ABDuLKADIR – Institution building vs. nation building

Institution building vs. nation buildingTurkey has experienced many economic crises.

Although specific mechanisms were different, in all of the crises the underlying causes were the same — the political and technical aspects of economic policies were too intertwined. The political figures in the government prioritized short-term political gains over the long-term interests of society.

In many cases, the outright corruption of politicians harmed the performance of economic institutions.Finally after the 2001 financial crisis, society decided that something was wrong with the status quo.

A simple political controversy sparked a full-blown crisis — economic collapse. The public mood was different this time citizens wanted real change.

This change was readily provided by international actors. The International Monetary Fund (IMF), World Bank, US and EU were almost too eager to provide financial and technical assistance to Turkey.

The IMF was desperately looking for a success story as almost none of the countries they had supported in the past achieved significant economic relief, while the EU and US likely had their own political motivations. In the end, Kemal DerviI was acknowledged by foreign and local actors as the main agent of economic structural transformation in Turkey.

Shortly after the crisis, DerviI –former vice president of the World Bank for the Middle East and North Africa region — was appointed as the minister of economic affairs after firm requests by the IMF, World Bank, US and EU. The government had to accept the appointment because financial support from these groups was desperately needed.

This appointment, in combination with directly loaning funds, would provide credibility to Turkish government in international credit markets.Against this backdrop — unparalleled support from external and internal actors — DerviI worked with incredible speed and determination, and Parliament passed numerous pieces of legislation that made fundamental changes to the structure of the governance system A common theme was the separation of politics from economic policy, though this does not mean that politicians did not provide any input.

After these changes, short and medium-term economic policies started being enacted by independent, technical institutions rather than politicians and the degree of autonomy provided to existing institutions increased.The Justice and Development Party (AKP) governments have since followed DerviIand#39s program, which was a success story in almost every aspect.

Almost all economic indicators improved substantially between 2002 and 2007 — from GDP to inflation, budget deficit to income inequality and so on. However, Turkey did not renew the stand-by agreement with the IMF in 2008 as the country no longer needed the credit and credibility provided by the IMF Most believed that Turkey was mature enough that it would not repeat its past mistakes and politicians would stop meddling with the day-to-day activities of economic institutions.

Unfortunately, they were wrong and political problems with the EU and US did not help the situation.The AKP governments became very powerful politically, partly due to the successful economic conditions that resulted from the independent, technical economic institutions.

Ironically, this political strength motivated AKP leaders to diminish the autonomy of these institutions. Today this encroachment is obvious and its negative effects are visible to everyone.

For some time, the impact of political meddling with the technical aspects of economic policies has been seen on economic indicators.I want to note that the political elites did not diminish the autonomy of economic institutions because aspects of economic performance were weak.

On the contrary, between 2002 and 2007, almost every indicator improved substantially (the unemployment rate being the main exception) and in 2007 most economic indicators were at their peak values. After 2007 the countryand#39s economic performance started to decline, the same year that the AKP government stopped following DerviIand#39 program and diminished the independence of economic institutions.

Although that also coincides with the 2008 global crisis, I believe the countryand#39s deteriorating economic performance was the result of reducing the autonomy of economic institutions, rather than the cause.As a result of this experience, I have learned that economic institutions cannot be established by the encouragement or mandate of external actors.

Even if such institutions are established due to some financial or other shock, they wonand#39t be sustainable unless the local democratic culture of the society is amenable to them — it wasnand#39t a coincidence that almost none of the IMF relief programs provided sustainable relief to countries in need. Economists are learning that institution-building is almost impossible via foreign forces.

SOURCE: Today’s Zaman