Credit: Daily
Reckoning Australia
By James M. Dorsey
Financial
injections by Qatar and possibly China may resolve Turkey’s
immediate economic crisis, aggravated by a politics-driven trade war with the
United States, but are unlikely to resolve the country’s structural problems,
fuelled by President Recep Tayyip Erdogan’s
counterintuitive interest rate theories.
The latest crisis in Turkey’s boom-bust economy raises
questions about a development model in which countries like China and Turkey witness
moves towards populist rule of one man who encourages massive borrowing to
drive economic growth.
It’s a model minus the one-man rule that could be repeated
in Pakistan as newly sworn-in prime minister Imran Khan, confronted with a
financial crisis, decides whether to turn to the International Monetary Fund
(IMF) or rely on China and Saudi Arabia for relief.
Pakistan, like Turkey, has over the years frequently knocked
on the IMF’s doors, failing to have turned crisis into an opportunity for
sustained restructuring and reform of the economy. Pakistan
could in the next weeks be turning to the IMF for the 13th time,
Turkey, another serial returnee, has been there 18
times.
In Turkey and China, the debt-driven approach sparked remarkable
economic growth with living standards being significantly boosted and huge
numbers of people being lifted out of poverty. Yet, both countries with Turkey
more exposed, given its greater vulnerability to the swings and sensitivities
of international financial markets, are witnessing the limitations of the
approach.
So are, countries along China’s Belt and Road, including
Pakistan, that leaped head over shoulder into the funding opportunities made
available to them and now see themselves locked into debt traps that in the
case of Sri Lanka and Djibouti have forced them to effectively turn over to
China control of critical national infrastructure or like Laos that have become
almost wholly dependent on China because it owns the bulk of their
unsustainable debt.
The fact that China
may be more prepared to deal with the downside of debt-driven development
does little to make its model sustainable or for that matter one that other
countries would want to emulate unabridged and has sent some like Malaysia and
Myanmar scrambling to resolve or avert an economic crisis.
Malaysian Prime Minister Mahathir
Mohamad is in China after suspending US$20 billion worth of Beijing-linked
infrastructure contracts, including a high-speed rail line to
Singapore, concluded by his predecessor, Najib Razak, who is fighting
corruption charges.
Mr. Mahathir won elections in May on a campaign that
asserted that Mr. Razak had ceded sovereignty to China by agreeing to Chinese
investments that failed to benefit the country and threaten to drown it in debt.
Myanmar is negotiating a
significant scaling back of a Chinese-funded port project on the Bay
of Bengal from one that would cost US$ 7.3 billion to a more modest development
that would cost US$1.3 billion in a bid to avoid shouldering an unsustainable
debt.
Debt-driven growth could also prove to be a double-edged
sword for China itself even if it is far less dependent than others on imports,
does not run a chronic trade deficit, and doesn’t have to borrow heavily in
dollars.
With more than half the increase in global debt over the
past decade having been issued as domestic loans in China, China’s
risk, said Ruchir Sharma, Morgan Stanley’s Chief Global Strategist
and head of Emerging Markets Equity, is capital fleeing to benefit from higher
interest rates abroad.
“Right now Chinese can earn the same interest rates in the
United States for a lot less risk, so the motivation to flee is high, and will
grow more intense as the Fed raises rates further,” Mr. Sharma said referring
to the US Federal Reserve.
Mr. Erdogan has charged that the United States abetted by
traitors and foreigners are waging economic
warfare against Turkey, using a strong dollar as ''the bullets, cannonballs and
missiles.''
Rejecting economic theory and wisdom, Mr. Erdogan has sought
for years to fight an alleged ‘interest rate lobby’ that includes an ever-expanding
number of financiers and foreign powers seeking to drive Turkish interest rates
artificially high to damage the economy by insisting that low interest rates
and borrowing costs would contain price hikes.
In doing so, he is harking back to an approach that was popular
in Latin America in the 1960s and 1970s that may not be wholly wrong
but similarly may also not be universally applicable.
The European Bank for Reconstruction and Development (EBRD) warned
late last year that Turkey’s “gross external financing needs to cover the
current account deficit and external debt repayments due within a year are
estimated at around 25 per cent of GDP in 2017, leaving the country exposed to
global liquidity conditions.”
With two international credit rating agencies reducing
Turkish debt to junk status in the wake of Turkey’s economically
fought disputes with the United States, the government risks its access to
foreign credits being curtailed, which could force it to extract more money
from ordinary Turks through increased taxes. That in turn would raise the spectre
of recession.
“Turkey's troubles are homegrown, and the economic
war against it is a figment of Mr. Erdogan's conspiratorial imagination.
But he does have a point about the impact of a surging dollar, which has a long
history of inflicting damage on developing nations,” Mr. Sharma said.
Nevertheless, as The Wall Street Journal concluded, the
vulnerability of Turkey’s debt-driven growth
was such that it
only took two tweets by US President Donald J. Trump announcing
sanctions against two Turkish ministers and the doubling of some tariffs to accelerate
the Turkish lira’s tailspin.
Mr. Erdogan may not immediately draw the same conclusion,
but it is certainly one that is likely to serve as a cautionary note for
countries that see debt, whether domestic or associated with China’s infrastructure-driven
Belt and Road initiative, as a main driver of growth.
Dr.
James M. Dorsey is a senior fellow at the S. Rajaratnam School of International
Studies, co-director of the University of Würzburg’s Institute for Fan Culture,
and co-host of the New Books in Middle Eastern Studies podcast.
James is the author of The Turbulent World
of Middle East Soccer blog, a book with the same title and a co-authored
volume, Comparative Political Transitions between Southeast Asia and
the Middle East and North Africa as well as Shifting
Sands, Essays on Sports and Politics in the Middle East and North Africa
and just published China
and the Middle East: Venturing into the Maelstrom
