assignment

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THE FINANCIAL CRISIS OF 2001 IN ARGENTINA AND TURKEY

Hilal Gezmis

The University of Sheffield

Department of Politics

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A) RESEARCH QUESTIONS AND HYPOTHESIS

Late 1990s remarked a series of financial crises which led to the collapse of the

economies in different regions of the world. East Asian economies were exposed to financial

crises in 1997; Russian economy was hit in 1998 while Turkey and Argentina faced financial

crises in 2001. The financial crisis of 2001 resulted in the collapse of these countries’

economies, social unrest and temporal loss of governability. Overall, the crisis raises

important questions about the political economy of development, the role of finance in

development and the policies that have come to be known collectively as the Washington

Consensus. This research will explore the underlying reasons of the 2001 crisis in Turkey and

Argentina. It will argue that the crisis occurred as a result of the ‘globalised’ state which

internalises neoliberal recipes and so sharpens inherent tensions among new and old

constituencies in its state-society composition.

The overarching research question is what accounts for the 2001 crisis in Argentina

and Turkey?

The research will also address the sub-questions outlined below:

1) What was the role of external factors, such as the impact of the policies and neoliberal

development rhetoric of the international institutions the IMF and World Bank, in

precipitating the crisis?

2) What was the role of domestic socio-economic actors and state strategies in causing

the crises and the way the crises unfolded in both countries?

3) Why did the crisis unfold differently in each case?

4) What were state responses in managing the crises and how successful were they?

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B) IPE AND FINANCIAL CRISES

The literature in International Political Economy (IPE) on the financial crises in

developing countries mainly attributes the crisis to two factors: 1) increasing vulnerability

posed by the global financial system, especially in countries with weak banking sectors and

the IMF policies which imposed neoliberal reforms, and 2) lack of transparency and

corruption in these countries. According to the first explanation, the global economy went

through structural changes in the 1980s and 1990s both materially and ideologically which

were shaped by the interests of the US and Wall Street and promoted by the IMF and World

Bank (Wade and Veneroso, 1998). It was argued that states were imposed to liberalise trade

and finance markets through the conditions laid down by the International Monetary Fund

(IMF). Thus, developing countries were exposed to speculative attacks and external shocks.

The second approach, which is also found in the discourses of the IMF and World Bank,

assumes the perfection of markets and blames the states for the crisis. Hence, according to

international institutions, especially the IMF, the crisis emerged due to heavy state

intervention in markets which caused inefficiency and corruption (Fischer, 1998). Overall,

while the first approach emphasizes international factors in unfolding the financial crises, the

second approach promoted by the IMF blames the state to be responsible for the crisis.

Hence, both approaches reproduce state-market and state-global dichotomies assuming the

states as ‘homogenous’ units in explaining the financial crises.

This thesis, by incorporating Development studies into Critical studies in International

Political Economy (IPE), will attempt to go beyond state-market and state-global binaries and

will argue that financial crises can be understood as part of complex relations in which state

mediates between state-market-society and global spheres to implement developmental goals.

As Cox (1987) puts it, ‘production generates the capacity to exercise power but power

determines the manner in which production takes place’. Hence, state is embedded in social

forces but has the capacity to conduit the interests of the society to maintain the order and

decide policy changes when the policies are not sustainable (Cox, 1987: 106). The state`s

action, on the other hand, is influenced by the structure of the world order and global

production relations. The state, then, (Evans, 1995) needs to channel these elements of

society to implement its specific policy shifts, which entails a continuous process of

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negotiation of goals and policies with the domestic sphere – involving old and new elements

– and international actors.

Hence, state capacity is shaped by the state`s ability to manage economic and political

conflicts within the state-society-global nexus. However, changes in developmental concerns

in relation to economic elites` interests or global dynamics do not necessarily lead a linear

path of transformation but development follows a specific logic in which state`s practices on

development; the way it to manages political and economic conflicts influences the path of

development. In this context, this thesis asserts that economic crises reflect critical moments

of negotiations and constellations between changing developmental ideas and state practices

in development. Hence, it aims to contribute to the literature of the IPE, by showing

divergent state capacities in global political economy within state-market-society and global

spheres.

