2001 Financial Crises and the role of the IMF in Argentina and Turkey



Argentina’s most severe economic crisis, the 2001 economic crisis, was one of the punchlines in the course of neoliberalism that we observed during the structural reconfiguration process in the 1990s through which national economies were forced to open up their economies and to integrate themselves into the global economy. In a similar way, Turkish experience, precisely a series of economic crises from 1994 to 2001, coincided with Argentinean crisis and underscored the vulnerability or inappropriateness of what is called ‘Washington Census’ that favours four principles to reach a level of economic readiness to grow efficiently in a way that every economy will gain more or less in accordance with its material capacity.

In both cases, those economies were announced as a successful remark of to what extent the IMF could guide an economy and of how the IMF acted in line with its initial aim which was and is to assure a robust and stable international economy in which every state is part of the global economy. Starting from the outbreak of economic crises in both Argentina and Turkey, the development model which was favoured and suggested by the IMF, World Bank and the U.S. Treasury, was at the centre of huge critics regarding its limits and its implication in developing economies. Besides, as a part of Washington Consensus, these crises put in question the role of the IMF and its effectiveness during those crises which were simply considered as a prolongation of emerging market crashes, namely the 1995 Tequila Crisis as well as the 1997 Asian financial crisis and the 1998 Russian ruble crisis. (Demiroglu and Karagoz 2016) One should claim that emerging markets are located in the semi-periphery of global economy and that’s why, what was observed at the end of 20th century and in the early 2000s is a sort of reshuffling of international economy by which the U.S. victory against Soviet Russia could be translated into diffusion of market-oriented economy in a horizontal manner. At that point, this paper’s main priority is to underpin the limits of neoliberal model and to investigate why these two different economies ended up with a financial crisis even if the external factors that they encountered were diametrically different. By doing that, the IMF and its recommendations will be held under a microscope.

Argentinean and Turkish Development Paths in the 20th century 

Argentina and Turkey were enlisted among rural economies in the wake of Second World War, and both countries were eager to quickly industrialise as other rural economies, such as Brazil and South Africa.(Önis 2006) Yet, neither of them could not properly catch up developed economies in the following three decades.

In fact, Argentina was, at the beginning of 1930s, one of the fifth richest economies in the world thanks to rapid increase in food prices. However, it couldn’t benefit from its capital to invest in the manufacturing industry and kept relying on its agriculture.(Blustein 2006) In contrast, Turkey was, to be franc, devastated in the aftermath of the First World War, and channelled its energy towards building its infrastructure rather than ramping up its competitiveness. So much so that, every government that came to power put an emphasis on highways. For instance, the total length of highways was increased from 44.000 km to 62.000 km in 1945 and 1957, respectively. (Oral and Aydin 2018) Given that, one should claim that Turkey put all its energy to complete its highways network. However, things have changed. From the mid-1950s, both Argentina and Turkey adopted the import-substitution system and dedicated themselves to build up a self-sufficient economy. At that time, their initial aim was to protect their infant industries and to accumulate enough know-how to so that core countries, such as the United States and the EEC, exploited their raw materials. For instance, it is noteworthy that Turkey was the biggest exporter of chrome and ore minerals to the EEC until the end of 1970. (Doğan 2015)

By all accounts, one could say that it was, at that time, a common way to enhance domestic productivity and thus, it is logical that Argentina and Turkey employed protectionist regulations. However, this policy changed income distribution in both countries, and it entailed a series of coup d’état between 1960 and 1980. First, Turkish military forces (TSK) made a coup d’état to dismiss the Menderes government and to reconfigure the Turkish economy under the excuse of ‘clientelism’. Following this putsch, Turkey experienced two other coup d’états, precisely in 1971 and 1980, by which the structure of Turkish economy was redesigned. Same happened in Argentina. Juan Péron, socialist and authoritarian politicians, got withdrawn from the government under the guise of keeping ‘Argentina on track’, which was defined by the United States.(Sheinin 2006) Indeed, democracy matters for every country but what was happening behind the scenes is the tension between outward-oriented entrepreneurs along with huge landowners and inward-oriented industrialists in both countries. At the end, former group won out over latter one until the beginning of 1980s.

