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If the IMF is involved; savings problem changes its characteristics
Do you follow the "We need to save more" discussion? Lately, Kemal Derviş brought the issue forward. Hasan Ersel drew a good frame about the issue at his column in Referans daily. This discussion is of importance considering our near future. IMF's recent statement about providing support for developing countries also matches up with this exact issue. A transition period solution is offered for a transition period problem. Let us admit that there is a highly pessimistic discussion going around. However, it seems wise to think about the dynamics of the transition period and the new global architecture to be shaped henceforth separately. If we do not make such differentiation, we have to get prepared for a period where Turkey will encounter growth-related problems for long. Or, we will learn how to use institutions like IMF correctly. We will acknowledge the ongoing change; we will even push it. Otherwise, the economy will not grow. Let us join the discussion.
We said that the "We have to save more" discussion is a pessimistic one. It is so for two reasons: First, it is based on the assumption that Turkey cannot get prosperous easily by using others' savings as done before. Second, as savings rate cannot be increased overnight, countries like Turkey are to face a quite slow growth process. Of course we had better to not expect an economic activity like savings, which contain cultural ingredients, to change overnight (here, we refer particularly to private sector savings. Public savings is another matter) Then, are we at the down of a handicapped period in terms of growth?
Both yes and no. The answer is yes for the transition period; but it is impossible to estimate what will happen next. Then, the first question that must occupy our minds must be: Are these two main points correct? Yes, they are. The discussion that came on the agenda is highly beneficial in this regard. In fact, this discussion is like a rose blossoming in the desert of meaningless economic policy. Let us join the discussion: So, is there anything to do in such circumstances? Yes there is. Where there is life there is hope. The remedy stands right in front of our eyes. The important thing is to see the remedy. So, where is the remedy? Are you ready for a horizon tour before addressing the details of savings issue?
With the economic crisis, our beautiful blue planet is entering a period where international fund flows will slow down. This is correct. With 'slowdown in international fund flows', we refer to the fund flows through "the channels we know". The first point: we are in a transition period where the old is being replaced by the new but the new is not yet shaped. In such a period we had better avoid talking as if there is a new phenomenon around. It is fund flows through "the channels we know" that tightens. So, with what the old will be replaced? In this period, in particular in this transition period, it can be more important to try to shape "what is about to happen".
Let us switch to the second point. In the transition period we go through, it is the fund flows through private channels that will lead to a slowdown in international fund flows. For now, the damage banks at the center of the system suffer will result in such an outcome. When viewed from this aspect, it is correct that the world we know has ended for now. But, we have to note a certain thing. The phenomenon that ended is not the natural order of God, but a private fund flow system which appeared as an opportunity only after 1980s. Before that, there was another system based on fund flows between states, which can be called as international Keynesianism; was not there? Yes there was.
The question of the day: how will the global system operate in this transition period? If global division of labor and value chain competition will continue the way it used to be, there arises a need for a mechanism that will compensate for the tightening in private-sector originated international fund flows transferring funds from one state to another or this time from international financial institutions to state and even to private sector. As you see, there is more than one alternative. There is an exit way.
One alternative for the transition period is that international financial institutions step in to fill the gap caused by private financial markets. Here, we refer to the institutions like the IMF and the World Bank with international financial institutions. Fourth point is obvious: Those avoiding the IMF relying on the experiences in the past are those who are not aware the world they live in today. In the current period, institutions like IMF shall not be considered as sources of trouble but as a source of relief. In fact, they are sources of relief. What else that funds distributed by the IMF between 2001 and the crisis has jumped from 1.5 billion USD to 185 billion USD can be the indicator of? Turkey did not receive a dime; so who benefits? If states fail to acknowledge the new meaning of agreeing with the IMF, maybe firms shall be entitled to apply directly to the IMF. There are no limits of thought.
So, what if international institutions fail to replace private markets in a regular pattern over a temporary period? Then, it will be the doom of the global system. Everyone becomes obliged to start living on his own means. Domestic markets become extraordinarily valuable. Domestic savings gain importance. And there is no doubt that protectionism turn out to be legitimate. This is the fifth point we also emphasized before. If international institutions fail to adapt to the new period and to replace the gap of decreasing private saving flows; a new world is established and everyone becomes genuinely protectionist. Then "Boycotting Chinese products" becomes quite legitimate.
There is not a single way in economics. The one we drew is one among a number of alternatives. As "We have to save more" discussion also implies, Turkey will either experience slow growth or get acquainted to cooperating with the new IMF, and even tell the IMF what to do. We well know that Turkey has thought lessons to the IMF before. We can do it again. We just need the courage; a slight piece of courage.
This commentary was published in Referans daily on 23.07.2009