The Multinational Monitor



After the Tanks Come the Banks

by Matthew Rothschild

Turkey receives massive Western bilateral and multilateral aid, for two main purposes: ""strategic" (or "geopolitical") and economic. The case of Turkey illustrates how interrelated these two functions are. The aid policy which the West has implemented to shore up its strategic alliance is the very policy which helps Western commercial banks and multinational companies operate in Turkey.

In early May, 17 members of the Organization for Economic Cooperation and Development (OECD) pledged $940 million to Turkey for fiscal year 1982. Though down slightly from last year's $1.16 billion, the OECD aid represents the most recent expression of the West's high level of interest in Turkey. In the past two years, OECD countries have rescheduled debts of $5.2 billion to the nation which was known more than 100 years ago as "the sick man of Europe."

Turkey ranks as the third largest recipient of U.S. military and economic aid-behind Israel and Egypt. And U.S. assistance is growing, with economic aid pledged to increase to $350 million this fiscal year, compared to $295 million last year. Military aid will show a 60 percent jump. For fiscal year 1981, the U.S. gave $250 million to Turkey in foreign military sales credits and loan guarantees at about 4 percent below prime interest rate. Scheduled for fiscal year 1982 are $400 million in sales credits, $250 of which will be on concessional terms-at 3-5 percent interest.

Why the infusion of aid from the U.S.? It "reflects our strong interest in a Turkey that's economically healthy and strong," says Larry Benedict, U.S. State Department officer for Turkey. With the second largest NATO army (500,000 troops) and a foothold in the Middle East, Turkey counts as a crucial ally in the eyes of U.S. policymakers. "Just look at its geographic , position," says Benedict. "On the one side, the Soviet Union, and on the other borders, Iran, Iraq, and Syria, none of which are very stable, and two of the three are major oil suppliers."

Aside from "geopolitical" concerns, the West may have an additional motive for aid giving aid to Turkey: to induce the government to open the economy to Western capital. As the Financial Times of London noted, the West is "interested in Turkey's reversing more than 50 years of economic tradition and opening its doors to foreign investment and trade."


"Our aid is contingent upon Turkey continuing to abide by the IMF stabilization program," says the State Department's Benedict.

The International Monetary Fund is acting as a major provider and the taskmaster for the Turkish economy. Last June, the Fund issued a three year, $1.65 billion stand-by loan to Turkey-the largest country loan in relation to' amount contributed to the Fund ever granted. The IMF has insisted on its usual austerity measures as a condition for the loan, including cutting back on government subsidies, tightening the money supply, and opening the economy to foreign capital.

These days the IMF is happy with Turkey, for the economy is being run along IMF lines. Turgut Ozal, finance minister under the Demirel government which preceded last September's coup, engineered a major economic reform program in January, 1980. Breaking with Turkey's tradition of a state-dominated economy with protection for local manufacturers and subsidies on consumer goods, Ozal reduced government involvement, tightened money and credit supplies, abolished price controls, devalued the lira, emphasized exports and, in general, opened the economy to the West. "The measures embody not only a comprehensive programme of economic stabilization but also a basic reorientation of economic policy, away from detailed government intervention and control toward greater reliance on market forces, competition and foreign investment," states a February, 1981 booklet from the Turkish State Planning Organization. "The Fund considers the program a sound one," says Ronald Hicks, Turkey specialist at the IMF.

Ozal's policies not only survived the coup; they actually were reinforced by it. He himself was promoted from finance minister to Deputy Prime Minister and now reigns over all aspects of economic policy-making.

Most importantly, the military government provides the control over the population that such stringent economic policies often require. "The social risks of these policies are very great," says Feroz Ahmad, history professor at the University of Massachusetts in Boston. "Like the situation ,in some Latin American countries," Turkey's rulers believe the risks "can be controlled by greater police force," Ahmad adds (see box).

Two principal sectors have the potential to lead domestic disaffection: the small merchants and labor. By cutting back on subsidies to local businesses and by raising the interest rates, Ozal's IMF policies have severely crippled the abilities of small entrepreneurs to make a profit. By early May, more than 2,700 local businesses had folded in Istanbul and Ismir this year alone.

With government food subsidies lifted, workers and peasants on the margins of existence will have an increasingly difficult time making ends meet. Even in 1979 when collective bargaining was still very much a part of Turkey's economic functioning, workers suffered a decrease in real wages of 20.8 percent, according to the State Planning Organization. The IMF/Ozal austerity measures are likely to induce labor unrest; one function of the generals is to squash that possibility. "The total lack of freedom for labor unions is part and parcel of the economic program," says Ahmad.