It is interesting that both Argentina and Turkey passed democracy in the similar period. Argentina experienced a transition phase from military junta to democracy in 1983 under a presidential system. After turbulent years, Carlos Menem, the shining boy in neoliberal milieu with support of the Peronist group, has won the first democratic election in 1987. Similarly, democratic elections were held in Turkey after three years of military committee’s rule. Turgut Ozal, young and dynamic politician educated in the U.S. and fervent believer of neoliberalism, was elected in November 1983. It is perplexing to notice that both Menem and Ozal promised to implement what the IMF would suggest for the development of their national economies. At that point, their challenges and solutions were mainly common. First, they had to curb government deficit and attract foreign capital inflow so that both Argentina and Turkey were in difficulty to finance their balance of payment.(Bambaci, Saront and Tommasi 2002; Yalman, Marois and Güngen 2019) Second, Menem and Ozal preferred to privatise state-owned companies because international creditors had lost their confidence to lend money for Argentina and Turkey. For instance, the Carlos Menem government privatised 90% of public companies operating in infrastructure, mining, telecommunication and transportation.(Önis 2006) By opening these companies up to the stock market, Argentina and Turkey found enough capital to kick-start the economic transformation phase, which was stipulated by the IMF for further aid packages. Third, both the Argentinean and Turkish economies were financially closed economies for foreign investors in a way that current accounts were strictly regulated, and capital inflow/outflow was restricted to a certain degree. After Menem and Ozal, current accounts were partially liberalised and rules regarding capital inflow were loosened in line with the IMF’s advice on deregulation and financial liberalisation. For example, Turkey established the General Directorate of Money Market and Fund Management and promulgated a new law concerning full convertibility and government’s assurance on foreign capital in 1989 thanks to which the volume of foreign current accounts rose by 30% in 1989.(Evrensel 2004) As you can see on the left-hand side, Argentinean and Turkish bonds incrementally increased after financial deregulation. (IMF 2000) Last, Argentina and Turkey had chronic hyperinflation problems for over 20 years. For instance, the consumer price index in Turkey rose from 19.5% to 101.4% in 1970 and 1980, respectively.(FRED 2020a) Same as Turkey, even if there is no available data for consumer price index in Argentina, one-to-one surveys demonstrate how Argentinean people suffered from high prices during the military junta regime. That’s why, Menem and Ozal applied specific exchange rate regimes. Argentina adopted a dollar-pegged exchange rate in 1990 after Domingo Cavallo was appointed as the Prime Minister and state minister responsible for Economic Affairs. Meanwhile Turkey applied a crawling peg exchange rate regime which permits the Central Bank of Republic of Turkey to intervene from time to time and to keep the value of Turkish lira under control.

Contrary to their similarities, Argentina and Turkey had three distinct features. First, the Argentinian insurance system is well established and covers labour rights compared to Turkish one. The Argentinian social security system was a pay-as-you-go (PAYG) type of social security which protects labourers in case you’re still employed.(Blustein 2006) As for Turkey, social security is protected by the Constitution of Turkey in Article 60 according to which even if you’re unemployed, you are able to enjoy basic health services.(Elveren 2008) It’s important to highlight this difference because labours in Turkey did not manifest as much as Argentinean labours during the crisis period. That’s why, social unrest was limited in Turkey thanks to which public confidence could be quickly restored as opposed to Argentina.

