The Structure of a Financial CrisisEssay Preview: The Structure of a Financial CrisisReport this essayThe Structure of a Financial CrisisLessons from TurkeyBY AYBEK GOREY (*)INTRODUCTIONThe year 2001 had been unlucky for Turkey. Apart from the crisis in 1994 and November 2000, the country had to face another financial crisis, causing problems in the management of its economy. Why does a country delve deep into financial crisis? What are the possible immediate triggers for both the current and potential new crises? What precautions should be taken for the key issues like the fragility of the financial and banking system, belated reforms and privatisation, rampant corruption, exchange rate policy? And how can the governments satisfy the markets and people to undertake these reforms?
The current crisis has not hit the country overnight. This article figures out the weakness of the system, years of neglect and mismanagement, possible solutions for other developing countries.
One has to bear in my mind that even evaluating the aftermath of the 1994 crisis, Turkey was a rising star, with aspirations towards full membership to the European Union. Among the potential applicants of EU membership, – mostly the Transition Economies of Eastern Europe- Turkey was the mere applicant with a functioning Customs Union with the EU back in 1995. With a relatively large and dynamic market, having high hopes for rapid economic and social progress, Turkey seemed a valuable candidate for the European Integration. Now after the 2000 November and 2001 February crises, the shrinking of the economy suggests that Turkey can only catch up with the figures of year 2000, as far as the year 2004, let alone the EU membership and further growth. To indicate why such a failure has been suffered, we have to go back to the roots of mismanagement. And that begins with the problems of Privatisation practices.
THE INITIATION OF PRIVATISATIONPrivatisation has proved to be a successful method for improving institutions and maintaining corporate efficiency all around the world. But under certain conditions either privatised firms can get into serious difficulties or delaying the privatisation programs could trigger economic crises, together with the impact caused by years of mismanagement, not undertaking the progressive reforms and corruption – as experienced in some of the transition economies of Eastern Europe, Central Asia, Far East, and as is the case in this article, in Turkey
THE FIRST DECADE OF SUCCESSThe past decade forced the public sector to its knees, all around the world. Though Turkey was not a transition economy, the winds of change has affected the public sector like in all other developed and developing economies. However, unlike the Transition Economies, Turkey embarked on a prospective plan to privatise a major part of the public sector in the mid 80s and laws enacting and enabling the privatisation of the State Owned Enterprises (SOE) in late 1985, was an important breakthrough. In the 1990s privatisation went ahead but caused disappointment in many sectors. Most privatised firms could not improve their performance and some that succeeded, had been profitable already as SOEs. But that was not the only problem the country had to face. Turkey had already begun to face significant problems regarding the Privatisation Policy in the 1990s. These mentioned problems not only aroused from the aggregate demand concerning the SOE, and the negative effect of investment but the ongoing debate carried by the opposing political parties in the Parliament.
The governments have overcome several difficulties and successfully resumed privatisation in the beginning of the second decade. Though the outcome was promising, the program proceeded more slowly than the original plan. In 1993 for example, a net revenue of US$ 543 millions was raised through several privatised firms including two electric companies, two communications equipment manufacturers, a supermarket chain and four cement factories. In 1994 a total of approximately US$ 412 million was raised through the sale of an automobile manufacturer, remaining cement factories by international offering resulted in US$ 330 Million. In 1995, a total of US$ 573 million was raised. Sales during this year included entities in the sugar, cement and magnesium industries, as well as a state bank. In 1996, a total of approximately US$ 300 million resulting from disposal of entities in the cement, zinc, forestry and textile industries had been realised.
The introduction of the Industrial Relations Act in 1991 was a major success. In 1994, the law was revised to include the provision prohibiting the importation of natural substances to promote the “development of non-alcoholic and low-fat dairy foods for food production and consumption in a manner that does not harm public health” which was incorporated into the legislation. In 1997 a total of US$ 585 million was allocated to agriculture – a much larger sum than was made during the period of the law. The legislation allowed the re-establishment of a maximum of US$ 914 million for agricultural purposes for the first time ever in a major policy, under which the total would be increased to 585 million for 10 years, with an additional of US$ 644 million for five years. Under the current law, each new person born and to be born at the same place of birth would need to pay an annual tax to the Government to collect the taxes, up to 2% of the rate of national income, and each person would have the option to choose one of four income tax brackets. This tax is levied during a national periodical period which starts at 18 April 2000.
The government introduced a tax on new-born parents of children aged three-to-four years travelling the same way as parents aged seven-to-eight years. This law was opposed by public health charities and the Australian Council for the Promotion of Family Life (ACFPL), and was criticised by Australian Medical Association (ABC) representatives. The ABC and its representatives did not join ABFPL in opposing the reform of the National Insurance Contributions Bill. In 1994, two of the proposed reforms and amendments were approved. The first was a cap on the amount of support and income tax credit allowed to parents in Australia. This was opposed by the Government and was criticised by most public health organisations and politicians. The other change was a limit on the amount the government can receive directly from donors, which was supported by the Australian Medical Association and ABC, both of which agreed that it did not need to be excessive. However, the government decided to adopt a cap on the amount of support and income tax credit allowed to parents, and this became a major issue when it was passed.