C) WASHINGTON CONSENSUS AND FINANCIAL CRISIS OF 2001 IN

ARGENTINA AND TURKEY

In the 1980s and 1990s, IMF-led Washington Consensus recipes offered a set of

policies to reduce the role of the state in economy which was seen as the cause for the

economic stagnation of the late 1970s in late-industrialising countries such as Argentina and

Turkey. The Consensus involved policy measures such as privatisations, fiscal discipline,

trade liberalisation, export promotion and deregulation of labour markets which meant not

only an economic process but social and political transformation. This led to a redefinition of

the state`s nature and functions which entailed a shift in its nature from inward-oriented

growth towards an outward-oriented growth, emphasizing trade and finance over concerns of

industry (Dicken, 1998; Phillips, 1998; Cerny, 2008; Sorensen, 2006; Marsh, Smith and

Hothi, 2006).

Phillips (1998) explains this process as the ‘paradox of the state power’; the

‘internationalisation’ of the state led nation states to become stronger in the domestic arena

while they became weak at the international level. While the global economy continued to

change, for example because of the increasing globalisation of financial markets and

agreements with international institutions which increased the costs of non-conformity that

restricted states’ policy-making option, states actively participated in this process and

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legitimised themselves through discourses of non-conformity that enabled them to make

policy changes and dismantle old coalitions when the previous development model became

unsustainable. In pursuit of neoliberal transformation, the state aimed to restructure the state-

society relationship in conformity with the marketization of development and dismantle old

coalitions to force a rupture with the past. Neoliberal restructuring involved, hence, a

transformation in the state-society relationship in the context of a shift of the allocation of

resources from the demand-side to the supply-side. States built alliances in accordance with

market imperatives with the new bureaucratic elite holding degrees in economics or business,

exporters and local and foreign banks. Furthermore, states also built coalitions with old

constituencies such as big industrialists and labour unions to garner support. This

marketization process led, on the one hand, to the emergence of a small group of winners of

domestic and international business, and on the other hand, weakening of the labour unions

leading to unemployment and poverty (Phillips, 1998; Yeldan and Sakallioglu, 2005;

Teichman, 2001; Grugel and Riggirozzi, 2009).

As a result, this thesis argues that while trade and finance opening that took place

from 1980s onwards increased vulnerabilities of development path in Argentina and Turkey

exposing them to external shocks; it was the crisis of the state that the way it managed

political and economic conflicts shaped the unfolding of the financial crisis of 2001 which

increased instability. While in Argentina the financial crisis of 2001 stimulated high social

protests and calls for promotion of national industry and rejection of IMF-led policies, in

Turkey the crisis unfolded as questioning the state`s regulatory role and state`s identity in

continuity with IMF-led neoliberal policies with a focus on export promotion. To support this

argument, below tables, Table 1 and Table 2, attempt to show divergent paths of

neoliberalism in Argentina and Turkey within a global focus that led the way for the crisis of

2001 in each case. The tables track main economic policy priorities, political coalitions,

institutional shifts, the role of global factors (also regional) and political factors such as party

politics since the early 1980s until the crisis of 2001 to explain the crises drawing from the

fieldwork data such as interviews, newspaper archives and official documents. The

interviews were done with policy makers such as Central Bank officials and Economy

Ministers; economic and social groups` representatives such as leaders/economists from

business organisations and labour confederations; representatives from unemployed

movements; and academicians. The interviews focused on why and how questions to explore

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the policy motivation of policy makers and interactions between different government/public

institutions. The interviews also explored perceptions of the nature of neoliberal

transformation in each country and the unfolding of the crisis (also state`s responses which is

not discussed in this paper) by different sectors of the society such as labour, business and

government/public institutions.