Second, as we mentioned earlier, Turkey and Argentina adopted different FX regimes. Argentina’s one-to-one dollar-pegged FX regime was not sustainable unless Argentine economy was dollarized. (Takagi and International Monetary Fund 2004) As the Central Bank is no longer capable to independently print paper money and enlarge money supply in case of either an immediate payment crisis or an exogenous shock resulting from a fluctuation in the international market just as seen in the Tequila Crisis, Argentina has lost control of its economic policy. As for Turkey, Central Bank was fully operational. For instance, Central Bank deflated money supply as a response to 5 April 1994 from 16.06 billion lira to 10.09 billion liras in February 1994 and April 1994, respectively.(CEIC 2020)

Last, Turkey significantly differed from Argentina thanks to its institutional capacity. Ziya Onis argues that Turkey geared up its legal and regulatory framework for fully functional market economy after it signed 1963 Ankara Agreement where the EEC underlined its support to Turkey for harmonisation of its institutions.(Önis 2006) When it comes to Argentina, Onis further claims that Menem’s arrival to the rule immediately changed the economic and political scene and because of that, Argentina was exposed to a shock therapy. Based on that, Argentina have not found a chance to digest what is proposed by the IMF. Onis’s argument is rock solid given the pre-crisis conditions in both Argentina and Turkey because the 2001 economic crisis damaged the Argentine economy so much harder than Turkish economy given the recovery duration. Argentina’s GDP reached the pre-crisis level after seven years ($284.2 and $287.5 billion in 2000 and 2007, respectively). (FRED 2020c) Compared to Argentina, Turkish economy recovered very quickly and attained same GDP level after one and half years ($272.9 and $311.8 billion in 2000 and 2003, respectively).(FRED 2020d)

Given these differences, we can claim that Turkey and Argentina got into a financial crisis in the same period, yet Turkey caught up very quickly in comparison to Argentina thanks to its resilience and its financial elasticity.

Post-crisis Dynamics in Argentina and Turkey 

Economic crisis is, as always, a double-sided coin. Either a crisis lays the basis for new opportunities or it can lead to a vicious cycle where the wheels of the economy are stuck in a mud and cannot escape from it. In fact, what is seen during the Turkish and Argentinean experiences was exactly the same. The former was able to boost its economy by swallowing the bitter pill and the latter resisted what has been suggested after the crisis hit. Hereby, it presents us with a unique display to compare these two economies.

To start with, it is important to underscore types and origins of both crises. First, the Argentine crisis resulted from government inability to service its debt. It means that the Argentinean government borrowed a huge sum of money from foreign creditors to the degree that tax revenues and public spending cuts could not meet the amount of loans. In this case, the Argentinean government decided to leave Convertibility Plan adopted in 1991, and it expanded money supply. However, it was not enough to get away from insolvency. At that point, government increased budget cuts and froze bank accounts. Argentina’s debt rose from $49.5 billion to $152.2 billion in 2001 and 2002, respectively. (CEIC 2020) Public debt skyrocket signifies that the government’s actions not only didn’t solve the problem, but also triggered a bank run and capital flight. Besides, unemployment rose tremendously as a result of financial collapse. According to Gustava Bacarrezza and Luis Soria, Argentinian unemployment rate rose from 15% to 25% in 2001. Yet, they argue that if informal sector is added to unemployment, it is striking that unemployment rose from 13% to 52% in 2001. (Canavire-Bacarreza and Lima 2009) This drastic increase in unemployment entailed a social turmoil in Argentina and halted all activities until 2003 when the government announced new social aid package covering both rural and urban workers. Besides, labour unions in Argentina was part of collective bargaining. It means that if a labour association quits negotiations, that workplace is immediately stopped. During the December 2001 crisis, Kristina Hill displays to what extent work activities were halted and triggered an impasse between workers and entrepreneurs.(Hille 2015) In comparison to Argentina, Turkish crisis was basically an internal debt service problem stemming from government issued bonds which were used as the main mechanism to curb the public deficit. Due to its nature, Turkey’s public debt slightly rose from $51.6 billion to $76.07 billion in 2000 and 2001, respectively. Along with a smooth increase in public debt, Turkey encountered a mild unemployment problem. Unemployment rate rose from 6,5% to 8,4% in 2001. Another important factor that alleviated the damage of unemployment was strong social solidarity. According to Hasan Comert and Erinc Yeldan, informal social networks, such as neighbourliness, worked a lot to compensate the losses of unemployed workers. For this reason, there has not been any turmoil between 2000 and 2002 in Turkey. (Comert and Yeldan 2018)

