Greece 2011 & Turkey 2001: The Tale of Two Crises

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By Michael Liebig

 



In seems almost certain that Greece will get a 50%+ debt cut sometime in 2012, if not earlier. The “haircut” will be painful for the holders of Greek state bonds – in Greece and abroad. But the EU governments, the European Central Bank and the IMF will do whatever it takes to prevent a severe banking and currency crisis in Europe. And, putting things in perspective: Greece’s share in the Eurozone’s GDP is less than 4%. But after the debt relief, the real challenge for Greece will only begin. And here the Greeks can learn something from their Turkish neighbors – even though they won’t like it.

Ten years ago, Turkey was stuck in a deep financial and political crisis comparable to the one in Greece today. Yet, Turkey managed to overcome its crisis within a relatively short period of time. What happened then? In 2001, Turkey faced state bankruptcy. The annual budget deficit stood at roughly 20% and the total public debt was about 80% of GDP. Foreign investors pulled their money out of Turkish state bonds. And for the same reason, the Istanbul stock market crashed. The Turkish banking system was buried under bad debt and effectively paralyzed. And Turkey’s political system too was in a state of paralysis.

Turkey had to turn to the IMF for a $30 billion “rescue package”. Attached to it, were really tough “conditionalities”: budget cuts, higher taxes combined with enforcing tax collection, privatizing state companies. The ailing banking sector had to restructured. The Turkish central bank was separated from the government and given the priority task of fighting inflation. The short-term effect of these IMF-dictated austerity measures was a severe recession of the Turkish economy: Unemployment shot up as one million people lost their jobs and the GDP shrunk by 6%. The lowering of the standard of living led to mass demonstrations against the government of then-Prime Minister Bülent Ecevit.

This sketch of the 2001 Turkish crisis should suffice to illustrate the parallels with the current Greek crisis. In 2010, Greece had budget deficit of 13% and total public debt was at 130% of GDP. Since Spring 2010, the Greek government has been unable to refinance its debt on the capital market. Greece had to turn to the European Union and the IMF for emergency credits. Attached these credits are “conditionalites” which are similar to those imposed by the IMF on Turkey ten years ago.

“Client Politics”

The most important parallel between Turkey in 2001 and Greece in 2011is “client politics”: The corrupt intermingling of the political class with private interests – both in the business community and other interest groups at the expense of the state and society as a whole. In Turkey, as in Greece, the government and the parliament were distributing financial “favors” to the various interest groups on a grand scale. Simultaneously, the government tolerated wide-spread tax evasion acquiescing systematic under-reporting revenues and incomes. The combination of endemic client politics and a “culture” of tax-evasion led inevitably to excessive state indebtedness – up to brink of state bankruptcy.

Like it or not, the return to fiscal solidity via structural reforms and austerity was the inescapable precondition for economic stabilization. Already in 2005, Turkey had a balanced state budget, and in 2008 the IMF credits had all been repaid. While fiscal consolidation (re-)creates “confidence” for economic actors – both domestic businesses and foreign investors – it doesn’t automatically generate economic growth. What were the additional factors which lead to Turkey’s economic recovery in the years after the 2001 crisis?

The first factor was political. For decades, Turkey had been controlled by a “Kemalist elite” a tightly knit nexus of state officials, the military and business interests. While Kemal Atatürk was a truly exceptional reformer, who created out of the ruins of the Ottoman Empire a nation state, his political successors substituted his nationalist and secularist reform dynamism with a “status quo” mentality. The Kemalist elite and the dominant political parties controlled by it became self-centered and ossified. Tensions and changes in society were first denied and then suppressed. This stance became manifest in respect to social issues, religious questions – Islam and Alevism (15% of the Turkish population) – and ethnic minorities, notably the Kurds constituting some 20% of the population of Turkey.

