In developed countries interest rates vary at quite low levels. Table 1 shows the returns on two-year treasury bills in selected developed countries, Turkey and Brazil. As seen, the difference is quite large. Interest on ten-year bills of developed countries stand at 2.3-2.9% interval while that in Japan stands at 0.9%.

Table 1.Interest on two-year treasury bills (%)

During the financial sector bailout operation, central banks of developed countries, beginning with FED, threw money all around. And this policy has recently been a source of trouble for developing countries including Turkey. One among the troubles is the appreciation of developing countries' currencies. If we do not witness an unexpected development, this appreciation pressure seems to prevail for some time more.

It is apparent that abundant liquidity, low interest rate phenomenon in developed countries is temporal. After some point, they will start to withdraw the utility and interest rates will start to tend upwards. Of course it is not certain when this process will begin; but my concern today is not the timing of this reversal. What matters is that the current phenomenon is temporal.

Now let us take a look at another possible appreciation process which domestic currency of Turkey and other large developing countries can encounter: You are a large market even at the current level of income. And imagine that the necessary attempts are being made. First you secure permanent economic stability and than initiate a series of institutional reforms. It is clear that in such a climate per capita income will rise. In other words, the market will grow further.

Such economies are expected to attract large amounts of foreign capital. Capital inflow to these countries increases if international conditions allow and decreases if not. But in the end, such capital flows do not diverge from the mentioned fundamental trend. So, such countries become permanent centers of attraction.

Thus, there are two different mechanisms of currency appreciation, which can sometimes interlock but stem from different reasons. This difference should be regarded when thinking on measures against the appreciation of national currency.

When capital controls come on the agenda, experts argue that countries with savings gap necessitate the savings of other countries to raise the pace of growth. And controls preventing the inflow of such savings are opposed to. Though this opposition seems to be righteous at first instance, the differentiation I made above reveals that this is not necessarily the case. It is highly doubtful whether the capital inflows resulting from temporary abundance of liquidity and extremely low interest rates in developed countries qualifies as foreign saving boosting growth.

This commentary was published in Radikal daily on 10.10.2010