From the tables, some preliminary conclusions could be drawn. Washington

Consensus left legacies of cuts in public provisions, unemployment, indebtedness and rise in

financial interests over industry. However, this restructuring was shaped by the nature of the

state capacity in each country to manage economic and political conflict. In Argentina,

historically economic conflict emerged between inward oriented industrialists and outward

oriented agricultural exporters, while political conflict emerged between Peronist unions and

the military and agricultural exporters. The way neoliberalism was adopted in the 1990s

intensified these conflicts. Neoliberal reforms mostly put burden in Peronist working classes

in metropolitan areas leading to high unemployment due to harsh privatisations and

increasing poverty. The crisis unfolded as emergence of the ‘new poor’ which unfolded as

high social protests in which labour was highly conflictive with the state. These protests were

translated into demands for social programmes and promotion of employment (Interviews

with the labour confederation CTA and unemployed movements). Meanwhile, tradable

sectors were harmed from new alliances with non-tradable sectors and agricultural exporters

that raised calls for devaluation and return to national industry (Interviews with

representatives from industrial organisations UIA and CGE).

In Turkey, historically, economic conflict took place between inward-oriented

industrialists and outward-oriented small producers in Anatolia, while political conflict

emerged between secular and Islamist elite. In the 1990s, a nationalist and secularist bloc

adopted neoliberal reforms that gave way to alliances with Istanbul-based big industrialists

through Customs Union with rising dependence on local private and public banks to sustain

domestic coalitions. During this period an anti-privatisation bloc emerged under national

identity which also included public workers` confederation Turk-Is. In this sense, labour

unions were more cooperative than in Argentina (interview with Turk-Is). In the wake of

Customs Unions with the European Union (EU), full candidacy for membership to the EU

and IMF stand-by agreement in 1999, problems arose with the EU on minority rights and

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with the IMF on privatisations and banking regulation (interviews with the Economy Minister

and the Central Bank bureaucracy). The excluded ones were export-oriented small and

medium sized producers which expanded their activities throughout the 1980s but lost state

support during the 1990s (interview with representative of those exporters MUSIAD).

Overall, calls for banking regulation, Central Bank independence and recovery of industry

and exports were vocalized by the business (interviews with TUSIAD, MUSIAD and medium

sized industrialists in Istanbul). Furthermore, urban poverty was alarming due to two-digit

inflation levels, high informal structure of Turkish labour market and oppressive Labour

Code (interviews with labour confederations DISK and Turk-Is). Furthermore, state became

more repressive on leftist groups after the 1980 coup d’état giving way to depoliticization

(interview with DISK). Labour unions were weak and divided ideologically to resist

neoliberal reforms (Interview with DISK). It should be also noted that cuts in agricultural

subsidies also led to high vulnerability and farmers who migrated to cities were left without

safety nets. Finally, the crisis unfolded as a question of identity of the state that secular-Islam

debate and Kurdish ethnic problem led to high elite level conflict. It should be noted that

radical Islam, in the 1990s, took its power from organisation in the municipalities responding

to poverty and from the support of excluded small and medium sized Anatolian producers.

TABLE 1: TURKEY

Policy

Regimes

State`s

economic

policy priorities

Political

representati

on/

interest

groups

Shifts in

institutions

Global

effects/

International

trade and

finance

Political Factors/

Party politics

First phase

of

neoliberal

reforms

1980-1988

-12 January

Reforms

Supported

by IMF and

World Bank

-Export

subsidies,

reducing import

restrictions,

liberalization of

prices and

interest rates,

devaluation,

-Labour code

(ban on strikes,

-TUSIAD

Istanbul-

based big

industrialist

protected

by import

surcharges

-

Conservativ

e small

producers

in Anatolia

(it refers to

the

peninsula

-1980 Coup

d`etat

-1982

New

Consitution

-Increasing

power of

National

Security

Council

and the

military

-The debt

crises

and IMF

conditionalit

y

-Iran Islamic

Revolution

-‘Mild

Islam’

promoted by

the US in

Middle East

-Military Regime

(1980-1983)

-Banning

political

parties and

restricted

democracy

-Newly

established

right wing

liberal

ANAP in

government

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wage decreases

and restrictions

on collective

bargaining)

