Introduction
The world of today is no longer one of isolation and aloofness. Rapid changes in all walks of life are the norm and they include political, economic, and cultural changes. It can be said that almost all the countries of the world are affected by this change. The advent of globalization, free trade, advancements in technology, transportation, and communication are some of the catalysts that brought about this transformation of the global and individual economies of the world. As a student of economics, it is pertinent that a working knowledge of international economy and the way business is conducted in the twenty first century be understood. This paper is an attempt to enhance understanding of the economies of the world and their interdependence, and to analyze the impact of changing global financial and trade systems on businesses.
The country in focus for this study will be the Republic of Turkey. In the process, it will analyze the impact of changing global financial and trade systems on businesses. It will also analyze the importance and consequences of integration with such organizations as European Union (EU), North American Free Trade Agreement (NAFTA), North Atlantic Treaty Organization and the World Trade Organization (WTO). A study will also be done with reference to international financial systems, such as currency union, fixed and floating exchange rate systems. There are many international financing institutions (with specific reference to Europe and Turkey) like the World Bank, European Investment Fund, European Investment Bank, and the European Bank for Reconstruction and Development.
Background of the Republic of Turkey
Turkey, officially called the Republic of Turkey or Turkey Cumhuriyeti (in local language) was formed in the year 1923. “Modern Turkey was founded in 1923 from the Anatolian remnants of the defeated Ottoman Empire by national hero Mustafa KEMAL, who was later honored with the title Ataturk or “Father of the Turks.” (The World Fact Book: Background). Under his leadership, a lot of political social and cultural transformation was brought about in the country. For a long period (until 1950) the governance was authoritarian and had only a one party rule. A multiparty system was introduced in 1950 and the country still follows this form or rule even now. But political atmosphere was not quite democratic with the Turkish military playing a role in governance through military coups. In effect three coups, one in 1960, one in 1970 and the last one as late as 1980 had rocked the democratic system of the country.
At present the atmosphere is relatively stable and democratic even though the military does have a strong, but (for the present) a silent influence. Turkey has membership in the United Nations and North Atlantic Treaty Organization since 1945 and 1952 respectively. The country became an associate membership in the European Commission in 1964 is trying to become a full fledged member of the European Union ever since the latter’s formation. Political problems faced by the country include the Cyprus issue and the Armenian genocide issue. Internally, Turkey has been having intermittent problems with Kurds through their political wing People’s Congress of Kurdistan or Kongra-Gel (KGK).
Turkish economy
Economic indicators show the situation in the country as quite vibrant and stable. The following table which shows key indicators will make the matter clear. A comparative study with the economy of a strong European country namely Germany will be also be done to indicate the relative performance of the Turkish economy.
Even though the German economy is huge when compared to that of Turkey, the country matches or outperforms the German economy indicators in certain areas. They include GDP – real growth rate, unemployment rate, public debt, and industrial production growth rate. Turkey is also beginning to export non-agricultural commodities like machinery, chemicals and foodstuffs. Another indicator of the health of the economy is the rising foreign direct investment in the country.
Types of economies and interdependence
All governments across the world follow some policies with regard to regulation of their economies. The most common forms of economies are capitalistic economies, socialistic economies and mixed economies. Each of these types is indicative of the level of government control that is exerted in the economy. A capitalistic economy is where the government does or chooses not have any significant role in regulations. The United States is an example of such an economy. In a socialistic economy, the government will have a major say in the market through laws and statutes. “In a socialist economy, on the other hand, most of these decisions are made by citizens acting through the state, which coordinates and implements these decisions through central planning and command. In fact, a socialist economy is often referred to as a ‘planned’ or ‘command’ economy.” (Economic Concepts Capitalism, Socialism and Mixed Economy: Definition).
There will be heavy subsidies, free education and healthcare, high level of government employment, strict controls on imports etc. The concept of fully socialistic economy is now found impractical in today’s globalized world and more and more socialites countries are now opting for a mixed or even capitalistic economy. Cuba can be considered to be a socialistic economy though not in its strictest sense. “The socialist peso economy applies to most Cubans, providing them with free education, free health care, universal employment, unemployment compensation, disability and retirement benefits and the basis necessities of life: food, housing, utilities and some entertainment at very low cost.” (Military: Cuba’s Economy).
