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    Living within one’s means

    Fatih Özatay, PhD17 July 2014 - Okunma Sayısı: 1042

    Cooperation does not seem on the table from this date onward, either. That’s why Turkey has to get used to living within its means

    A large part of emerging market economies encountered a major problem starting in the second half of 2010. The chief source of the problem was that developed countries’ central banks had first cut interest rates down to zero and later injected abundantly liquidity into the system in order to ensure certain level of recovery in their respective countries.

    Yet a substantial part of the injected money in developed countries did not bring as much credit growth as desired. As a result, emerging market economies with higher interest rates and faster growth prospects were stormed with mainly short-term capital inflows. Asset prices increased, domestic currencies rose in value and credit growth accelerated rapidly, all of which posed a threat to domestic financial systems if not controlled.

    Therefore, the steps developed countries had taken to turn their economies around had undesired consequences for emerging market economies. What is more, these changes did not always evolve in a single direction. During the second half of 2011, for instance, the Eurozone went into turmoil or Bernanke made his well-known speech in May 2013, which caused outflows or limited inflows towards emerging markets and hence falls in asset prices and depreciation of domestic currencies.

    Such remarkable volatility has drawn reaction from the majority of emerging market economies. For instance, the governor of the Reserve Bank of India explicitly criticized FED governor recently. Response to such reactions generally read that “each central bank is bound to its own law and is responsible for economic developments in its country as per that law.” That is to say, when the FED decides to taper monetary expansion and raise interests as of 2015, it does not consider how emerging market economies might be affected. It is concerned with the level of inflation and unemployment in the US.

    Although this defense is right at the end of the day, there are two counterarguments to this “reckless” attitude. First is that, today emerging market economies are more important than ever for the global economy. Any downturn in the emerging market economies means a bigger harm for the US and the Eurozone compared to say, a decade ago.

    Second, the global mood was entirely different just five years ago. Between the Lehman bankruptcy on 15 September 2008 and the end of 2009, there was strong international cooperation. The G-20 in particular adopted solid action. In order to limit economic depression developed countries as well as emerging market economies loosened fiscal policies as of spring 2009.

    Emerging market economies within the G-20 also loosened monetary policies starting in the late 2008. China and India stepped up first, followed by Turkey, Indonesia, and South Africa, and later by Mexico, Brazil and Russia. This was done by gradual and substantial cuts in policy rates, and by cuts in reserve requirements in the case of some. Given that developed countries also loosened monetary policies simultaneously, the level of economic policy cooperation at the international level catches the eye immediately in September 2008-2009.

    Long story short, the environment of global cooperation turned into one where each country increasingly pursues their national policies, especially starting in 2010. This brought about a bunch of challenges for emerging market economies in expense of cooperation.

    To put it another way, cooperation was a possibility between September 2008 and the end of 2009 roughly, because first the interests were common and second all of the policies on the table were politically viable. The policies responses required by the challenges that emerged by the late 2010, however, were different. Cooperation does not seem on the table from this date onward, either. That’s why Turkey has to get used to living within its means; of course without neglecting the efforts to expand the means but not stretching them. Indeed, not neglecting such efforts is not enough; they should be the top item on Turkey’s to-do-list.


    This commentary was published in Radikal daily on 17.07.2014