With respect to the global crisis, it appears that the worst part is most likely over. With respect to employment and growth, however, it becomes apparent that the recovery will take quite long. In particular for emerging market economies where level of savings is not sufficient and therefore investments and thus growth rate cannot be scaled up at the desired level, this problem is expected to intensify. To compensate for the insufficiency of domestic savings, it is necessary to use savings of "the others". And the savings of the others refer to 'international capital flows'. Institute of International Finance (IIF) recently announced new estimates on capital flows. Capital flows toward emerging market economies attained a record high with 888 billion dollars in 2007. This amount dropped to 392 billion dollars in 2008. The estimation for January 2009 was initially at 165 billion dollars; recently, the estimate was reduced further down to 141 billion dollars. It is foreseen that the amount will rise only up to 373 billion dollars in 2010; i.e. less than half of the amount in 2007. In short, global capital flows toward emerging market economies like Turkey's economy will remain at very low levels and have a negative impact on the growth pace.

Monetary policy also has a role in the evaporation of capital flows in particular during periods with intense financial crisis. If the financial crisis is not global, the country where the financial crisis takes place encounters the problem of international capital shortage. Sometimes the problems of that particular country are transmitted to some other countries; the countries infected by the disease can suffer from similar problems. Nonetheless, the disease is not observed in all emerging market economies. Or as it was in 1994 and 2001 crises, the disease we have is not transmitted at all to other markets.

This difference (global crisis - local crisis) is of great importance considering monetary policy. If the crisis is not global, level of world income does not drop. This has two impacts. First, an environment prone to fall in international commodity prices (provided that other conditions remain the same) is not formed. Second, foreign demand does not fall; so you can export.

If the crisis is local this is the case in terms of inflation: The evaporation of fund flows toward the country in crisis elevates the exchange rate in the country. This creates an upward pressure on inflation. And no positive development to compensate for this pressure takes place as energy prices or prices of other imported commodities do not fall down given that the crisis is not global. Yes, domestic demand decreases, corporate profit margins are reduced and bargain power of labors fall down. These create a downward impact on inflation. However, after a while, foreign demand compensates a certain part of the fall in domestic demand and thus corporate profit margins start to go up again.

If the financial crisis is local, factors that eventually push up inflation outweigh the others. Central bank of the country cannot cut down interest rates as the inflationary outlook is not favorable; or even made the cuts prove insufficient. On the other hand, unemployment rate goes up. It is possible that this rise continues even if domestic demand is substituted by foreign demand at a certain extent. Central bank of the country in crisis can be put under high pressure.

If the crisis is global, neither there is foreign demand that will compensate for the fall in domestic demand, nor do commodity prices remain constant. Both domestic and foreign demand falls down and profit margins are reduced. And commodity prices decrease sharply. Bargaining power of the working class falls down. All of these factors exceedingly compensate for the inflation increasing effect of the rise in exchange rate. So, central banks cut down interest rates easily.

The climate which is a 'fortune' for monetary policy unfortunately does not bring 'happiness': The mentioned climate makes unemployment rate remain high for a long period.

This commentary was published in Radikal daily on 25.06.2009