actually doom Turkey's chances for membership.

By Erinc Yeldan and Mark Weisbrot.

Erinc Yeldan is a professor in the department of economics at Bilkent University in Ankara

Mark Weisbrot is co-director of the Center for Economic and Policy Research.
 

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Another pespective on Turkey's EU membership from Gwynne Dyer:

13 December 2004

Turkey in the EU?

By Gwynne Dyer

"I am absolutely in favour of Turkey's membership in the European
Union," said Poland's President Aleksander Kwasniewski in September. "We
will support it. But -- if we say yes' to Turkey -- it is a question then
what we will say to Ukraine."

The EU probably will say "yes" to starting negotiations for Turkish
membership at its summit meeting in Brussels on 17 December, although it
could be ten years or longer before Turkey is actually a member. Ukraine
is not even a candidate yet, and has not begun the lengthy process of
reform that would be needed to bring its laws and practices into conformity
with EU human rights standards. But it is Turkey that faces the higher
hurdles.

President John F. Kennedy was still alive when Turkey was first
promised EU membership some forty years ago. Since then the EU has
expanded from six to twenty-five members, with three more scheduled for
entry in 2007 (including two, Romania and Bulgaria, with a lower per capita
income than Turkey). The reason that Turkey is still at the end of the
queue is not its relative poverty (though that is an issue), but its
location, its size, and -- above all -- its religion.

Turkish membership would give the EU borders with Iran, Iraq and
Syria, and make it a major power in the Middle East. Turkey would be the
biggest country in the EU (its population, now 71 million, will overtake
Germany's within ten years), and since most EU decision-making is weighted
by population, that would give it a huge voice in the EU's affairs. Above
all, it would kill the notion of "Europe" as a Christian club.

Add, say, eighty million Turks to the twenty million Muslims who
already live in various EU member states, and an EU that includes Turkey
would be an entity whose population is about 20 percent Muslim. This has
prompted bigots like former French president Valery Giscard d'Estaing to
warn that Turkey's membership would mean "the end of Europe," but such
voices are in the minority.

More representative of mainstream official opinion in the EU is
French President Jacques Chirac's comment that "We have an interest in
having Turkey with us," or the Advisory Council on International Affairs's
September report to the Dutch government that "Admitting a Muslim country
may be new to the EU, but it does not differ in principle from earlier
expansions. One way or another, Islam should gain a place within the
EU...."

So far, so good, but the problem until recently was that Turkey
simply wasn't a sufficiently democratic country to meet the EU's standards.
As Britain's Minister for Europe, Denis MacShane, put it in October:: "The
process of the entry negotiations should promote as radical a reform
process as that initiated by Ataturk."

An immense amount has already been accomplished on this front in
the past two years. After a decade of political turmoil and deadlock, the
Turks elected a government in November, 2002 with a large majority in
parliament and a clear mandate for change. The new governing party was,
remarkably, an "Islamic" party whose predecessors had once been seen as
opposed to the whole secular republic founded eighty years ago by Ataturk.

Under the leadership of Prime Minister Recep Tayyib Erdogan,
however, the Justice and Development (AK) Party repackaged themselves as
"Muslim Democrats" along the lines of Europe's many "Christian Democratic"
parties, and proceeded to remake the whole Turkish state in order to fit it
for EU membership. In only two years, Erdogan's government has rewritten a
fifth of the constitution, ending the death penalty, bringing the army
decisively under civil authority, granting language rights to the Kurdish
minority and entrenching European standards of free speech in Turkish law.

Abuse and torture of prisoners in Turkish jails is one area where
more work is needed (though the government is clearly trying), and there is
a continuous tension between the AK party leadership's Europeanising
intentions and its conservative religious base over questions having to do
with women's rights and family law.

Nevertheless, enough progress has already been made that in October the
European Commission declared that Turkey had met the political and economic
conditions to be considered for EU membership.
.... cont'd
 

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......

What remains is the political decision to open negotiations, which
must be taken unanimously by the governments of the 25 existing EU members.
The Turks have been promised an answer, they have worked themselves to the
bone to meet the conditions, and it looks like they will get the right
answer. There is great anxiety about Tuskish entry at the popular level in
a number of European countries, but the governments are mostly taking the
longer view, and in some cases showing considerable political courage in
doing so. (Chancellor Gerhard Schroeder has consistently backed Turkish
entry despite the German public's clear opposition to it, for example.)

The wheels could still fall off this vehicle at the last minute --
Austria, Cyprus and the Netherlands are the three governments that people
most worry about -- but it appears that Turkey will get the green light for
opening membership negotiations in Brussels this week.

As Yusuf Kanli remarked in the Turkish Daily News when the European
Commission gave its approval in October: "What we got is just a conditional
green light to start a journey on a road on which for some reason many red
lights were erected with great skill." But it's a start -- and no country
that ever started membership talks has failed to join the EU in the end.

Gwynne Dyer is a London-based independent journalist whose articles
are published in 45 countries.
 

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words not often put together:

Turkey
EU
Interesting
 

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Does this mean Thanksgiving Dinner will have to be purchased with euros?
 
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