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Turkey’s tough lessons for Greece: cut spending and retool economy 25 juillet 2011

Posted by Acturca in Economy / Economie, South East Europe / Europe du Sud-Est, Turkey / Turquie.
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The Wall Street Journal (USA) July 25, 2011

By Marc Champion, Istanbul

Why can’t Greece be more like Turkey? That’s what Greek Prime Minister George Papandreou asked his country’s legislators late last month as he tried to herd them into voting for an austerity package that was triggering riots.

Mr. Papandreou was referring to the success that Turkey had in donning a hair shirt and recovering from a financial crisis in 2001. Now Greece is being asked by creditors to take the same kinds of austerity measures—but whether Greeks will go the distance, and whether they can recover the way Turkey did remains unclear.

Euro-zone leaders last week agreed on a second bailout package for Athens. On Monday, Greek Finance Minister Evangelos Venizelos will meet with International Monetary Fund chief Christine Lagarde in Washington. The IMF estimates Greece will need more than €100 billion ($140 billion) in additional funding into 2014 beyond an existing €110 billion joint European Union/IMF program.

« Why can’t we do what our neighbors the Turks have done? » Mr. Papandreou asked the Greek parliament.

According to Kemal Dervis, Turkey’s former economy minister who designed Turkey’s recovery plan in 2001, the answer is that Greece also can recover. But there is at least one huge difference in the tools at the disposal of the two countries: Greece can’t cut interest rates and allow its currency to devalue, because unlike Turkey, Greece is part of the euro zone.

Turkey’s 2001 crisis was tough by any standards. Over a two-year period, Ankara borrowed an amount equal to 14% of its gross domestic product from the IMF, pared spending to generate primary budget surpluses of 9.6% of gross national product, and persuaded labor unions to take a 20% cut in real wages. GDP sank by 5.7% in 2001.

During the 2008 financial crisis, Turkey again was hit hard, despite having radically reduced its debt and strengthened its banking sector since 2001. In the first quarter of 2009, GDP plunged 14.7%. Again, Turkey bounced back, this time to become one of the world’s fastest-growing economies.

There are other profound differences between the two longtime rivals who have been tussling over territory and pre-eminence since before the Turks conquered Constantinople in 1453. Turkey is larger by almost every measure, has a dynamic manufacturing sector and a much younger population than Greece.

Turkey has its own economic worries, namely a current-account deficit near 9% of GDP, and financed by volatile short-term investments. Investor concerns over those imbalances have contributed to a selloff of the Turkish lira this year. But those concerns are tempered by widespread confidence that the country is set to expand over the next 20 years. The same can’t be said of Greece.

A recent IMF working paper took a look at what the twin tools of a flexible exchange rate and the ability to cut interest rates were worth to Turkey during the post-Lehman crisis. It found they were significant. The paper calculated that the Turkish central bank’s decision to slash its policy rate—now 7%—by 10.25 percentage points in the year from November 2008, and at the same time to let the lira plummet had reduced the size of Turkey’s contraction in 2009 to 4.7% of GDP, from the 8% it would have been otherwise.

Those cuts in borrowing costs triggered a credit boom that supercharged Turkish growth—the kind of stimulus that Mr. Papandreou’s opponents say his country should be looking for now, through tax cuts and other measures, rather than agreeing to an austerity program that will damp growth. In 2010, the year after the recession, Turkey’s economy grew by 8.9%. In the first quarter of this year, Turkey’s 11% growth rate outpaced China’s.

« An exchange-rate tool is a very good tool to have, and giving it up is tough. It requires a degree of discipline that not only Greece but also other euro-zone governments may not have realized, » Mr. Dervis said.

According to Paul De Grauwe, professor of economics at the Catholic University Leuven in Belgium, that’s a reason for Turkey and other large nations such as Poland considering joining the euro not to do so. « In general for Turkey it is better not to be in the euro zone, » said Mr. De Grauwe, citing the flexibility Turkey now has.

Most economists say Greece would be worse off if it tried to leave the euro zone at this point–even if some have begun to predict that it will. And Mr. Dervis says focusing on Greece’s current troubles ignores the benefits the country has reaped from EU and euro-zone membership. Greece posted growth rates between 3% and 5% since the early-1990s, a period in which Turkey suffered bouts of surging inflation and booms followed by bust. Greece’s GDP per capita today is close to three times as high as Turkey’s.

Yet Turkey does have lessons for Greece, said Mr. Dervis. First is that Athens has to wear the hair shirt. That’s because, like Turkey in 2001, Greece’s position is so extreme that the only way to restore lenders’ confidence is by slashing spending. Try to skip that stage, he said, and the interest rate that creditors demand to take the risk of lending to you will just keep going up.

Just as important, said Mr. Dervis, is combining austerity with reforms to make the economy emerge stronger in a program that convinces creditors of Greece’s ability to grow out of its debt. For Turkey, that meant 19 structural-reform laws aimed at transforming an economy that was crippled by political interference and monopolies. The reforms included creating an independent central bank, revising agricultural subsidies and revamping the banking system and civil aviation.

For Greece, the challenges will be entirely different, Mr. Dervis said. But it, too, must retool to create a convincing growth story.


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