By Imad-ad-Dean Ahmad, Ph.D.

Minaret of Freedom Institute


One element in the raging debate over globalization is the role of the IMF in the ever-mounting debt of so much of the world.  The IMF has resisted calls from those who want the debts of the world’s poorest countries to be forgiven outright with the objection that to reward those who have most mismanaged their economies constitutes a “moral hazard.”  This cannot be denied.  Is it not also a “moral hazard,” however, to repeatedly restructure loans and make partial forgiveness in a seemingly endless series of programs that repeatedly fail?


The issue is a shadow not only over poor nations.  Even Turkey, a country with an economy that is in many respects dynamic, has undergone crises within the past year that raise questions about its future stability, both economic and political.  Three years ago Turkey negotiated a three-year stabilization program whose goals were “to reduce inflation to single digits by 2002, ensure a sustainable fiscal position, remedy chronic structural inefficiencies in the economy, and raise the sustainable levels of growth” (Schaeffer 2001a).  As with all previous arrangements with the IMF the result was economic crises (one in November 2000, one in February 2001).


Turkish inflation has frequently been in the unacceptable area of 80-100% per year.  In order avoid spending more than the government was taking in, a common sparkplug of the poor monetary policy that drives inflation, Turkey met its obligation to the IMF to reduce budget deficits not by the politically difficult (though in the long run more sound) method of reducing spending, but by the politically expedite method of raising taxes.  This unsurprisingly slowed the economy.  The IMF proposed devaluation of Turkey’s currency to stimulate growth (Schaeffer 2001a).


What happened next should have been predictable from similar experiences in the Mexican and Southeast Asian economic crises (but the IMF never seems to learn).  The Turkish central bank lost approximately $7 billion defending the government’s peg of the exchange rate before finally giving in to market forces on February 21 and allowing the currency to “float.”  The result was a 50% drop in value against the dollar over the succeeding months.   During the time the government stubbornly attempted to peg the price, however, speculators made easy profits “borrowing foreign currency at low interest rates in order to buy government debt at much higher interest rates…. Then, when the peg collapsed, the already weak banking system was left with a drastically increased foreign currency debt” (Schaeffer 2001a).


Now the state is bailing out thirteen acquired private banks and the state banks.  The debt is 13% of the gross domestic product.  George Bush has kicked in a $13 billion dollar bailout in exchange for “a priori reforms” (Schaeffer 2001b).  The IMF has approved an $8 billion loan (in addition to an existing $6 billion loan from last year’s bailout attempt)  “after the Turkish parliament passed radical laws to reform the corruption-plagued banking sector … and to privatize debt-ridden state companies…” (Western Policy Center 2001).  Does this mean the end of the cycle?  Don’t believe it.  Although economy minister Kemal Dervis has proposed 15 reform measures, the sequence of their implementation places less important reforms before the most critical ones, which may never be implemented. 


The Turkish elites fear that certain reforms may somehow be seen as softening their stance against the Kurds or giving in to demands from the Islamist movement.  The corruption issue has been an especially strong drawing card for the Islamists in the past.  John Hulsman (2001), an analyst for the Heritage Foundation professed, “I don't fear an Islamic government.  I fear a grumpy Turkey.”  


The February crisis was sparked by a flare-up between President and Prime Minister over the fact that officials accused of corruption were still in office.  If Turkey is to get rid of the corruption, it is insufficient to fire corrupt officials; it must get rid of the policies that induce corruption.  Foremost among these must be liberalization of the economy and a reduction in government spending. 





Hulsman, John 2001.  “Turning Point for Turkey”, Heritage Foundation Seminar (Washington, DC June 14).


Schaefer, Brett D. 2001a “Turkish Crisis Creates Opportunity for Needed Economic Reform.”  The Heritage Foundation Executive Memorandum #273 (Feb. 28).


Schaefer, Brett D. 2001b.  “Turning Point for Turkey.” Heritage Foundation Seminar (Washington, DC June 14).


Western Policy Center 2001.  “Turkey: Bush Administration Conditions, Bailout on Economic reforms.”  The Strategic Regional Report.  6 #4 (May-June).