-Reducing

agricultural

subsidies

-Extra-

budgetary

funds which

was used by

municipalities

to mediate

social

costs

which takes

place at the

west end of

Asia) were

promoted to

export

mainly in

textile

oriented

towards

Middle East

-Turk-Is

representati

ve of public

workers;

participatio

n in a very

limited way

-DISK

(leftist

labour

confederati

on

Banned

-Strategic

alliance with

the US in the

Middle East

(1983-1991)

-depoliticization

through

Turkish-Islam

Synthesis;

alliance with

religious groups

The Crisis

of

the first

phase

1988-1989

Crisis

Response:

-Further

liberalization of

finance and

trade

in 1989

-treasury bonds

-Agricultural

subsidies and

wage increases

as response to

social unrest

-TUSIAD

(discontent

with liberal

policies and

rise of new

exporters)

-Labour

strikes led

by DISK

-Iran-Iraq

war

-Decline in

exports due

to the

instability in

Middle East

-Military

concerns about

the rise of radical

Islam

and Kurdish

ethnicism in

Southeast region

-Political crisis

between liberal

and conservative

wing of ANAP

-Return to multi-

party democracy

in 1987

Second

phase of

neoliberali

sm

-Stand-by

agreements with

IMF in 1994

and in 1999

-Rise of

local banks

( in 1990s

nearly 80

-Central

Bank

reform

(not

Washington

Consensus

The rise of

-Rise of NSC

and military

in Turkish

politics

9

1991-

1999

-Export

promotion

through

subsidies and

devaluations

-public

borrowing

through

Treasury bonds

-International

arbitrary law for

the sales of oil,

telecommunicat

ions and airlines

in 1999)

-Wage decline

after 1994;

recovered after

1999

-Social Security

Law in 1999

-Gradual

removal of

agricultural

subsidies (1994,

1999)

banks)

-TUSIAD

main actor

participatio

n in

financial

and

industrial

activities;

protected

industry

especially

automobiles

due to

Customs

Union;

oriented

towards

Europe

-Turk-Is

(cooperativ

e under

national

identity)

-MUSIAD

(formed in

1990 ex-

small

producers;

small and

medium

sized

conservativ

e export-

orientated

producers

started in

textile and

expanded

their

activities in

different

sectors;

towards

Middle

complete)

-Banking

Regulation

and

Supervion

Agency

(not in

practice

until the

crisis)

-Customs

Union in

1996

-Full

candidacy

for the

European

Union

in 1999

IMF and

World Bank

in

influencing

policy

priorities

The rise of

financial

capital

(emphasis

on national

security and

secularism)

-Coalition

governments

-Political parties:

Liberal/

conservative

( identity issues

between

secularism and

conservatism)

ANAP, DYP

Secular/nationali

st/pro-

labour/anti-

privatisation

(DSP, CHP)

ultra-nationalist

MHP

Radical Islam

( RP led by

Erbakan

increased its

votes to 21, 37 in

1995 elections)

-1997 Post-

modern coup

d`etat : Banning

RP from political

life

(investigations

towards

members of

MUSIAD and

their financial

resources)

-Conflict in

Southeast region

10

East;

excluded in

the 1990s;

lack of

access to

credit)

The

financial

crises of

November

2000 and

February

2001

-In response to

economic

stagnation and

squeezing

public finances

in late 1990s;

-In 2000

Convertibility

of Turkish lira

to US dollar in

line with the

1999 Stand-by

agreement

-Tensions

between on one

hand the IMF,

the Central

Bank and

Treasury

bureaucracy and

on the other

hand the

government

especially with

MHP and DSP

over Banking

Regulation and

Supervision

Agency and

privatisations

-Collapse

of small

and

medium

sized

companies

including

members of

MUSIAD

-Corruption

and

bankruptcy

in local

private and

public

banks

-Rise of

urban

poverty due

to inflation;

informal

labour

market;

corruption

in

municipaliti

es;

agricultural

cuts

-8, 4

per cent

unemploym

ent

in 2001

-Central

Bank

reform

-Banking

Regulation

and

Supervison

Agency

(both in

practice

after the

crisis)

