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Tuesday, 5 December, 2000, 12:49 GMT
Turkey's inflation woes
Trasctor carrying earthquake refugees
Turkey still needs to modernise its economy
Turkey's economic troubles stem from its overdue attempt to reduce the high level of inflation in the economy.

Over the past few decades, double figure inflation has become endemic in Turkey, with prices rising at an annual rate of 70% just one year ago.

High inflation, in turn, has led to distortions in the financial sector, which had become dependent on high interest rates - at about 100% - for its profits.

And it has been very expensive for the government, which has to pay a large part of the budget to finance the interest payments on its public sector debts.

The situation was made worse by the huge earthquake in 1999, which reduced economic growth and increased the budget deficit.

The development of tourism has boosted the economy
The development of tourism has boosted the economy

In December 1999, the Turkish government signed an agreement with the International Monetary Fund to try and bring inflation and public spending under control, in return for a $4bn loan.

In the words of the Marx Brothers, the programme has been a success - but the patient has almost died.

Fighting inflation

Under the terms of the IMF loan, the Turkish government pledged to bring down its budget deficit - which exceeded 10% of the country's economic output in 1999 - by half, and to cut inflation from 70% to 25%.

Macroeconomic stability is not yet achieved and a solid basis for sustainable public finances remaines to be established

European Commission

It also agreed to a string of privatisations, a reduction in subsidies, especially to the agricultural sector, and a partially fixed exchange rate.

In broad terms the reforms had seemed to be working, with the budget deficit declining as the economy shifted into recovery, and inflation and interest rates dropping sharply.

Unemployment, however, has continued to rise, and is now at about 8% of the workforce.

However, attempts to reform the banking sector have revealed the depth of their problems, especially the subsidised loans to small private firms and the inadequate regulatory structure.

And that in turn has affected the confidence of foreign investors, who are funding Turkey's large trade deficit, which has doubled to 6% of GDP.

Joining the EU

A key motivation for economic reforms in Turkey is the country's drive to join the European Union.

Turkey was accepted as a membership candidate in 1998, but no date has been set for its admission.

While a large part of the EU's reluctance to admit Turkey relates to slow progress in the area of human rights, there are also significant concerns about the state of the economy.

The latest EU assessment says that Turkey does not yet fully meet its criteria for a fully functioning market economy.

"Macroeconomic stability is not yet achieved and a solid basis for sustainable public finances remains to be established... significant restructuring is needed, especially in banking, agriculture and state enterprises, in order to guarantee competitiveness for the economy as a whole," the EU says.

The EU is also concerned with the low level of foreign investment in Turkey, due to the economic instability.

But more than 50% of its trade is within Europe, partly due to a customs union that has been in effect since 1995.

And there are fears that with nearly 70m people, any early accession before Turkey's economy is modernised would lead to a flood of economic migrants to other parts of the EU.

Wide social gaps

In some ways, Turkey's high inflation is also a symptom of a deeper economic imbalance.

The country is still split between a relatively modern urban sector and a much less developed rural sector in Eastern Turkey.

More than 40% of the population still work in agriculture, although it provides only 14% of GDP.

And the infrastructure in rural areas is poor, and there are low levels of education, especially among women.

Nearly a third of school age children work rather than attend classes, according to OECD figures.

To join the EU, the country must modernise its infrastructure, including the health and education system.

And more fundamentally, the high degree of inequality in Turkey is in itself a key source of political as well as economically instability.

Tackling Turkey's long list of economic problems is likely to be a long-term task.

And the road to reform could well be bumpy.

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