Growth vs. Development…

We leave behind a bumpy week and head towards the weekend; feeling relaxed knowing that monetary and capital markets will be closed until Monday.

The fact that USD/TRY and currency basket have been record highs lately is a clear proof that whenever tensions escalate in Turkish markets, it directly echoes in exchange rates, which in fact applies not only to Turkey, but also to many developing countries.

From Brazil to India, a number of developing countries, measure whether their economies perform properly based on the value of their national currencies against the dollar. There’s this practical and partially true approach, “Dollar’s fall means that things are going pretty well, its rise, on the other hand, means that things are getting worse”. And the interesting thing is that whenever Dollar tends to appreciate on a global scale, developing country currencies may depreciate even though their economies seem just fine.

Now, let’s take a quick look at the two main reasons behind USD/TRY’s record-breaking ascent: resignation rumors about a prominent minister and the ongoing Turkish Bank trial in the USA, in addition to this, dollar’s global appreciation.

“Instead of priding yourself on solving the problem you have created in the first place, you should….…”

Although there’s no substantial reason behind the rise of exchange rates, such uptrends may give us an idea about countries’ fragilities. If an instant demand for foreign currency arises the moment exchange rates start to go up for some reason, the reason for it is the fact that there’s a significant number of natural persons or institutions owing foreign currency debt. This also shows us that cash inflows may stop for political reasons as well as economic ones. It’s a pretty regular thing in countries with large savings gap.

As I have mentioned in yesterday’s report, I think it would be far more rational to think that exchange rate rise is caused by certain key issues, rather than economic parameters. Foreign currency debt or external fragility is an outcome. So, we should investigate the causes of this outcome and make a better analysis on the reasons that led businesses to get overwhelmed with economic fragilities.

Instead of coming up with temporary solutions to rises in exchange rates or interest rates, we need to study sectors’ problems, one by one, and provide proactive solutions by identifying the future problems.

This is the difference between growth and development. We can only get to pride ourselves on problem-solving if we focus merely on growth. But if we do the opposite by putting the development at the center of everything, we can avoid a number of problems. Though quite difficult, the latter is also a quite enjoyable challenge. So, we must quit, as immediate as possible, this approach that pushes us to praise ourselves for solving a problem that we’ve created in the first place.