E Why The Turkish Financial Crisis Matters To The Rest Of The World

To long-time observers, Turkey’s economic woes are so familiar and are almost a textbook case showing how a country can run into severe balance of payments difficulties in just a few years. The 1990s featured a similar crisis as various emerging markets had to turn to the international community (Thailand, 1998) or the United States (Mexico, 1994) to right their financial ship.

Turkey’s crisis is a replay of past emerging-market currency crises. The Turkish situation exhibits all the features that give rise to these types of crisis:

A large, persistent current account deficit, with a populist leader who has undertaken economic policies that are simply unsustainable;

A high dependence on overseas investors who anticipated much higher rates of return than exist in their home countries;

A rise in protectionist policies that hamper export growth, necessary to generate foreigncurrency to finance the current account deficit;

A sudden and severe drop in the value of their currency which exacerbates efforts to reduce trade deficits;

A rise in the US dollar as the Federal Reserve adopts monetary policy reflective of the economic conditions at home which, nevertheless, impact directly on international capital flows; and, resulting in;

Stress on the stability of some of the biggest banks which have significant exposure to the borrowing nation.

What makes this current crisis worthy of our attention is the sheer importance of the emerging markets as they increase their relative share in all aspects of the international financial markets. Brazil, China, India, Indonesia, Mexico, Russia and Turkey (EM7) now account for 33% of global economic output. The EM7’s growth rates are responsible for nearly half of world’s annual economic expansion. The growth in the advanced economies average 2% while the emerging markets enjoy rates of over 5% on average. On the export side, the emerging economies’ share has increased from 20% of world exports in the early 1990s over 40% today. On the import side, the share has increased from 20% to 30% over the same period.