David Lubin:  Argentina and Türkiye: a tale of two adjustments

Türkiye and Argentina, two relatively wealthy developing countries, both have been characterised in recent years by a persistent malaise that has triggered vast outflows of capital, very large currency depreciations and inflation at intolerably high rates, with all the misery that entails.


Yet both countries now have governments determined to clean up their economic mess, though each has chosen different paths towards stabilisation: ‘shock therapy’ in Argentina under its new President Javier Milei, and ‘gradualism’ under President Recep Tayyip Erdoğan in Türkiye.

Success is far from assured in either country. But for a raft of reasons, it is Türkiye that has the best chance of improvement. That’s not because gradualism is inherently more reliable than shock therapy; but rather because Türkiye’s problems are shallower than Argentina’s, and because the domestic politics and the geopolitics around Türkiye’s stabilisation seem more promising.

Monetary versus fiscal problems

Türkiye’s monetary policy problem famously lies in Erdoğan’s claim that high interest rates cause inflation rather than prevent it. More than 10 years of insistence on this frankly absurd view helped drain the central bank of its credibility, a problem reinforced by a revolving door in the governor’s office: Türkiye has had six governors in the past 10 years.


Argentina’s original sin is less monetary and more fiscal. While Türkiye’s public debt stock has remained below 40% of gross domestic product during the past 10 years, Argentina’s doubled from around 40% in 2012 to 85% in 2022.


But what started as a fiscal problem in Argentina has ended as a monetary one. With markets rather unwilling to finance the government’s deficit, the central bank has printed money to fund it. The result: inflation was 160% in November and, like Türkiye, the central bank’s net foreign reserves have been negative since the middle of last year.



Türkiye moves slowly while Argentina aims to shock


After winning re-election in May last year, Erdoğan has brought back his former finance minister, Mehmet Şimşek , a policy-maker with a reputation for competence among market participants. He has appointed a new central bank governor, Hafize Gaye Erkan, as a way of signalling a commitment to orthodox economic policy.


Their approach is undeniably gradualist. When Erkan took over at the central bank, the policy rate was 8.5% and inflation was running at 40%. Rather than move dramatically to make it more attractive to own Turkish lira, she has moved slowly. While the policy rate has now been raised to 42.5%, it remains at a level way lower than the current inflation rate of 65%, and only roughly at the level of inflation expectations for this year.


By contrast, newly elected Milei seems more inclined to revolution, not evolution. The shock therapy now being administered in Argentina carries the spirit of similar efforts – in Russia, Poland and in Argentina itself – in decades past, especially the 1990s.


The treatment includes a large devaluation of the exchange rate, very large cuts in public spending, a freeing of prices, an end to import controls and a determination to shrink the state by eliminating ministries, de-regulating economic activity and selling off state-owned enterprises. This will start with Argentina’s airline, but will later include rail, media, water and YPF, the oil company.


Whether shock therapy works better than gradualism is a question that keeps social scientists busy, but it’s likely that there is no inherent advantage in either strategy. Milei’s predecessor-but-one, Mauricio Macri, adopted an explicitly gradualist approach to reform when he assumed office in 2015, since that was deemed most appropriate in view of Argentina’s notably delicate social fabric. It failed.


Striking a geopolitical balance


It’s not so much the speed of adjustment that determines a country’s chances of economic stabilisation, but rather the depth of the problem and the domestic and global politics surrounding the adjustment. In those respects, Türkiye has an edge over Argentina.


For one thing, the hole that Milei has to dig Argentina out of is very deep, and his political authority is frail compared to that of his Turkish counterpart. Argentina’s external debt, around $280bn, is more than two-and-a-half times the value of the country’s exports. Much of this comes due quickly, and debt restructuring – Argentina’s third since 2001 – will be necessary. Nationwide strikes are planned later this month.


Second, although neither country been attracting much in the way of long-term capital recently, Türkiye has a better chance to do so if, and when, macro stabilisation is achieved. Its more diversified economy, proximity to the European Union and (currently) rather balanced diplomacy make it a destination for ‘near-shoring’ flows of foreign direct investment much more naturally than Argentina could hope for.


While Türkiye has relatively balanced geopolitical relationships, which have helped it attract tens of billions of financial commitments from the Gulf, Argentina is unlikely to be well-served by Milei’s ambivalence towards China – the top buyer of Argentine soybeans and beef, an important investor in Argentine lithium and a key supplier of external financing in the form of a bilateral currency swap.


Countries with the kind of economic stress facing Argentina and Türkiye need all the friends they can get. For now, at least, Erdoğan is better at cultivating those friendships than Milei. If economic stabilisation is achievable, the rewards might be relatively attractive.


David Lubin is Senior Research Fellow at Chatham House, this is an  excerpt from the OMFIF article.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.