The World Bank

The IMF's sister institution, the World Bank, is supplementing the Fund's aid with some of its own. In 1980, the Bank issued $275 million in "structural adjustment loans" to Turkey-loans designed to alleviate serious balance of payments difficulties, rather than to finance a specific project, as the traditional World Bank loan would. Turkey is one of eight countries to receive structural adjustment loans since the World Bank instituted this loan program last year.

In May, the Bank came through with an additional structural adjustment loan-this time for $300 million-to "complement the program of economic recovery of January, 1980," says Melham Salman, spokesperson for the Bank. The World Bank is "trying to give a cushion to the economy," Salman explains, adding, "the loan will be disbursed as quickly as possible," probably "within a few months."

The Commercial Banks

Suffering an external debt of nearly $22 billion and a balance of payments deficit of 52.7 billion at the end of 1980, Turkey's economy depends on the Western multilateral aid to stay afloat. All of the nation's export earnings go toward paying for oil imports-without aid, Turkey could not pay for the raw materials and machinery necessary to run the economy. Without aid, Turkey would also have no hope of paying even the interest on its loans from 260 Western commercial banks, which total $4.7 billion.

Finding themselves overexposed in Turkey in the late 70s due to overeagerness earlier in the decade, Western bankers were caught in a bind: either restructure the debt and delay repayment, or risk default. In late 1979, the banks agreed to reschedule $3.2 billion of the debt-the amount that was immediately falling due. Their agreement with the Central Bank of Turkey called for a three year grace period-during which the Central Bank would have to pay off only interest-and a seven year payment maturity for the principal. The interest rate was set at 1 7/ 8 points over LIBOR, the "London interbank offered rate."

In January, the Central Bank and Turgut Ozal went back to Western bankers, requesting an additional extension of the grace period by two years, and a three year extension on the maturity. The Central Bank suggested an 0.5 percent reduction in the interest rate.

When Ozal floated the idea of again restructuring the loans, bankers were initially wary. The 1979 debt extension had not yet expired, and bankers recognized that Turkey most likely would again ask for restructuring, further down the road. "Why stretch it at one point when you're going to have to stretch it again?" asks Sergio Stefani, assistant treasurer at Banker's Trust.

Actions by the IMF and improvements in Turkey's economy, however, persuaded the commercial banks to be sympathetic. International Monetary Fund officials tried to oenlist commercial bankers' support for Turkey, either by issuing new loans, or at least by rescheduling payments on the old ones. "They (Fund officials) were very keen on this," says Kenneth Picknell, second vice president of Chase Manhattan. "Why should they contribute money just to pay off the bankers?"

Picknell's comments point out an area of tension between the interests of the IMF and those of the commercial banks. The banks, worried about their exposure, see IMF assistance as a way to protect their loans-indeed, much of Turkey's IMF assistance goes for the servicing of the nation's debt to private banks. The Fund, however, more concerned with the strategic importance and long-term economic health of Turkey, has hoped the banks would be a little more generous. "The banks should play their role in supporting the Turkish economy," says the IMF's Ronald Hicks.

Improvements in Turkey's economic indicators, apparent by early 1981, helped soften up the bankers. Ozal's policies have brought the annual inflation rate down from its peak of 117.8 percent in April, 1980, to 40.9 percent in March, 1981, according to the Central Bank of Turkey. In addition, exports jumped in the first quarter of 1981 to $1.0 billion, 43 percent higher than the comparable figure for 1980. Remittances sent home by Turkish workers in Europe and elsewhere were also on the rise. These indicators signalled to Western bankers that Turkey was headed in a direction which would increase the chances of eventual repayment. "It's quite astounding," says Chase's Picknell, referring to the recovery. "It's a tremendous improvement."

By early June, the Western banks had reached an "in principle agreement" to reschedule the debts, accepting Ozal's requests for a five year grace period and ten year maturity-backdated to 1979-on the loan payments. "The major banks have all agreed to this," confirms one source close to the negotiations, adding that the official agreement should be announced "within the next two months." Ozal's hopes for cutting the interest rate by 0.5 percent, however, were dashed by the bankers, and he eventually dropped the idea.

In the past two months, both Citibank and American Express have announced that they are opening branch offices in Ankara-a crystal-clear indication of the renewed confidence Western bankers place in Turkey. Citibank opened its branch office on May 1-although the opening ceremony was marred when a plane carrying five Citibank executives to Ankara was hijacked-and American Express will begin its operations "in the very near future," says one official of the bank. "The government is doing everything right," the official explains.


"Open the country to foreign investment." This IMF prescription has found firm believers within Turkey's government. Abandoning the traditional policy of etatism-state-sponsored industry with little reliance on foreign investment-Turkey under Ozal has taken dramatic steps to lure multinational firms.