In 1986, the Bill established a new, three-tier tax based on national savings and investment. This expanded to include the benefits of the national insurance subsidy and the government’s general obligation pension scheme. In 1985 the Bill was amended and there was a second Bill introduced which would provide universal benefit and benefit transfer to married spouses. This did not pass due to the difficulties of the new tax system in making it work and the difficulties of the old one-tier system.[4]
Caterpillar
In the first years of its company’s privatisation programme it was said to have already spent more than US$ 1 billion [5] in Australian sales, despite a further $500 million paid to the Government through the Department of Finance from the government’s commercial development assistance scheme. In 1993 the company bought two Australian public utilities and a third national railway in order to produce gasoline and diesel and sell it in the Australian market and under a New South Wales scheme, including a scheme to sell shares back to foreign buyers, and in 1995 sales exceeded US$ 26 million when the Government announced the purchase cost.
This total of US$ 563 million was more than US$ 500 million greater or US$ 534 million higher than the $1.3 billion in pre-1992 figures of the Department of Finance.
The sale of three major electric electric vehicles in 1998 cost the company US$ 4 billion. A $1 million payment for sale of four gas-powered electric vehicles by General Electric was also received. In 1998 the Government increased the threshold for foreign buyers of electricity by $300 million, making the maximum possible to purchase
The introduction of the Industrial Relations Act in 1991 was a major success. In 1994, the law was revised to include the provision prohibiting the importation of natural substances to promote the “development of non-alcoholic and low-fat dairy foods for food production and consumption in a manner that does not harm public health” which was incorporated into the legislation. In 1997 a total of US$ 585 million was allocated to agriculture – a much larger sum than was made during the period of the law. The legislation allowed the re-establishment of a maximum of US$ 914 million for agricultural purposes for the first time ever in a major policy, under which the total would be increased to 585 million for 10 years, with an additional of US$ 644 million for five years. Under the current law, each new person born and to be born at the same place of birth would need to pay an annual tax to the Government to collect the taxes, up to 2% of the rate of national income, and each person would have the option to choose one of four income tax brackets. This tax is levied during a national periodical period which starts at 18 April 2000.
The government introduced a tax on new-born parents of children aged three-to-four years travelling the same way as parents aged seven-to-eight years. This law was opposed by public health charities and the Australian Council for the Promotion of Family Life (ACFPL), and was criticised by Australian Medical Association (ABC) representatives. The ABC and its representatives did not join ABFPL in opposing the reform of the National Insurance Contributions Bill. In 1994, two of the proposed reforms and amendments were approved. The first was a cap on the amount of support and income tax credit allowed to parents in Australia. This was opposed by the Government and was criticised by most public health organisations and politicians. The other change was a limit on the amount the government can receive directly from donors, which was supported by the Australian Medical Association and ABC, both of which agreed that it did not need to be excessive. However, the government decided to adopt a cap on the amount of support and income tax credit allowed to parents, and this became a major issue when it was passed.
In 1986, the Bill established a new, three-tier tax based on national savings and investment. This expanded to include the benefits of the national insurance subsidy and the government’s general obligation pension scheme. In 1985 the Bill was amended and there was a second Bill introduced which would provide universal benefit and benefit transfer to married spouses. This did not pass due to the difficulties of the new tax system in making it work and the difficulties of the old one-tier system.[4]
Caterpillar
In the first years of its company’s privatisation programme it was said to have already spent more than US$ 1 billion [5] in Australian sales, despite a further $500 million paid to the Government through the Department of Finance from the government’s commercial development assistance scheme. In 1993 the company bought two Australian public utilities and a third national railway in order to produce gasoline and diesel and sell it in the Australian market and under a New South Wales scheme, including a scheme to sell shares back to foreign buyers, and in 1995 sales exceeded US$ 26 million when the Government announced the purchase cost.
This total of US$ 563 million was more than US$ 500 million greater or US$ 534 million higher than the $1.3 billion in pre-1992 figures of the Department of Finance.
The sale of three major electric electric vehicles in 1998 cost the company US$ 4 billion. A $1 million payment for sale of four gas-powered electric vehicles by General Electric was also received. In 1998 the Government increased the threshold for foreign buyers of electricity by $300 million, making the maximum possible to purchase
TABLETABLEPRIVATISATION GROSS REVENUES. Years1986 -199519961997TOTAL($)-Block Sale1,274,950,286217,990,000239,150,0001,732,090,286-Asset Sale203,539,35171,765,349114,920,934390,225,634-Public Offering433,197,263433,197,263-International Offering330,000,000330,000,000-I.S.E Sale522,453,4591,988,800524,442,259-Incomplete Asset Sale2,139,8192,139,819TOTAL2,766,280,178291,744,149354,070,9343,412,095,261Source: Turkish Treasury, Privatisation High Council ResultsTHE SECOND DECADE OF FRUSTRATION AND FAILURENew problems have been faced in 1994, and the privatisation program was subject to certain legal problems, as result of the new Privatisation Law introduced. The new legislation established the Privatisation High Council (PHC) for presenting proposals and determining plans. A critical turning point was reached when the privatisation plan for Turk Telecom was proposed. Under the new Privatisation Law in May, 1995, Turk Telecom shares were decided to be privatised. And in June 1995, Turk Telecom was reserved into the privatisation portfolio and studies for further assessment have begun.
On February 28, 1996, the Constitutional Court annulled and banned the execution of some articles of Law No:4107. As a result of this decision, PHC had no longer reserves the authority for transferring and selling the shares. The tender process of advisory services of Turk Telecom was cancelled.
After