Government employment in the country is as high as ninety percent. In a mixed economy, both the state and market will play an active role in the economy. The government may choose to intervene in certain select areas like regulation of imports, subsidies, free trade, foreign direct investment, currency pegging etc. Turkey follows a mixed economy that is leaning more and more towards free trade. “THE TURKISH ECONOMY is being transformed in the 1990s from a state-led to a market-oriented economy.” (The Economy). The level of interdependence among economies varies with the type of economy and the policies followed by each government. A country that has a closed economy will be very independent of other economies. But in today’s world there is no concept of a fully independent economy. “As economies grow, they become more complex and interdependent; and the demands placed on the financial sector grow even more rapidly.” (Krueger).
An example would be imports of commodities like oil, machinery and foodstuffs. No country will be totally self sufficient in all these matters and will have to import some or all of the items mentioned above. To reduce the burden of imports trade agreements that promote mutual export and import of commodities will be made. For example, a country having surplus food will export it and import oil in return. In reality, interdependence is more complex than what has been given in the above example. Complex interdependence can exist among many countries and not just between two as mentioned above. Turkey’s main export partners are Germany, UK, Italy, France, Russia, and Spain. Its main import partners are Russia, Germany, China, Italy, US, and France.
Changing economic scenario
The main change that is taking place is increased level of globalization and free trade. Markets across the world are now jumping into the globalization bandwagon even though adoption of free trade policies has not been as rapid. The Turkish economy is also seeing such changes mainly for two reasons. One is to reap the benefits of globalization and foreign direct investments. The second reason is to speed up its accession to the European Union which requires many policy and constitutional changes. This is reflected in the rising level of FDI as shown in the chart given earlier.
With regard to accession Turkey is bound by the Copenhagen conditions for membership. “Membership requires that the candidate country has achieved stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities.” (Grabbe, p.3). Other conditions include a reasonably free and competitive market economy, the ability to comply with the political and economic policies of the Union and the capacity of the Union itself to take in new members. All these factors will have an impact on the Turkish economy as well.
Integration with international organizations and bodies
Rising levels of international trade resulted in the formation of monitoring and regulatory bodies like the WTO, NATO and the NAFTA. The collapse of the Soviet Union also brought about issues of balance of power. After the collapse, the United States was considered to be the only global economic and military superpower. It became necessary (even otherwise) to form organizations that were aimed at cooperation among many nations of the world. These associations were formed on the basis of geographic proximity or alignment in economic (and other) policies. An example would be the European Union aimed at monetary and military strengthening among all European nations. The integration of Turkey with the above mentioned organizations will be given here next.
World Trade Organization
The “World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.” (The Wto in Brief). The main aim of this organization is to see that international trade agreements between countries are implemented according to agreements. This results in an assurance to individual exporters and importers within trading countries about the delivery of products and completion of payments. Turkey joined the World Trade Organization only in March 1995 and now does trade according to the policies and rules set out by the organization. WTO has also welcomed the economic policy changes in the country in its effort for accession to the EU.
North Atlantic Treaty Organization
NATO is an organization formed for protection of freedom and security of member countries rather than for economic cooperation. This organization was mentioned just because of an argument in favor of Turkey becoming a party to the North American Free Trade Agreement. The argument was that since the country is already a party to NATO, it can also technically become one to the NAFTA as well.
The North American Free Trade Agreement
This agreement is in fact only between three countries namely the United States, Canada and Mexico. The main purpose of this agreement was to effectively remove all barriers for trade and investment between the three countries. The issue of Turkey becoming a party to the agreement was brought up by one of the country’s political leaders. “Since AKP leader Recep Tayyip Erdogan brought it up during his meeting with U.S. President Bush during their White House meeting on December 10, the word is in the air: “Turkey should enter NAFTA,” that is, North American Free Trade Agreement valid between the US, Mexico and Canada.” (Ataturk). The article from which the quote was taken argues that since the European Union is taking its own time to admit the country as a full member, Turkey can alternatively benefit if it becomes a party to the NAFTA. But no concrete steps have been taken in this regard to date. There is also an argument that the Customs agreement singed with the EU will effectively prevent the country becoming a part of the NAFTA.
The European Union (EU)
The acceptance of Turkey into the EU has been one of the most contentious issues that have come with regard to admittance of new members. The country has been trying to get itself accepted as a full fledged member for a long time. Turkey had been a member of the European Commission since 1964, but its efforts to become a member in the EU has not yet been successful. There are a number of reasons for this and the main reasons are given below. The country has been accused of genocide in Armenia way back during the time when it was part of the Ottoman Empire. Millions of minority Armenian people living in the country have been allegedly killed as a part of ethnic cleansing. There is also and issue with Greece regarding Turkish occupied Cyprus. Both these countries have powerful lobbies in the Union that have been effectively able to resist full membership to the country. The lack of progress in constitutional and economic reforms in the country is another reason, with the Union alleging that areas like human rights have not yet seen any real improvement.
