Keep The Change ...

At the end of the month, Inci Ozyilmaz, a 25-year-old with a degree in mathematics, is expecting to collect a cool 350 million. She is not a member of Turkey's dotcom new-rich. Nor has she won the lottery. Rather Ozyilmaz, who works in an Istanbul branch of a large commercial bank, will simply be collecting her monthly wages which, when converted from Turkish lira to dollars, come to just under $575.

Around the corner from where she works, a Big Mac goes for 1,400,000 TL, enough, when Ozyilmaz was back at high school, to take the whole school out to lunch. The year she was born, it would have bought the shop. About half Turkey's 65 million population are younger than Ozyilmaz. They have never seen single-digit inflation. "It makes a big difference to their expectations their attitude toward risk, their ability to plan for the future," according to Cem Behar, a demographer at Istanbul's Bosphorus University. There is still no such thing as a house mortgage in Turkey. It would be near impossible to calculate the interest rate.

Turkey has grown used not just to inflation but to wobbly government coalitions unable to plan more than a few months ahead. The current three-party alliance is celebrating its first birthday and despite the odd hiccup is proving relatively solid. At the start of the year it entered into a $4-billion standby agreement with the imf, as profound in its implications as the sheaf of economic reforms associated with Turgut Ozal in the 1980s. Then, government opened up the private sector, removed trade barriers and introduced competition. Unfortunately, the one thing the government neglected to reform was itself.

The current administration promises to bring down the rate of consumer price rises from 64.7% in 1999 to 25% by the end of this year though analysts would be delighted if they achieved 35% and to get down to single-digit increases by the end of 2002. The ministries and Central Bank have a detailed plan to remove the burden of an inefficient state sector by shrinking its day-to-day role in the economy, but strengthening it as a regulatory force.

If the reforms succeed, few expect the implications can be confined to the economy. Last December, the European Union accepted Turkey as a full candidate for accession. To grab this carrot, Ankara must adopt a much broader agenda of political change. Ahmet Necdet Sezer, the Turkish President, who took office on May 16, is a constitutional court judge who strode into the public eye by demanding Turkey rid itself of its "bad boy" image of a state that still restricts freedoms and just isn't democratic enough.

Economically, Turkey has gone a long way to integrating itself into Europe. A customs union with the E.U. means that its goods compete at home and abroad on an equal footing. Even with inflation, it is Europe's fastest-growing market for credit cards and for mobile phones. Last year, Istanbul's stock exchange grew faster in dollar terms than any other market in the world. A large industrial base and young consumers coming on tap all the time make Turkey a potential dynamo of a region extending from the Balkans to the Middle East and Central Asia. Its economy now rates among the world's top 20. It is also one of the world's most peculiar.

Back in the 1970s when opec was ratcheting up the price of oil, most nations suffered the trauma of inflation. Turkey developed an addiction. Israel, Brazil and other countries printed money to finance infrastructure and growth, but they were forced to react when prices shot through the roof. For years Turkey has only feathered the brakes. The average rate of inflation in the past decade is 73.7%. Economists scratch their heads over how Turkey sustained what the textbooks declared unsustainable long-term chronic inflation.

Over the years, ordinary Turks have grown expert in hedging, keeping one eye on bank interest rates and the other on the exchange rates posted in the little foreign exchange shops that sprouted like news- stands on every other corner. "Turkey developed a whole technology' for dealing with the effects of inflation rather than tackling the problem itself," said Gazi Ercel, governor of Turkey's Central Bank. His job now is no less than to change a national psychology that expects prices to go up and up. First, the lira's devaluation against major currencies will be pegged to inflation forecasts rather than past performance. The result may be a temporarily overvalued lira, but this will make for cheaper imports and push prices down.

This strategy will only work if accompanied by much wider reform. In the past, governments allowed political priorities to keep them from getting their fiscal house in order. The Turkish economy has its famous "black holes" loss-making public banks, a subsidized agricultural sector and, despite the young work force, a bankrupt social security fund. The government had to borrow to meet those obligations and paid a large risk premium to do so. That fueled inflation, kept interest rates high and led to ever more expensive borrowing. The first signs that the market is taking the reform strategy seriously is that interest rates immediately tumbled by nearly two-thirds to just over 30%. "As interest rates fall, the economy picks up, taxes increase, interest rates fall still further and confidence increases," explains Akat.

But not everyone is keen to see the process gather steam. Turkey's financial sector grew prosperous, and more than a little lazy, lending to the treasury at handsome returns. Ordinary depositors, too, could rely on interest rates of 20-30% in dollar terms. High interest in Turkey meant that industry was not only discouraged from borrowing but could compensate when consumer demand was lean by simply putting money in the bank and racking up better profits from government paper than from its own assembly lines.

Turkish society has paid a high price as well, though it has been more difficult to spot. "If you live with uncertainty, you become shortsighted, even selfish. The incentive for civil society to cooperate just isn't there," says Hasan Ersel, chief economist at Yapi Kredi Bank. And while Turkey's military chiefs of staff warn of the dangers of religious reactionaries to Turkey's secular foundation, no one mentions inflation's effect on political stability. Islamic fundamentalist movements everywhere rail against the un-Islamic practice of charging interest. In Turkey, their audience understands that they are attacking an economy which penalizes wage earners and lavishly rewards investors.

The real cost to Turkey has been the lost opportunity to bring prosperity to its hardworking and entrepreneurial people. Although the economy grew in real terms on average 3.6% for the past 25 years, the Central Bank's projections suggest that it was only in second gear. Per capita income would have been $6,000 twice the current figure had there been less than 10% inflation in that period.

Last year the knock-on effect from the Russia crisis, a cyclical downswing and August's horrific earthquake caused gdp to contract by 5%. But the earthquake also seemed to rouse Turkey's rulers from their torpor. The scale of that tragedy had been exacerbated not just by the lack of emergency planning but also by years of political expediency during which tough choices were invariably avoided. Even without that bitter lesson, the government realized this time that with its shaky fiscal situation, it could not borrow its way out of trouble. Now after an intensive legislative program which increased tax revenue, restarted privatization (a 20% stake in Turk Telecom worth a few billion is now on the block) and even changed the constitution to facilitate foreign investment Turkey's credit rating has begun edging back up.

Young people in Turkey may still expect prices to change, but they expect their society to change as well. Ozyilmaz has no hesitation about the direction. "Turkey has to get into the European Union," she says. To do that, Turkey needs not just to get its economic affairs in order but to deal with the quality of its democratic institutions. In her mind, the two are related. "How can people be expected to focus on a better democracy, when in their working lives they are running to keep still?" she asks. The good news is that for first time in decades, it appears that her government is being forced to ask itself the same question.