While we were enjoying the holiday, South Korea introduced additional measures to discourage short term capital inflows.

'Not meeting' with Ireland today seems to be the best option. I had envisaged the risk of accusations of being the 'Ireland inside us' but I never foresaw that I would face resistance. It seems that friends preparing the column to press did not like my way of defending Ireland strongly. The title of the figure which is the cornerstone of my comments supporting Irish friends in their hard times, reading 'you are the sons of a nation which has accomplished a lot over the last twenty five years' somehow was printed as 'Comparison of per capita income in Spain and USA'. Err is humane; but I want to assure my Irish brothers that this time it was not my mistake.

Anyway, today let me turn toward the east and take a look at what South Eastern brothers have been doing. By the way, it just occurred to me that I feel the need to turn toward the west at one time and the east at another. Why is that? Is it because nothing interesting happens in this part of the globe?

Appreciation will be temporary

'Heaven forbid!' you might say; but what if the developments in Ireland were encountered also in Turkey? In this framework, it is not a bad thing that nothing interesting happens in this part of the globe. Nonetheless, looking at South Korea, one cannot help bewailing the passive attitude in Turkey.

Turkish lira has been appreciating which basically stems from a temporal phenomenon. Measures some developed countries, mainly the USA takes to overcome the crisis as soon as possible lead to severely low interest rates and liquidity abundance in that host countries. This abundant liquidity flows in countries like Turkey resulting in the appreciation of their domestic currencies. Developed countries will eventually push the interest rates up and they will drain the liquidity they had spent generously.

I have already discussed what can be done to prevent currency appreciation stemming from short term liquidity booms. To begin with, vein hopes that such appreciation can be prevented completely must be avoided. And then, the relevant policy package must be designed. Such package can involve the following steps: 

Korea has taken measures
First of all, an economic environment allowing the (Central Bank of the Republic of Turkey) CBRT to reduce interest rates must be assured:  budget discipline must be ensured but not through unplanned price raises. Rapid increases in bank credits must be prevented (partially done) particularly in order to establish financial stability. Rate of foreign exchange the CBRT receives in auctions must be pushed up (done).  Way of implementation of the inflation targeting regime must be revised and ways to increase responsiveness to exchange rate must be sought (no effort declared to the public yet). More importantly, foreign currency inflow, particularly temporary (short term) inflows must be discouraged (not done and will not be done ever as declared several times).

The reason why we have to turn our heads towards South Korea is associated with the last measure. While we were enjoying the holiday, South Korea introduced additional measures to discourage short term capital inflows: 14 percent withholding tax and 20 percent capital gain tax was to be imposed on foreigners purchasing Treasury and Central Bank's bonds were introduced. Korea had already implemented a series of regulations aiming to reduce the FX liabilities of the banking sector.

Countries like Turkey does not have magical solutions to the devastating effects of 'immodest' policies introduced by developed countries. But South Korea does at least something.

This commentary was published in Radikal daily on 22.11.2010