The crisis in 2001 dealt a decisive blow to the Kemalist elite. In the 2002 national elections, the “Justice and Development Party” (AKP) came to power with an absolute majority in parliament. The AKP pursues a political agenda which combines an “ethics of hard work”, Islamic values and Turkish nationalism. With no hesitation, did the AKP government of Prime Minister Recep Tayyip Erdogan carry out the IMF-dictated “structural reforms”. The Turkish people gave the Erdogan government a credit of trust and stomached the austerity measures. Already in 2002, the Turkish economy began to grow again. Since the average growth rate has been around 7%. In the first half 2011, the Turkish economy grew by 10% and there are worries about an “overheating”.

“Work Ethics” & Geo-Economic Opportunities

If you ask people in Turkey – across different social strata – why the Turkish economy has developed so impressively over the past decade, the answers vary little and can be summed up in two words: “hard work”. Indeed, the Turks are hard working people with a solid sense for self-initiative. What may appear as a rather blanket appraisal, is backed by the facts. Notwithstanding many serious and unresolved internal problems, Turkey has a dynamic economy and a stable political situation – and has become a significant actor on international scene.

Social ethics of hard work and entrepreneurial self-initiative go along with a keen sense for grasping economic and strategic opportunities which have emerged out the geopolitical transformations of the past two decades. Turkey is in a process of geo-economic reorientation. While the European Union remains its most important trading partner (roughly 45% of exports and imports), Turkey has realized the enormous advantages of being a truly “Eurasian” country. Turkey is the “bridge” between Europe and Asia. And that is not just a metaphor as demonstrated by the two bridges over the Bosporus and the rail tunnel under the Bosporus, currently under construction.

Over the past decade, Turkish businesses have increasingly focused on the Balkans region, Russia, the Black Sea region, notably Ukraine, Central Asia and the larger Middle East region. Of special importance are relations to countries with Turkic languages – Azerbaijan, Turkmenistan, Kazakhstan, Kyrgyzstan and Uzbekistan.

The condition for an successful exploitation of the new opportunities in these areas, is a competitive manufacturing base. Opposite to Greece, Turkey does have a strong manufacturing base. Over the past decade big industrial firms and small/medium-sized enterprises (SMEs) have significantly expanded – both in quantitative and qualitative terms.

The country is among the world’s leading producers of agricultural products, textiles, motor vehicles, ship building, construction materials, consumer electronics and home appliances. Turkish manufactured goods are competitive because both productivity levels and technical quality are comparatively high. Cheap labor costs and the exchange rate of Turkish Lira are no longer decisive factors for Turkey’s export performance.

Like in Greece, tourism is an important factor for the Turkish economy. 20 years ago, tourism was minuscule, today there are almost 30 million tourists in Turkey. But tourism is not the central pillar of the economy. And the same goes for the agricultural sector in Turkey. Different from Greece, tourism and agriculture are balanced by Turkey’s manufacturing sector.

Mainly thanks to 30 years of EU funding, Greece’s infrastructure is well developed – and better than Turkey’s which has to rely on its own resources. But Turkey is making big efforts in its infrastructure development. One example: The railway tunnel under the Bosporus, currently under construction. The rail tunnel is first of all vital for public transportation connecting the European and Asian districts of Istanbul – a mega-city of 13 million inhabitants. But the Bosporus rail tunnel has much wider geo-economic implications: It opens the possibility of a direct rail connection from Europe to India via Iran and Pakistan. Only across Lake Van in South Eastern Anatolia ferryboats have still be used, as the last missing rail link in Southern Iran (Bam-Zahedan) was completed in 2010.

By rail, containers from India could reach Western Europe in 10 days – less than half the transit time of seaborne freight and much cheaper than air freight. Transcontinental container transportation from Asia to Europe is still in its infancy, but within a few years that will change. Note that China is looking not only at the Trans-Siberian Railway as a transport route to Europe, but also at the “Silk Road” rail lines from Western China through Central Asia and Iran to Turkey and then to Western Europe.

