I will continue with the 'Us and them' series. Main subject of the series was the difference between country groups in terms of the policies they implemented to tackle economic contraction and rising unemployment. Two main phenomena attracted attention in this context. First, there were fundamental differences between the countries, which are not developed and which were affected by the crisis the most, in terms of their responses to the crisis. Second, such difference could also be observed between the responses of developed countries and other countries. However, fiscal indicators were not in favor of developed countries in G-20.
The reason that first comes to mind is as follows: for the first phenomenon, that there are differences between 'us' in terms of economic fundamentals. Therefore, it is natural that differences in policy responses arise. In fact, considering as of the end of 2007, lowest the ratios of public debt, budget deficit and current account deficit to the national income were, strongest were the domestic demand boosting responses the countries in the 'us' group gave. For the second phenomenon, though fiscal indicators are not in favor of developed countries, this might not be that big of a problem. For instance, same level of public debt can mean more risk for us compared to them. What is more, it is not possible to assess all developed countries the same way; fundamental indicators are not that bad for some.
These ideas are partly correct. Yet, I believe that most of the countries in the 'us' group do not give economic response to the crisis even though they had the means to do it. To put it differently, responses of the most of the countries from the 'us' group were quite 'timid'. But we have to make one evaluation. Recently, significant improvements in the economic bases of emerging market economies. Yes, as stated above, those countries with stronger economic foundations gave stronger responses to the crisis.
However, economic fundamentals of those countries, whose economic fundamentals were 'less solid', were not less solid at all. This means: ratio of public debt to national income being 50 percent and 70 percent is quite different in terms of risk. However, the same difference of risk will not apply between 10 and 35 percent. For instance, fiscal indicators for large Latin American economies and Turkey were improved significantly in the 21st century. Foreign exchange reserves tended to rise. The indicators were not as good as that for China and Korea, but they were not at all at the danger threshold considering riskiness.
What other factors might have played role in weak response of us toward the crisis given that we cruise in less dangerous waters in terms of riskiness? One of the factors that appear in mind is that citizens of those countries have 'strong' memories. It is possible that in those countries, people are afraid of the questions "Populism again? Are they loosening the policies?" Because if such questions are asked frequently, risk perception for those countries will elevate. The second factor might be the fear in those countries of a possible reduction in credits ratings to be implemented by rating agencies. Third, maybe the intense ambiguity that was dominant in particular during the first phases of the global crisis imposed the 'wait and see' policy. For instance, it is possible that instead of using foreign exchange reserves in the presence of ambiguities, using them in a period where plans can be made more easily was preferred.
Fourth, majority of countries in the 'us' group are used to implement tight monetary and fiscal policies in crisis periods. And before the crisis, they played ducks and drakes with the money. However, global crisis required spending money beyond measure. However Turkey does not have such an experience. The fifth factor might be the problem of recognition. At the first phases of the crisis, administrators of some countries might have through that nothing serious will face them. All of these can be determinant. But eventually I believe that an important opportunity was missed.
Taking departure from the understanding that unprecedented periods require unprecedented measures, many countries might have implemented fiscal policies that will stimulate domestic demand without pushing up the risk perception. Ensuring that fiscal discipline will be re-attained in the future would be one way to prevent increases in risk perception. This way, countries could have secured space for fiscal expansion.
This commentary was published in Radikal daily on 08.10.2009