It’s noteworthy to take a look at the domestic political environment both in Argentina and in Turkey. As a result of a profound economic crisis, Argentine politics run off the rails. From December 2001 to January 2002, Argentina had 5 presidents. At the end, political parties unanimously appointed Eduardo Duhalde as the acting president. Five presidents in a month displays to what extent Argentine politics was destabilised. When it comes to Turkey, the coalition government was dismissed after the February 2001 economic crisis. Until the election of November 2002, a group of technocrats consisting of former IMF and World Bank staffs ruled the country and prepared an action plan according to which Turkish economy started to give positive signals about the future. IMF Article IV reports indicated that Turkey is in a recovery path and economic governance is deemed sound in the hand of Kemal Dervis. (International Monetary Fund 2002) Along with technocrats, the rise of new political party consisted of both liberal and Islam-oriented political figures, AKP, won the majority in November 2002 and formed a government that gave confidence to foreign investors and the IMF. Last, the EU played an important role as a reliable anchor through which AKP found enough opportunity space to manoeuvre political reforms in the following years. For example, new legislation expanding Banking Regulation and Supervision Agency’s competence was adopted just after the 2001 crisis. In addition, Turkey became a part of BASEIL-II Agreement by which Turkish banking system gained resilience to external shocks.(Yalman, Marois and Güngen 2019) Along with improvements in the banking system, Turkey as a member of the Customs Union, could attract the European investors coupled with the U.S. support due to the Iraq War during which Turkey’s geopolitical importance outweighed its structural risks stemmed from the lack of effective monitoring in the Turkish financial market as well as  chronic corruption issue and questionable rule of law. Both the government’s willingness and harsh application of the IMF’s suggestions in Turkey coupled with the EU’s role as a last resort paved the way for Turkey to launch a series of reform programs and apply them in a secure and committed manner.(International Monetary Fund 2002) In comparison to Turkey’s performance, Argentina refused to pay its debt and announced sovereign default. Following that period, the IMF offered a debt relief programme providing a long payment scheme. However, Argentina refuted to pay 24% of total debt and contested the IMF’s offer and unilaterally proposed a new debt relief programme. (Hornbeck 2011) That’s why, economic crisis in Argentina was prolonged until the end of 2006.

III- The role of the IMF in the Argentinean and Turkish experiences

IMF policies during both Argentinean and Turkish economic crises were broadly criticised by Argentinean and Turkish economists as well as scholars and former policymakers. In fact, most of the critics regarding the role of the IMF consists of three big flaws.

First, The IMF’s Article IV, Sec.3(b) indicates that every country has a right to determine its exchange rate regime. In fact, what is seen in both crises was that the IMF actively engaged in the choice of exchange rate regime. In Argentina, Paul Blustein clearly displays how the IMF crystallised and fragilized the Argentine economy by insisting on dollar-peg. The IMF pushed forward the duration of Credibility Plan which was deteriorated balance of payment although it seemed reluctant to imply at first place. (Blustein 2006) Below, the table presents economic dislocation in Argentina considering real GDP growth, real effective exchange rate and the amount of imported goods and services along with division between general and central government’s overall balance. (Takagi and International Monetary Fund 2004)

At that point, what is appropriate to urge the Argentine government to discipline its fiscal system in a short time period. In Turkish case, the IMF has done the exact opposite of what was implied in Argentina. Although Turkey was going to on the edge of a bankruptcy, the IMF ignored huge imbalances in macroeconomic indicators due to Turkey’s accession negotiation to the EU. Onis makes criticism on the IMF’s attitude in the Turkish experience and explains that the IMF tried to buy time to strengthen the Turkish banking system by ignoring Banking regulation which allows opening a bank branch with almost zero capital. He further claims that the IMF’s exit strategy was inadequate and pious in a sense that 15% margin in crawling peg regime is futile considering Turkey’s economic magnitude with almost $280 billion at that time. (Önis 2006)