-Sudden stop

in capital

flows and

decline in

terms of

trade after

Russian

Crisis

SouthEast

Asian

crisis

overvalued

Turkish

Lira due to

rise in

dollar

-rise in

interest rates

-sudden

retreat of

foreign

capital

-Recovery

through IMF

aid in

November

2000 and

IMF aid

during

February

2001 crisis

( followed

by stand-by

agreement in

2002)

-Conflict

between the

President and

Prime Minister

about corruption

stimulated the

crisis

-ANAP-DSP-

MHP

coalition

government

tensions

within the

government

on privatisations;

EU reforms

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TABLE 2: ARGENTINA

Policy

Regimes

State`s policy

priorities

Political

representation/

interest groups

Shifts

In

institutions

Global

effects/

International

trade and

finance

Political

Crisis/

Party

politics

First

Phase

Of

Neoliberal

reforms

(1983-

1989)

Austral Plan fixing

peso to dollar

to bring stability

and reduce inflation;

freezing wages,

prices of

public utilities;

reducing export

taxes

Weak

ties

with

social

and

economic

groups

-1982

Debt Crisis

-Radical

Party

government

-Unrest

of the

military

-Return to

democracy

Crisis

of the first

phase

Weak

in response to

hyperinflationary

pressures

and increasing fiscal

deficit

-13 strikes

during

Radical Party

governments

led by

CGT

(Peronist

labour

confederation)

-Protests

by

agricultural

sector

Decline in

commodity

prices

The

second

phase

of

neoliberal

-To reduce fiscal

debt; bring inflation

down; attract

foreign investment

Convertibility

-Fiscal Pact

with provincial

leaders in 1992

and 1993;

reforms

-Mercosur

-Peronist

party PJ

in power

-alliances

12

reforms

1989-

1999

Regime in 1991

-Fixing peso

to dollar; reducing

import tariffs

-Labour Law 24,

013 and 24, 467

abolished the right

to strike,

deregulation of

labour market

-Decrees issued for

privatisations of

telecommunications,

airline,

petrochemicals,

petroleum, railways,

natural gas

distribution,

electricity,

water,

iron and steel

industries,

-Public

Administration

Reform

were delayed

in non-

metropolitan

provinces;

-discretionary

funds to

mediate the

social

costs

-side-payments

to big business

in non-

tradable

sectors during

privatisations

-appointment

of agricultural

exporters in

government

positions

-tariff

protection for

automobile,

petro-chemical

and electronics

involved in

Mercosur

-Exclusion of

tradable

sectors

CGE (small

and medium

sized

producers

mainly

Peronist) and

even some big

industrialists

in UIA

(representative

of big

industrialists)

-Side-

payments for

specific labour

unions

with right

wing UCD

-alliances

with

provincial

leaders

13

especially

within CGT in

competitive

sectors

-CTA which

was

established as

a result of

division within

CGT was

excluded

( especially

during Public

Administration

Reform)

The

Financial

Crisis of

2001/2002

In

Argentina

-Response to

external shocks:

-Restoring

credibility

-Mega Debt Swap

-Zero Deficit Policy

( 13 per cent cuts in

public salaries)

-Corralito

( restriction on

withdrawals bank

deposits)

-State

Default on Debt and

Devaluation

-Massive

unemployment

18,3 per cent

in 2001

-Poverty in

2001

38, 3 per cent

-Huge social

protests

(roadblocks

and

lootings) led

by

unemployed

movements by

the support of

CTA; calls for

promotion of

employment;

cash transfer

programmes

and national

production

-External

shocks

-Sudden

stop in

capital

flows after

1998

Russian

Crisis

-overvalued

peso due to

rise in dollar

and

devalued

Brazilian

Real

-IMF

resigns from

lending

-sudden

retreat of

foreign

capital

-Coalition

government

between

Radical

Party with

alliance of

small

parties

Frepaso

dissidents

from

Peronist

movements

-Crisis

within

coalition

government

due to

corruption

claims and

resignation

of Alvarez

(Frepaso )

from vice-

presidency