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 counter intuitive 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.
*
This article was originally published on the author’s blog site: The Turbulent World of Middle East Soccer.
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
Featured image is from Daily Reckoning Australia.
The original source of this article is Global Research
Copyright © James M. Dorsey, Global Research, 2018
Amidst Turkish Crisis Indian Rupee Falls to All-time Low
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With the ongoing crisis involving Turkish lira, the Indian rupee fell to an all-time low on Tuesday. The Indian currency dropped to the level of 70.1 to the US dollar and ended at 69.93 at the end of the day, recording its largest one-day fall in five years.
Indian officials have attempted to downplay the severity of the crisis confronting the Indian economy and its currency. Economic Affairs Secretary Subhash Chander Garg told the media on Tuesday that there was “nothing at this stage to worry” about the fall of the rupee as it was due to “external factors.” He claimed that India had sufficient foreign exchange reserves to withstand the decline.
At the same time, Garg admitted that the country’s central bank, known as the Reserve Bank of India, was limited in what it could do to contain the fall. He said:
“As currencies of other economies are also depreciating, intervention by the Reserve Bank of India, by selling dollars in the country, will not help much at this stage for stabilising the rupee.”
Indian officials have been forced to admit their inability to control “external factors” on the country’s economy. According to Garg, the Reserve Bank of India (RBI) has spent about $US23 billion so far in this year in its attempt to stabilise the rupee.
The fall of the Indian rupee has been unfolding over several months, in response to moves by the US Federal Reserve to lift interest rates and end its “quantitative easing,” thus reversing the flow of relatively cheap dollar-denominated loans. The Indian currency has declined about 8 percent so far this year. Now, amidst the sharp fall of the Turkish lira, which underscores the far-reaching implications of an upward movement of the dollar as a result of the US Fed’s moves on so-called emerging markets, the decline of the Indian rupee is accelerating.
Pointing to the role of foreign investors in the fall of the rupee, B. Prasanna, group executive and head of ICICI Bank, said:
“The swift move [of the rupee] past 69 happened due to foreign portfolio investor (FPI) outflows and the need to hedge existing short dollar positions in the market, driven by global market sentiment rather than actual importer demand.”
The decline of Indian rupee is a part of global rush by investors away from so-called emerging markets. Radhika Rao, an economist at DBS Bank in Singapore, said:
“The fall in rupee was not in isolation, rather a part of the broader sell-down in emerging markets currencies.”
As a further indication of the growing economic crisis confronting the Indian elite, the country’s trade deficit rose to $18 billion last month, from $16.6 billion in June. The major factor was the increase in oil prices. India imports more than 80 percent of its crude-oil needs.
Some sections of Indian big business welcome a weaker rupee as a favourable factor for exports, arguing that it will make the country’s products competitively cheaper in the world market. Anand Mahindra, the executive chairman of the Mahindra Group, which has interests ranging from cars to construction equipment to insurance, tweeted:
“With this boost to India’s export competitiveness could we now convince global companies that it’s time to switch to India for world-scale, export-focused manufacturing?”
However, a weaker rupee will not favour all sections of Indian industries as argued by Mahindra. Those which rely on imported raw materials, component parts and machinery will face increases in their manufacturing costs in rupee terms.
Moreover, a weaker rupee could lead to higher inflation under conditions of increases in import bills of crude-oil, commodities, electronic items and engineering equipment. According to the Indian oil ministry, every rupee change in the exchange rate against the US dollar makes a change of 108.8 billion rupees ($1.58 billion) in the country’s crude-oil import bill, which reached $12.4 billion in July, 57.4 percent higher than a year ago.
While Indian officials boast the country’s foreign reserves are sufficient to push back against the downward pressures on the rupee, the current level of about $402 billion would not cover import costs for a year.
The global economic shocks will intensify the political crisis confronting the government of Prime Minister Narendra Modi. The Hindu supremacist Bharatiya Janatha Party (BJP) will face national elections next year. Its ability to allocate spending toward some cosmetic social policies, in an effort to retain support, is increasingly limited.
The higher inflation resulting from the depreciation of the rupee will intensify the already immense burden on the working people and rural poor in the form of increasing prices for fuel, food and other essential goods and services. It will lead to a further escalation of class struggle.
This year, significant sections of workers and the oppressed have engaged in strikes and mass protests over the attacks on their wages, jobs and working conditions, by both the national BJP government and administrations at state level. Bank employees throughout the country, public-sector bus workers in the southern state of Tamil Nadu, cab drivers attached to major taxi companies Uber and Ola, and farmers in western, eastern and northern India were among them.
Immense class antagonisms exist due to the poverty and widening social inequality caused by the pro-investor economic reforms carried out by successive governments since 1991. The top 1 percent of country’s population enjoys nearly a quarter of all income and owns 60 percent of the country’s total wealth, under conditions where about 70 percent of the population lives on less than $2 a day. Only a tiny minority of big bourgeoisie and privileged section of upper middle class has benefited from more than a quarter century of economic reforms in the expense of vast majority of workers and oppressed masses.
India’s social powder keg is on the verge of explosion under conditions where the main opposition Congress Party and the Stalinist parliamentary parties—the Communist Party of India (Marxist) or CPM and the Communist Party of India (CPI)—are discredited among the workers and oppressed masses due to their role in imposing pro-investor economic policies and associated austerity measures. These organisations will not be able to contain working-class resistance as they have in the past.
The original source of this article is World Socialist Web Site
Copyright © Deepal Jayasekera, World Socialist Web Site, 2018
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