One of Ozal's first steps was to create a Foreign Investment Department within the Prime Ministry to assist interested firms. Throughout 1980, Ozal announced new policies and incentives favorable to multinationals:

  • opening sectors that were previously closed to foreign investors, such as mining and agriculture
  • granting exemptions from custom duties and import taxes
  • allowing 50 percent retention of export revenues
  • allowing companies to set their own equity ratio.

Recognizing the toll that increased oil prices were exacting, the Turkish government offered special incentives for petroleum companies, including:

  • the right to export 35 percent of oil extracted (whereas before, the oil produced was only for the domestic market)
  • access to all oil fields, including those already being explored by the Turkish Petroleum Corporation, if the government determines that current exploration is inadequate
  • pricing oil at competitive world market prices, even oil sold in Turkey.

Responses by multinational corporations to these policies have been mixed. The most positive reaction has come, not surprisingly, from the oil companies. Huffco, a Houston-based oil firm, was granted exploration rights on 1.6 million acres this January. "The combination of the crude allowed for export, the world market price for domestic sales and the tax limit" convinced Huffco to invest in Turkey, according to one company official. Though Huffco is the first multinational to obtain exploration rights under the new incentives (Shell has been in Turkey for some time), "a number of other firms are actively negotiating with the government of Turkey," reports a telex from the U.S. embassy in Ankara.

Non-oil companies, particularly those with existing investments in Turkey, are not so sanguine about the' opportunities there. "Investors remain cautious in the face of the volatile balance-of-payments situation, high costs of production, and doubts about political stability," notes a U.S. Department of Commerce report on Turkey of January, 1981.

Goodyear Corporation, for instance, with an investment of about $8 million in a tire and rubber tubing factory, has no plans to boost operations in Turkey. "When there's no market, there's no use expanding facilities," explains Tom Wightman, Goodyear International's vice president and treasurer. The record of the Turkish government in paying back its commercial arrears may also have contributed to Goodyear's reluctance. Over the past few years, the government accumulated a debt to Goodyear of $11 million (for rubber products) and has settled the debt on terms Goodyear considers unfavorable: payment of the principal only after 10 years, with a grace period on interest of 54 months.

International Harvester, which owns a minority stake of about $15 million in a tractor manufacturing plant, also feels that the weak domestic market and the government's foreign exchange problems don't justify any expansion plans. "We have no plans to increase our investment," says Ron Ritter, manager of export operations for Harvester. "Their ability to pay is almost prohibitive."

Two U.S. pharmaceutical companies-Pfizer and Wyeth (American Home Products)-which have investments in Turkey echoed the sentiments of Goodyear and International Harvester: they have no intention of pouring more money into Turkey as of yet. "Turkey has been a difficult country to do business in," says William Treharne, vice president of public affairs for Pfizer. Though there have been some "encouraging signs," says Treharne, "the whole thing has to be seen ;in the Turkish context."

Judging by the reaction of multinationals to Turkey's new policies, the military government has a way to go before its grand economic reforms will be realized-but it is set squarely on the pro-Western path. With the West funnelling aid, the IMF calling the shots, and the generals controlling the population, it is likely to stay that way for some time.

What price "labor peace"?

Western aid to the military government of Turkey has increased at a time of escalating political repression which has included the abolition of parliament, prohibition of political speech, crackdown on trade unions including the denial of the right to strike and of collective bargaining, mass imprisonment and documented cases of government-sanctioned torture.

The Turkish government says that over 40,000 people were arrested from September 12-the date of the coup-to January of this year. "The terrorists are much more numerous than we thought they were," says Yalin Eralt, counselor at the Turkish embassy in Washington.

"Torture is widespread in Turkey at the present and is carried out as a routine practice in police stations and some military establishments all over the country," Amnesty International testified before the Council of Europe in late April. Amnesty reported that 36 people have died in custody since the coup, and claims to have the names of 106 people who are willing to testify that they have been tortured. There is a "clear" and "irrefutable case", Amnesty testified, "that torture is being practiced on such a wide scale in Turkey that it is impossible that it is being carried out without official sanction." The government of Turkey denies this charge.

The U.S. State Department has been downplaying the reports of violations. "As far as we know; no allegations of torture are not swiftly investigated and individuals brought to trial when warranted," says Larry Benedict, the Turkey specialist at State. Amnesty's testimony disputes this claim. "Not all allegations brought to (authorities') attention have been investigated, and in those cases where investigations have taken place, there are sometimes doubts that the action taken by the authorities is sufficient."

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