“I am nobody’s fool. I have parked all my money in dollars and am waiting,” said a good market analyst recently… Actually, the crisis is already making itself felt with an ever-increasing intensity. To make an educated guess, knowing how to read through the figures and intricacies of the political arena is enough.

Today, as I see people discuss whether interest rates are the cause or effect or whether adopting a sure-footed approach to cuts in interest rates can be defined as treason, my memory takes me back to 2000s.

I remember how the coalition government of three disparate political parties desperately tried to manage an economy in brink of a new political crisis amid a political atmosphere traumatized by the post-modern coup of February 28, 1997 –when the Turkish military forced the coalition government led by the now-defunct conservative Welfare Party (RP) out of power citing alleged rising religious fundamentalism in the country– in the wake of a big earthquake. All economic indicators were indicative of an impending disaster: internal and external debts had skyrocketed; inflation rates were about to go three-digit; interest rates had peaked; exchange rates were fluctuating sharply; the social security system was bankrupt; the banking sector was collapsing; production had plummeted; and unemployment had gone sky-high… If you stack up these adversities in a script for a dystopian film, your script will surely be rejected as too unrealistic.

To our dismay, they were real for us. There was virtually no chance for us to break free from this crisis just by repeating what we did in the past. We had to change our mindset. Therefore, full membership with the European Union and accepting the Helsinki decisions became our new roadmap. Using the EU criteria as reference and benchmark, we started to implement a number of political and economic reforms swiftly. Turning a blind eye to the fact that our former political diseases will relapse, we commenced with a ‘Tablita’ program under the supervision of the International Monetary Fund (IMF).

This program essentially sought to implement a currency peg and unfetter interest rates, but, at the same time, use monetary and fiscal policy instruments so that every variable complies with predefined targets. An aggressive privatization program that would restrict the influence of the political elites on public institutions had a special place among these instruments.

Things went smoothly for a couple of months. But our politicians started to grow weary with the tight fiscal policy and the privatization program, and the tensions inside the coalition started to dominate the country’s agenda. Hitches started to show up. At that time, I was a lawmaker from the Motherland Party (ANAVATAN) and a member of the parliamentary Plan and Budget Commission. I think it was in May 2000 when I, speaking at a parliamentary General Assembly meeting, indicated that the program was faltering and we had to sit around the table with the IMF and agree on a contingency plan. In those days, you could criticize even your own party’s policies… Of course, my criticisms went unnoticed. Eventually, in November 2000, the markets went awry in the face of the nationalism-tainted debates on privatization. In an effort to contain the exchange rate fluctuations, the Central Bank of Turkey (CBT) went with three-digit interest rates, and public banks came tumbling down on private banks and the entire banking system fell down on the Treasury, i.e., on us the citizens…

In this setting, the 2001 crisis came as expected.

To combat the crisis by preventing politicians from meddling with economy with heavy costs to society, a “program to strengthen the economy” was drafted and implemented. This program sought to keep the banking sector, capital markets and public tenders away from daily interventions from politicians essentially by reinforcing the institutional infrastructure of economy. It relied heavily on the autonomy of the CBT. In other words, the CBT would act independently in choosing and using the policy instruments to combat inflation…

The bank’s autonomy played a crucial role in overcoming the 2001 crisis in a short time and putting economy on the right track for a sustainable growth. Thanks to economic and political reforms which defined the EU bid and democratization as priority objectives, Turkey soon became a predictable and promising country. Unemployment declined and wealth increased. In this way, the Justice and Development Party (AK Party) won elections one after another, making people assume that single-party majority governments bring economic stability.

However, it is the strong institutional infrastructure which makes economic stability and sustainable growth possible. The existence of independent and impartial economic institutions in a pluralistic and democratic system guided by rule of law is a prerequisite for the growth of social wealth.

The past is for us a time frame from which we take whatever plays into our hands, but never any lesson. It is for this reason that I would like to bring the run-up to the 2001 crisis to your attention.

The institutional infrastructure of economy which had made Turkey an assertive member of the emerging countries group has largely been destroyed. But the outcome is obvious.

We are stuck in the middle income trap. And, it appears we can hardly stay here. All indicators including mainly the balance of payments –which is a good benchmark for assessing a country’s performance– are alarming. People try to save the day by focusing their investments on dollars or gold while banks are flooded with hot money and housing sales have dramatically declined and the private sector is taking their investments out of the country. Turkey’s international investment position was minus 85.5 $billion in 2002. Now, it is minus $438.1 billion, which is the lowest value among emerging market economies in the G20. This means that our debts abroad are many time higher than our receivables abroad. Moreover, a significant proportion of this deficit comes from the companies. It follows that balance sheets of our banks cannot remain healthy in this war for a long time. Every time the dollar gains on our currency, the likelihood of these companies’ coming tumbling down on banks increases. Both Economy Minister Ali Babacan and CBT President Erdem Başçı know well that investments will not increase in these circumstances even if interest rates are cut down. Those who do not know this should have a look at the case of EU economies and Japan… Knowing this fact, the economy minister and the CBT president keep silent in the face of all those hurtful criticisms. They know well what markets know by heart. Today, the CBT’s autonomy and exchange rate fluctuations concern us all. If criticisms against the CBT are not curbed and exchange rate fluctuations and volatility continue to rise, this does not bode well for any of us.