Tough Love For Turkey.

• Author: SCHAEFER, BRETT D.
• Position: Turkey's relationship with United States and International Monetary Fund - Statistical Data Included

Reform, not another IMF bailout, will stabilize Turkey's economy.

The Turkish economic crisis is the first international economic challenge to confront the Bush administration. Turkey plays a pivotal role in advancing U.S. policy goals in the Middle East, Europe, and Eurasia. America therefore cannot neglect Turkey and should help it achieve economic stability. The administration must not, however, perpetuate the Clinton administration's disastrous policy of insuring developing countries and international investors against their own imprudent actions--a policy that resulted in eight major financial bailouts beginning with Mexico in 1995. The Bush administration has stated its support for a new policy based on capitalism, not intervention. Turkey should be seen as the first opportunity to implement this policy, which would help set this important U.S. ally on the path toward long-term economic stability and growth.

Turkey and the International Monetary Fund negotiated a three-year stabilization program in December 1999, the seventeenth agreement since 1961. The goal of the program was "to reduce inflation to single digits by 2002, ensure a sustainable fiscal position, remedy chronic structural inefficiencies in the economy, and raise the sustainable level of growth." Turkey complied with IMF loan conditions to reduce its fiscal deficit, begin privatizing state corporations and utilities, and establish a "crawling peg" to reduce inflation in which the value of its currency, the lira, was tied to a ratio of the U.S. dollar and the euro.

Considering that all the previous IMF agreements failed to lead Turkey to sustained economic growth, it is not surprising that Turkey underwent two economic crises within three months, in late 2000 and early 2001. What is surprising is how similar Turkey's crisis is to other exchange-rate crises of the 1990's and the IMF's determination to repeat past errors. The IMF required Turkey to reduce its fiscal deficit--the result of financing a bloated state sector through high-interest deficit spending--by increasing taxes. The higher taxation slowed the economy, leading the IMF to propose devaluing the lira to stimulate exports for economic growth.

The most recent crisis was triggered by a February 15 dispute between Turkish Prime Minister Bulent Ecevit and President Ahmet Necdet Sezer that further undermined investor confidence, leading investors to dump the lira and purchase dollars. The central bank lost an...