Every time I have talked about our failure in negotiating a prudent financing package with the IMF (International Monetary Fund) and IMF’s own poor track record in designing economic management recipes for developing economies in need of help, I have been reminded by some quarters about the cases of Turkey and Brazil where IMF formulas have proven to be successful in turning around these economies - stories that supposedly entail transformation from the brink of financial disaster to global economic leadership!
However, there are two main problems with their argument: a) even if for a moment we agree that Turkish and Brazilian turn-around stories are IMF led, there are too many other stories that on the contrary tell us that how some poorly thought through IMF programmes became the root cause of stifling growth and stirring social unrest; and b) the IMF involvement with Turkey and Brazil can in no way be compared with that in Pakistan, since the two cases represent a completely different nature of engagement with very few commonalities in terms and type of financing. The bulk of IMF lending to Brazil and Turkey would qualify under IMF subsidised lending where the cost of such subsidised lending is primarily borne by IMF creditor countries, meaning mainly by the United States, Germany and Japan.
Further, both Brazil and Turkey benefited largely from the Supplemental Reserve Facility (SRF) - introduced in 1997 to supplement resources made available in the credit tranches and the EFF, and thought necessary in order to provide financial assistance to countries with exceptional balance of payments difficulties owing to large ‘short-term financing needs’, resulting from sudden and disruptive losses of market confidence. The SRF operates as sort of a working capital arrangement, albeit with the added advantages of the interest rate being subsidised to ensure that the borrowing countries are paying well below the market rate and a slightly extended repayment period of up to 18 months.
In this context, one only needs to recall the period of 2000 to the mid-2005, a period remembered as when the emerging-market borrowings contracted to their lowest, still at the time Argentina, Brazil, Indonesia and Turkey carried outstanding working capital loans to the IMF in excess of $50 billion. Further, though there is certainly a built-in premium in the IMF’s lending rates to countries, over its own cost of funding, this premium in case of Brazil and Turkey was consistently subsidised. Given that a large percentage of their borrowings were short-term in nature, they were extended a spread between short-term and long-term interest rates that was much lower than the market rate or in other words well below what these countries would otherwise have to pay if borrowing from alternative sources. In today’s world, Brazil, Turkey, Argentina and Indonesia still account for nearly 70 percent of the IMF outstanding loans. Last but not least, in special cases, the IMF can also accept gold in discharge of outstanding obligations. For example, in 1999 and 2000, the IMF mobilised approximately 12.9 million ounces of its gold holdings through a series of separate but closely linked transactions with Brazil and Mexico that had their financial obligations falling. India’s dealings in gold with the IMF are also common news these days.
Without going into too many minute details and to put things simply: There are not many parallels between Pakistan’s nature and terms of engagement with the IMF and that of Turkey and Brazil. More importantly, even if there did exist some similarities, we need to remember that for any country to progress meaningfully it needs to independently design and adopt economic policies, which best suit its own needs, environment, culture, history and ground realities. In this respect what most people do not realise is that Turkey resorted to the IMF to finance its requirements on way to seeking economic recovery and not like us to finance ventures we could neither afford, nor hope to pay back!
Economic recovery in itself is a long haul and does not come overnight. The Turkish miracle also did not start a decade or so back, but was initiated more than 30 years ago when Turgut Ozal brought about some radical changes that led to the country’s development and enabled entrepreneurial growth. Ozal’s reforms aimed at bringing legal order to reintroduce the culture of documented economy as against the undocumented one and, that too, in a non-coercive way: A way that did not spread fear, but instead carried incentives for everyone to become a part of the formal economy. His signature reform was to redirect government support to those (businesses) that could export and generate badly needed foreign reserves. Tariff rules, exchange rates, and subsidies were all changed to promote exports. Among those who thrived especially well were makers of textiles and furniture, which were clustered mostly in industrial zones in the Anatolian heartland, far from Istanbul.
By 1990, Turkish designers and engineers had started to create their own products, rather than simply filling orders for foreign firms. Others started investing in factories and franchises in the country. One way he did was to bring into circulation the unused capital from those opposed to interest-bearing banking. He also developed ties with the wealthy Gulf States and encouraged them to invest in Turkey. Ozal visited countries to see what was new in stores and shopping malls. He worked to communicate his consumer hunger to his people.
Also, he made it a priority to bolster Turkey’s statistics office. Accurate statistics was made available on a large-scale. The resulting transparency and access, in turn, boosted public confidence. Infrastructure development was given special emphasis to promote growth and it was during his time when the famous Turkish approach of BOT (Build, Operate and Transfer) became the official development approach. Last but not least, he made enhanced trade the cornerstone of his economic revival policy.
Similarly, the Brazilian success story is based on first self-understanding and then playing one’s core strengths, rather than borrowing injudiciously to ultimately fall into the trap of foreign/donor dictates. The good work started by President Lula has even today not been shelved by President Dilma Rousseff, as she has been careful to make changes only where the weaknesses had crept in over time, but in doing so to not disturb the underlying policy dynamics of a success story. Gauging Brazil’s environment, neighbourhood and culture, President Lula embarked on a series of economic revival policies that included women empowerment, pursuing technology up-gradation as a top priority, using technocrats effectively in key management and governance positions, emphasis on social development (investing in people) and gradually building a safety net for the common Brazilians.
In spite of some very stiff opposition from her coalition partners in the government, President Dilma has also held on to such principles in appointing Maria das Gracas Foster to the top job at Petrobras. As an engineer, who has more than 31 years of experience working for Petrobras, Ms Foster’s appointment not only lifted the share price of the company, but also became instrumental in rekindling investors’ confidence in the Brazilian stock market per se. Other key reforms that were introduced by Lula and continue to be sustained even today pertain to pension, deforestation, equitable distribution of resources (especially proceeds from Brazil’s off-shore oil) between the centre and the states and linking the tenure of any important government post to meeting the laid down performance targets in that respective responsibility. Brazil’s strength can be determined from the fact that in spite of being deeply interlinked with the economies of the USA and Europe, it has weathered the global economic storm very well. It is one of the few strong economies in the world where exports are registering a growth despite an overvalued currency, GDP consistently registers more than four percent annual growth but inflation remains under check, which allows the option to the Brazilian government to resort to interest rate cuts (as and when deemed necessary) in order to shore up domestic demand and stimulate investment.
Sadly, Pakistan today can neither be compared to Turkey, nor Brazil. Also, its debt history with the international financial institutions comes across as being very different to both of them. However, what is common is the lesson that can be learnt - if we are to come out of our present economic impasse, then we have to evolve homegrown solutions based on our self-interest because to expect from others to place our interests before their’s would only be foolhardy!
The writer is an entrepreneur and economic analyst.