Two Tales in Post-Crisis Adjustment

Erinc Yeldan, Guest Blogger

Two Latin American style economies, Argentina and Turkey, shared a common history until very recently.  This “commonness” included a prolonged history of import substitution industrialization (ISI) with inward-looking, state-led development paths.  Both economies had relatively high rates of growth during their respective stages of ISI and yet, found out that these paths reached their limits by late 1970s (Argentina perhaps half a decade earlier than Turkey).

Both countries had also witnessed a lost decade, respectively; Argentina the 1980s, Turkey 1990s.  For both countries the period after was one of active reform.  Both countries suffered from an almost identical type of financial crisis in 2001, while both of them were following an IMF-led disinflation programme that rested on exchange rate-based stabilization adventures.  The contraction of the GDP and the burden of adjustment through rapid currency depreciation, banking collapses, and a severe rise of unemployment were also at comparable scale across the two countries.  However, the two had divergent paths of adjustment subsequently. Turkey followed a strict orthodox adjustment programme under the auspices of the IMF, while Argentine chose to set its own course with debt default and an adherence to what is commonly referred to as a heterodox adjustment programme, while maintaining a strong anti-poverty and pro-employment stance.

Almost a decade into this divergence, Argentina was in the international news once again, now with a ruling by the district court of New York that the Argentinian government ought to pay $1.3 billion to a “vulture fund”: Elliott Capital Management.  The ruling further contained a statement that prohibited third parties to aid Argentina in its efforts of debt re-structuring.

Why now?

Ghosh and Vernengo[1], among others, state the main reason: the Argentinian episode shows that there is life after a default, and that austerity is not the best way out of a crisis.

Post-Crisis Macroeconomic Evidence

In the days that follow the 2001 crisis, Argentina implemented a debt-default programme along with a heterodox approach to crisis adjustments that entailed pro-employment, anti-poverty measures.  In contrast, the Turkish post-crisis episode followed much of the logic of the neoliberal austerity programs: adherence to high interest rates attracted short term capital inflows, the relative abundance of foreign exchange led to real appreciation of the domestic currency, the Lira. Cheap foreign exchange led to an import boom both in consumption and investment goods. The end results in the Turkish context were the shrinkage of the public sector in a speculative-led growth environment, and the consequent deterioration of education and health infrastructure, which urgently needed increased public funds.  Furthermore, as the domestic industry intensified its import dependence, it was forced toward adaptation of increasingly capital-intensive, foreign technologies with adverse consequences for domestic employment.

The divergent patterns of post-crisis macroeconomics is tabulated in Table 1 below.  Let’s take the headlines in turn:

  • After their respective crises both countries experienced fairly rapid growth up till 2008, with Argentina surpassing the Turkish rate slightly.  In per capita terms, however, Turkey achieved almost a three-fold increase in current US dollar terms.  Turkish per capita GDP increased form the 2000-2003 average of 3,548$ to 10,256$ in 2010-11.  Yet, a closer glance at the last row of the Table reveals much of the mystery beyond this score: Turkey experienced an unprecedented appreciation in its domestic currency over this period by as much as 50%.  Calculated in purchasing power parity terms, appreciation of the Turkish Lira by 53% compared to 2001, enables Turkey to enjoy gains in the dollar-value of its GDP.  A correction of this appreciation brings Turkish per capita GDP to about 5,000$ range.
  • Investment performance diverged significantly: with Argentina increasing its investment share out of its gross domestic product by almost two-folds from 15% to 23.6%; while Turkish investment efforts remaining roughly constant over the 2000s.
  • Fiscal balances were clearly the most debated issue across both Latinos.  Turkey achieved a strong success in reducing its fiscal deficit from about 10% of the GDP to the so-called “Maastricht levels” before the eruption of the 2008/09 crisis.  With its rapid growth and controlled fiscal expenditures, Argentina reduced the burden of its domestic debt from 82.7% by half over the relevant period.  Turkey held on to its relatively lower debt burden, albeit at the cost of maintaining very high primary budget surpluses at around 4.5% to its GDP.
  • The most visible aspect of the Argentinian post-crisis success was visible in its reduction of the open unemployment rate from high twenties to less than 7% by 2011.  Whereas in Turkey, growth was accompanied by persistence of open unemployment at the 10% plateau, characterized by jobless-growth patterns.
  • Turkey had a deeper internationalization effort with its exports increasing rapidly from an average of $31 bn  to $125 bn by 2011. The critical aspect of the Turkish external balances was its increased import dependence.   As a result, Turkey suffered from a severe deterioration in its current account balance.  The Turkish current account deficit expanded to 10% of the GDP; while Argentina maintained a positive surplus.  Consequently, total external debt of Turkey almost tripled in dollar terms; while Argentina reduced its foreign debt exposure.  The fact that, as a ratio to the GDP, Turkey reduced its debt ratio by ten percentage points over this period is related to the appreciation of its domestic currency, a fact we discussed above in the context of the dollar-valuation of the GDP .
  • Inflation performance is the most controversial issue in both countries.  Argentina officially maintained its inflation rate at around 10%, while Turkey strived for reducing its inflation rate to the targeted rate of 5%.
  • As briefly discussed in the introductory lines of this piece, Argentina worked with negative real rates of interest, while offering high rates of real arbitrage gains was the main pillar of the Turkish post-crisis adjustment strategy in tandem with the IMF-style austerity programmes.

The verdict?

Comparing these two Latinos, one can distill many lessons: first, no unique recipe exists when it comes to targeting more than one policy objective; secondly, austerity and social goals can be respected within a coherent programme; and yet all successful programs call for more policy space against the rhetoric of TINA (there is no alternative) orthodoxy.

Eric Yeldan is a Professor and Dean at the Faculty of Administrative Sciences at Yasar University. His interests include contemporary issues in international trade and macro economic policy.

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[1] Jayati Ghosh and Matias Vernengo, “Why Argentina is Now Paying for its Dangerously Successful Economic Story” International Development Economics Associates (