Bad money drives out good money

Bülent Keneş

You shouldn't think that I am referring to the observation Sir Thomas Gresham had famously made in connection with the shortage of money in the markets during the reign of Queen Elizabeth I of the UK.

The "good money" and "bad money" I will discuss in this article are completely different from Sir Gresham's concepts.

As you know, bills were not in use in the 16th century. There were only coins produced from various precious metals. In 16th century UK, the coins contained silver. Over time, the coins that had lower silver content entered circulation, driving the coins with higher silver content out of circulation. Then the queen's consultant, Sir Gresham, was assigned the task of examining the situation. Sir Gresham found that coins with the same market value became overvalued if they had lower silver content. Indeed, the same goods could be bought using 1 shilling with lower silver content and using 1 shilling with higher silver content. In this case, it was wiser to melt the coins with high silver content and sell the silver in them. And this is what happened in the UK.

The phrase "bad money drives out good," known as Gresham's law, served as one of the fundamental principles of economy for some time. Yet the emergence of bills and the liberalization of capital movements reversed this law. This time, people started to exchange local bills with depreciating values for foreign bills that could preserve their value. This trend became stronger particularly when the interest rates for the local currency were lower. Thus, the law was reversed and good bills started to drive bad bills out of the markets.

But this is not my point. Associations of Gresham's law are more appropriate for the story I will tell about Turkey. In this story, "good money" is the "clean/legitimate money" while the "bad money" is the "dirty/black money." Yet I will continue to use the good money vs. bad money dichotomy for the sake of the striking literary aspects of Gresham's law.

As is known, Turkey undertook radical democratic and legal reform, as necessitated by the country's bid to become a full member of the European Union, particularly between 2002 and 2005. Already, the national economic and financial system had been restructured from scratch as part of the $48 billion stand-by agreements with the International Monetary Fund (IMF) and the World Bank in the wake of the 2001 economic crisis. Thanks to these reforms and restructuring efforts, Turkey became one of the popular destinations for foreign direct investment (FDI). The country attracted in one year the total FDI it had secured during the history of the republic, and it could freely avail itself of the benefits of high availability of international money and loans at that time. Likewise, it was able to avoid the destructive effects of the 2009 global economic crisis owing to this strong economic/financial structure.

Unfortunately, the Turkish government started to roll back democratic and legal reforms in 2011 and undermined the economic and financial system that was restructured after the 2001 crisis during the last two years. Thus, Turkey completely wasted this success story that had made its impression on the 2000s. All autonomous regulatory bodies, introduced in the wake of the 2001 crisis, slowly came under the control of the ruling party, which increasingly gave the impression of being an autocratic one-man administration. Thus, neither the Central Bank of Turkey nor the Banking Regulation and Supervision Agency (BDDK), nor the Capital Markets Board (SPK), can act independent or autonomously. Having been largely stripped of their autonomy, these bodies fail to make the moves required by the science of economy and market conditions in a timely manner, but they rush to comply with the populist expectations of the ruling party.

With the judiciary coming under the total control of the executive and the abolishment of the system of separation of powers in the wake of the graft and bribery scandals that went public on Dec. 17, 2013, Turkey started to be perceived more strongly as a one-man dictatorial regime. The elimination of the guarantees and security provided by the law has led to a climate where property rights and freedom of enterprise cannot be upheld. Although the country continued to reap the fruits of its image attributable to the successful performance in the previous period for some time to come, everyone in Turkey and around the world eventually realized that the king is naked.

Yes, the king was naked and Turkey had turned into a country where the security of law is undermined hastily to cover up a large-scale corruption and bribery scandal that implicated Recep Tayyip Erdoğan and his close circle. Moreover, freedom of enterprise was threatened, as seen in the case of the shutting down of privately operated prep schools (dershane). Property rights were no longer respected, as seen in the case of the illegal confiscation of Çukurova Holding and Bank Asya. Dissident groups in the society were repeatedly intimidated, and they were stigmatized and vilified as "terrorists" or "spies" without any concrete evidence, and they were antagonized with the intention of total destruction. Turkey turned into a country where election results were not actually recognized by the ruling mafia gang and freedom of the press and freedom of expression were destroyed.

The investment climate, created with great efforts over 10 years, was annihilated in a few years due to Erdoğan's dictatorial ambitions. Why should foreign investors show any interest in a country where they could enjoy no security of law and where arbitrariness peaked and undermined predictability, a precious asset for investors, and where every businessman who refused to submit to Erdoğan's regime faced the risk of confiscation or bankruptcy? And they didn't show any interest… Apart from the lack of new investors, existing investors started to look for ways to leave the country with minimal damage. Worse still, local businessmen started to search for ways to deploy at least part of their capital and assets to foreign countries with the belief that their future would be at risk in their own country. Turkey quickly turned into a country which was no longer suitable for legitimate and clean capital that would look for security of law and minimal respect.

The rapid outflow of foreign capital is tremendous in size and this can be seen in the official figures. According to statistics provided by the CBT, which announced its international investment position on Wednesday, the amount of foreign capital that fled the country between January and July of this year is $44.8 billion. This foreign capital outflow consists of $17.2 billion in direct investment and a portfolio investment stock of $28.6 billion. Moreover, local businessmen were found to have made investments abroad amounting to $2 billion in the same period.

As you may recall, a similar foreign outflow occurred during the 2008 crisis, when foreign investments amounting to $102 billion left the country. But the global financial crisis was the reason at that time. Today, there is no crisis around the globe. In search of an autocratic iron fist, Erdoğan's regime has unfortunately zeroed the trust in Turkey's economic management. Thus, the World Bank demoted Turkey by four spots from 51st to 55th in the ease of doing business index. Politically motivated and arbitrary tax penalties, police raids on the most innocent companies that employ thousands of people without any substantiated charge and allegation and the total disappearance of the security of law have made Turkey no longer a country where investments can be made.

Thus, the country has become unlivable not only for foreign investors but also for established and legitimate capital like Kaynak Holding, Koza-İpek Holding, Boydak Holding and Doğan Holding, recently targeted by Erdoğan's dictatorial regime. Simultaneously, pro-Erdoğan parvenu companies and capital were encouraged with the generous offer of lucre and public resources. As efforts are being made to sink the Anatolian entrepreneurs, a.k.a., the Anatolian Tigers, which grew through decades of hardship, rootless and dubious capitalist groups which rely solely on their relationship with Erdoğan for power continue to grow.

What's worse, Turkey has virtually turned into a haven of black and gray money. As seen in the cases of Reza Zarrab and Babak Zanjani, who channeled Iran's semi-legitimate billions of dollars, excluded from the international financial system due to sanctions on that country, into Turkey's financial system, the Turkish financial system has grown all the more troubled. Thus, as part of the investigation of Zanjani, Iran claims that its $12 billion were lost in Turkey. It is rumored that Kurdistan Regional Government in northern Iraq lost $6 billion from its oil revenues in Turkey's twisted financial system.

On the other hand, as the clean and legitimate foreign capital quickly leaves the country, billions of dollars of unknown origin enter Turkey every year. It is known that the amount of money of unknown origin that entered Turkey during the last seven months is $9 billion.

So it is clear that in this suffocating climate created by Erdoğan's regime that gives the impression of being a mafia-like gang by suspending the rule of law, democracy, freedom of enterprise and the inviolability of private property, bad money drives out good money. Moreover, this does not happen spontaneously or secretly. With big sticks in their hands, Erdoğan and his men drive out the clean and legitimate money to the witness of everyone.

Published on Today's Zaman, 17 September 2015, Thursday