Second, IMF’s strict constraints on primary fiscal accounts weighted the burden on taxpayers that triggered economic slowdown and political turmoil in both countries. Below, the table conveys to what extent tax revenue became an important component of GDP in Argentina and Turkey.

Table I.II Total GDP and Tax-to-GDP ratio in Argentina and Turkey

1998 1999 2000 2001 2002
Total GDP $298.94 $285.52 $284.20 $268.69 $97.72
Tax-to-GDP 21.10% 21.02% 21.46% 20.94% 63.66%
Total GDP $275.76 $255.88 $272.97 $200.25 $238.42
Tax-to-GDP 20.61% 22.59% 23.59% 25.55% 24.01%
* Total Gross Domestic Product (in billion dollars)
*Tax revenue-to-GDP ratio

Source: OECD Stats & Federal Reserve Banks of St. Luis & Instituto Nacional de Estadistica y Cencos Republica Argentina (OECD 2020; FRED 2020b; INDEC 2020)

Last, the IMF’s biggest mistake was that it didn’t provide an ownership for both programs. It means that the IMF turned its back to Turkey and Argentina in case of a failure by claiming that all fault belongs to national governments, not to IMF policies. For instance, Paul Blustein argues that the IMF blindly gave additional funds to Argentina ignoring moral hazards of foreign investors.(Blustein 2006) It is applicable to Turkish case where governments investments blown up because beneficiaries were not strictly monitored. Finally, the IMF did not care about countries preparedness to such extent liberalisation and which is why, both Argentina and Turkey ended up with a severe economic crisis.


            Argentina and Turkey have followed similar development paths in the 20th century. Both countries invested, first, in an agriculture-intense economic model during which they focused on exports of raw materials. Later, they strived to leapfrog by adopting import-substitution model which gave the way for incessant public deficit problem. In that regard, Argentina and Turkey called for the IMF’s support to finance their debt. In return, the IMF imposed several conditions to transform their economies and converting its import-substituted economy into export-oriented one. In the 1980s, Turkey started to differ from Argentina by implementing neoliberal policies. When it comes to the 1990s, Argentina eagerly and rapidly adopted financial liberalisation, privatisation and deregulation. To that point, Turkey has already applied these three pillars of Washington Consensus with a robust institutional background. Yet, political instability in the Turkish political life slow downed the pace of economic reforms, necessary regulations for opening the Turkish economy up to the global economy remained incomplete, even obsolete given the Turkish banks’ malpractices during the 1990s.

            As a consequence of both malpractices in both Argentinian and Turkish domestic policies fuelled with the IMF’s blindness in terms of monitoring and controlling mechanisms, an economic crisis hit both Argentina and Turkey in the beginning of 21th century. What differs two cases is basically countries’ readiness to resilient against external shocks. On the one hand, Argentina succumbed in high level of corruption as well as improper exchange rate regime and complexity in allocation of administrative competencies. On the other hand, Turkey encountered a relatively low level of corruption being relevant at the highest ranks of Turkish politics as well as fragile banking system and consumption-oriented growth model. Due to their structural differences, the Turkish economy rapidly recovered in comparison to the Argentinean one. However, even if Turkey reacted well in a way that unemployment and inflation issues were delicately handled, the model itself is highly criticised by both scholars and the IMF, itself. These crises put an end to IMF policies dictating limitless and unrestrained neoliberal policies over developing economies. In this respect, these crises revealed to the degree institutional capacity and good governance are important in the path of development in a sense that the amount of foreign capital doesn’t solely constitute a ‘big push’ in terms of economic growth.


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