Turkey has a large population in comparison to many European countries. The problem is that Europe is seen as Christian territory and the entry of a large Muslim population is uncomfortable to many nations in the region. The same issue also has brought about fears that representation in the Union which is also based on size of the population may give Turkey and favorable advantage over economic and voting benefits among the members.
Benefits of membership in EU
There are several economic benefits that a member of the Union can enjoy and Turkey can avail many of them once it becomes a member. Members allow free trade between themselves and have resulted in one large international market. This can boost the economy of member countries. There is no restriction on labor movement and many Turks can find employment in prosperous European economies. The existence of a single currency, the Euro makes trade easier and faster among members. The Union also gives financial aid to deserving members and Turkey can benefit economically from it. Turkey has also benefited from the changes that it has implemented in its quest for membership. “The presence of an affluent and stable bloc to its west has given the modernisers in Turkey the ally they needed to create a democratic constituency for change. That change has been pushed through with the promise of a European future.” (So, What has Europe Ever Done for Us: Prospect of EU Membership has Forced Modernisation on Turkey).
International financial systems
Opening up of world trade has also brought about changes in the international financial scenario. Institutions like the IMF, WTO and World Bank have now become more prominent due to this change. There is also more international interaction and cooperation among the governments and their financial departments and also the central banks of different countries. Privately owned financial institutions and other businesses have also become major players in the international market. Technicalities like currency union, exchange rate fixation, international trading in stocks and securities, currency trading etc have also gained in importance now.
Currency union is the adoption of a common currency that can be freely circulated as legal tender among participating countries. The Euro is an example of currency union. There are several advantages (and some disadvantages) in having a currency union. The transaction costs associated with dealing in different currencies can be reduced. Free trade is made easier when there is a common currency. Interest rates can also be reduced in cases where the currency from another country is accepted as the common one and also if the interest rates of that country are lower. The main disadvantage is that a country would loose its independent monetary policy as a result. This could be bad when an individual country is facing problems like inflation and the government being unable to deal with it on its own accord. According to the Governor of the Reserve Bank of New Zealand, “The potentially major disadvantage would be the loss of an independent monetary policy, and hence loss of a very important way of moderating demand shocks and of any ability to influence our own inflation rate.” (Brash).
Turkey maintains a floating exchange rate policy which it changed from a fixed system some time back. Fixed exchange rate is a “system in which a country’s exchange rate remains constant. Normally this means that the exchange rate between the country’s currency and some other currency or basket of currencies stays within some small margin of fluctuation around a constant par value.” (Black). On the other hand a floating rate allows the value of currency to fluctuate depending its demand and supply. Financial experts are of the opinion that it is more advantageous to have a floating exchange rate in the background of globalization and free trade.
International financing institutions
Due to various reasons, the growth of the various economies of individual countries was far from equal. Many countries (especially in the West) prospered while many remained poor and under developed. International financial institutions were the solution to correct this situation to a certain extent. Even though the situation is far from satisfactory, they have been instrumental in helping out many economies in times of emergency and need. But the formation of international financial institutions can be attributed to the need for recovery from the after effects of World War II. Delegates from a group of 44 nations met at Bretton Woods in New Hampshire to chalk out a solution. “The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.” (1944 Bretton Woods Agreement: Developing a New International Monetary System).
The problem of unstable currency rates and issues related to international trade practices (for example, restrictions) were addressed. As a result two international institutions were created from what is known as the Bretton Woods Agreement. They are the International Monetary Fund and the International Bank for Reconstruction and Development (The World Bank). Over the years many subsidiary and independent financing organizations have been created for helping out economies in times of need. They include the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the European Investment Fund (EIF), the African Development Bank, Group of Seven/Eight, Bank for International Settlements, and the Inter American Development Bank. Turkey has also benefited from aid provided by such financial institutions. “Turkey is the largest borrower in the Europe and Central Asia Region and it has been the third largest World Bank borrower in terms of new commitments of over US$1.5 billion during the last three years.” (Turkey: The World Bank’s Strategy in Turkey: 2008-2011).
International Monetary Fund and Turkey
Turkey has a long relation with the IMF and has been a member since March 1947. The country has been getting financial assistance from the IMF from time to time especially after the 1980s. It would be worthwhile to mention about the lending process of the Fund in a brief manner. “A core responsibility of the IMF is to provide loans to countries experiencing balance of payments problems. This financial assistance enables countries to rebuild their international reserves; stabilize their currencies; continue paying for imports; and restore conditions for strong economic growth.” (IMF Lending).