Whether the European Union will ever accept Turkey as a member country, is more questionable than ever. Increasingly, another question has arisen: whether Turkey really wants to become a member of EU. Unquestionable is Turkey’s intention to create a free trade/economic cooperation zone in the Middle East. Agreements to that end have already been concluded with Syria, Lebanon, Jordan and Iraq. The recent political changes in several Arab countries are seen by Turkey as great opportunity for opening up new markets for Turkish goods.

But Turkey isn’t just looking at Central Asia and the larger Middle East. A good indicator of the closeness of inter-state relations and the intensity of economic ties are the frequency of state visits. In 2009, Brazilian President Lula da Silva visited Turkey. In May 2010, Turkish Prime Minister Erdogan visited Brazil. October 6-8, 2011, Lula’s successor Dilma Rousseff was in Turkey for a state visit and signed a joint declaration titled “Turkey-Brazil: A Strategic Perspective for a Dynamic Partnership.” Both Brazil and Turkey have a dynamic economy, a young population and a solid self-confidence in international politics.

Greece’s Unused Potentials

Of course, with 70 million people Turkey is a much bigger country than Greece whose population of 11 million is less than that of Istanbul (13 million). The Greek GDP is about a quarter of Turkey’s. On the other side, Greece is much more homogeneous than Turkey. It doesn’t have the ethnic and religious minority problems – Kurds and Alevites – which Turkey has. And Greece doesn’t have any serious security problem – neither internal nor external. Nevertheless, Greece has an oversized military and has wasted enormous resources in an arms race with Turkey.

Greece a maritime country. Greek shipowners control the world’s largest merchant fleet with more than 4000 ships and 15% of the world fleet carrying capacity. One wonders why Greece should not be a major supplier of technology and services relating to shipping albeit not necessarily shipbuilding as such. The global connections via the Greek shipping sector should provide ample geo-economic opportunities for identifying market niches for Greek products. Singapore – essentially an extended port with 5 million inhabitants – has managed to become a key and prosperous hub of maritime trade. Singapore’s GDP is only slightly lower than Greece’s. So why hasn’t Greece become a “Singapore” in Europe?

Greece has the “natural” preconditions for the generation of renewable energy (wind and solar power). Why are to date no sizable wind or solar energy parks in Greece? Information technologies and services are an ideal business area for countries which lack raw materials and/or big industries. The Baltic states, for example, have demonstrated how small countries can successfully exploit information technologies. Why isn’t the Greek IT sector performing likewise?

As agriculture plays such an important role in the Greek economy, one wonders why its export potential is obviously underdeveloped? Why is Greece, the world’s third largest producer of olive oil, exporting some 60% of its olive oil to Italy where it is bottled and then sold profitably to consumers in Europe and around the world. Similar is the situation with Greek “feta” cheese, of which only one third is directly exported as a finished product to consumers abroad, the rest goes to foreign intermediaries. These are just two examples, contained in recent report of the Greek Employers‘ Association.

I suspect that Turkish entrepreneurs would not have missed such business opportunities. It seems that the different attitude in Turkey has much to do with a sense of self-reliance and self-initiative. When there no chance of outside alimentation, one has pull up the sleeves and mobilize one’s own resources. I would assume that here lies a key reason why Turkey has mastered its financial crisis in 2001.

In contrast, Greece has been subsidized by the EU for 30 years. It seems that Greece has adopted a habitual attitude of being subsidized from the outside. This attitude seems to be the problem, not the subsidies as such as long as flow into productive investments. Therefore, proposals for a “Marshall Fund” for Greece are reasonable – provided the aid would be exclusively used for to raising the technological and productivity level of the real economy, notably the Greek manufacturing sector.

But the simple truth is: The way out of the Greek crisis, must come first of all from within Greece itself. After 2001, Turkey had to rely on itself – and it worked. And here, the Greeks must learn from Turkey – whether they like or not.

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