The fund only provides general assistance and does not provide finance for individual projects as in the case of the World Bank. Only member countries can avail of this assistance and an application has to be forwarded to the IMF to avail benefit from it. The IMF will also need to know how the problem will be solved and also the measures and steps to be taken have to be formulated in consultation with the IMF. All this will be in the form a letter of intent which will be presented before the board of directors of the Fund. Once approved, the amount will be released according to the terms of the agreement. The bank has various lending schemes such as Poverty Reduction and Growth Facility (PRGF), Exogenous Shocks Facility (ESF), Stand-By Arrangements (SBA), Extended Fund Facility (EFF), Supplemental Reserve Facility (SRF), and the Compensatory Financing Facility (CFF). (IMF Lending). It also has an emergency funding scheme in case a country is hit by natural disasters. An interest known as the ‘rate of charge” (and sometimes a surcharge) will also have to be paid by the borrower.
The IMF and Turkey entered into an agreement in 1998 called the staff monitoring program for stronger control by the IMF the loans provided and also the improvement of the Turkish economy. Turkey was hit be a very heavy recession during late 2000 and early 2001. This resulted in an inflation of 54% and a fall in GNP by 5.7%. The value of the Turkish Lira also fell by more than half in against other foreign currencies. The rate of unemployment in the country went up to 10% and there resulted a 20% reduction in salaries and wages. The IMF played a major role at that time in providing assistance to the country. “The IMF was involved with the management of the Turkish macroeconomy prior to and after the crisis, and provided financial assistance of $20.4 billion between 1999 and 2003.” (Yeldan).
The economy recovered to a large extent after that period mainly due to the pro-investment policies by the government of Turkey. Trade liberalization policies were also implemented and more cooperation with Western economies was extended. This was partly due to the required policy changes needed for EU membership. One of the policies followed was to maintain a high rate of interest in order to attract foreign capital. This policy paid off and the country became a target of high levels of foreign direct investment. But the situation led to a bad financial position for the country. The value of Turkish lira had increased which led to massive buying of imported goods and commodities. The country’s current account deficit came to an unprecedented 40 billion dollars (about 7% of GNP).
Unplanned private sector funding and speculation also compounded the problem to a large extent. Moreover, the country needed heavy capital and technological investment for their infrastructure development projects. All this ultimately led to the reduction and withdrawal of foreign investments in the country. The severe economic crunch faced by the US and world economy also did not help ease the situation and even contributed to worsening it further. According to an article in the International Herald Tribune, economic growth in the country is now as low as 2% per annum and unemployment may have touched 40%. (Thomas, p.1). A further assistance of 20 billion dollars from the IMF is on the cards as of now, even though the country has tried its best not to avail of it. This was in an attempt to see whether the country can manage the situation by itself. But the current circumstances will most probably lead to Turkey accepting the deal. If Turkey accepts the aid, it is hoped that the country’s economy can correct itself back to the old level with a heavy inflow of FDI. But it needs a lot of patience and prudent planning from the government to achieve it.
Financing for Private Investments
International financing institutions exist for financing and fostering private investments also. Examples would be the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). While the IFC provides direct investment to privately owned concerns especially in developing countries, the MIGA plays an indirect role. Foreign direct investments can help many economies to grow, but concerns about safety and return on investment may result in many investors to start projects in underdeveloped economies. “MIGA addresses these concerns by providing three key services: political risk insurance for foreign investments in developing countries, technical assistance to improve investment climates and promote investment opportunities in developing countries, and dispute mediation services, to remove possible obstacles to future investment.” (Miga and FDI).
Conclusion
Turkey is facing a challenge in the sense that its attempt to become a full fledged member of the EU is yet to become a reality. Once the process goes through, the country can avail all the benefits of with being a member of the community. The process incidentally has helped the country to become a free market economy with high levels of foreign direct investment pouring into it in the past few years. But the economy of the country will definitely undergo a huge improvement once it is accepted into the Union. Many constitutional and policy changes have to be implemented for this and it will be a long and patient process. Increasing levels of globalization and free trade has resulted in new opportunities as well as challenges. The emergence of organizations like the EU and NATO has similar repercussions and benefits. In such a scenario, international finance is of extreme importance and international financing organizations like the ones mentioned in this paper are now playing a major role in facilitating finance and also to help alleviate poverty in many countries.
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