How and why is Turkey launching an SWF?

Published 17.08.2016 00:28

There are a great number of examples to tell how the July 15 coup attempt will lead to a major transformation in Turkey. I think, however, one of the most important examples is the Sovereign Wealth Fund (SWF), which would not have been launched had Turkey not experienced the July 15 process. This is because the Turkish state has realized that Turkey would have had no economic and political safety were it not for the public courage on July 15. As a result, it has begun revising the hackneyed and accustomed teachings and practices that currently exist.

It is being asked as to why Turkey has not taken the steps that developed countries took many years ago. Also, it has become clear why Turkey needs to take these steps immediately. We have begun taking these steps, the most concrete of which is the founding of the SWF. We face quite an interesting picture when we look at the discussions about the fund, as we cannot politically categorize those who object to it's founding. Regardless of whether they are leftists, rightists, socialists or nationalists, they object to the initiative for the same reasons. It is very significant that anti-market leftists and statist segments and rightist nationalists speak with one voice.

Let us leave aside such hyperbolic subjective assessments. Technically speaking, the objection to the SWF stems from the idea that only countries that have current account surpluses, which are the net exporters of crucial resources such as oil and natural gas and which start accumulating surplus foreign currency in their central banks through these means, can found an SWF in order to evaluate their extra savings. In fact, these countries started founding such funds in the late 1950s and the funds have reached considerable amounts in recent years as, in addition to developed countries, oil exporting Gulf countries and Asia-Pacific countries with current account surpluses founded wealth funds. The SWFs, which were merely around $500 billion in the early 1990s, have exceeded $10 trillion today.

Since the 1970s, the petro-dollar savings of oil-exporting Gulf countries have been included in the global finance system based on the U.S. and the U.K. and these funds were regarded as one of the most important levers that made up for the system's falling profit rates through financialization. Throughout this process, however, countries like Turkey became the victims of this rapid and distorted financialization. This was because a fund pool of trillions of dollars flowed into developing countries to have a foreign exchange and interest rate advantage and disturbed the debt-income balance in these countries to an extent that could be resolved only if it escalated into a crisis. As such, these countries experienced financial debt crises one after another. This despoilment was accompanied by privatization practices, which grew into a plunder mechanism, in developing countries.

In fact, privatization was addressed as a direct block sale of assets and, as a result of this, many developing countries transferred funds to the outside through a high interest cycle. As such, developing countries with current account deficits turned into importing economies that constantly produced debts and that became vulnerable to external financial attacks. Interestingly enough, the foreign deficits of these countries were financed through these funds. In other words, as debt and investment deficits grew in countries like Turkey, fund sizes geometrically increased in the centers that controlled the wealth funds. Moreover, money and capital markets in the countries with surpluses were not deepened. In other words, the sovereign wealth of these countries were sold in blocks and they were not privatized through securitization.

Now, Turkey is overcoming this plunder mechanism. Turkey is not founding the SWF with a traditional approach and it is not an ordinary stability and saving fund. Despite including both, it is a new step going beyond stability and saving funds. With the SWF, Turkey will secure its national resources and savings and give them to the nation, the true owner of them - which is the main logic behind the SWF. With the fund, Turkey will in a way nationalize the mechanism of transforming savings into investments. Thus, apart from the current budget and build-operate-transfer models, it will develop a new efficient and controllable financing model for giant investments that will create externality in the economy. The transfer of many state institutions' assets and commercial stakes to the Privatization Administration has led to criticisms that they will be irregularly privatized. However, they are being transferred to the Privatization Administration to be reevaluated and be a resource for the SWF. This also means that state-owned national assets are being directly given to the nation's will. Certainly, this mechanism will be transparent and fully open to international supervision like in South Korea and other countries.

The Turkish SWF is aimed at preparing Turkey's future by increasing the sovereign wealth in a consistent and effective way. The fund will manage the assets provided by the government and public funds. The principal target of the fund is to increase overseas investments that domestic sectors would need and to pioneer domestic infrastructure projects that need financing. The fund will be very active and selective in asset allocation and sector selection and the risk management will be supervised through international standards.

Last but not least, along with the international audit, internal supervisions and a transparent management will also contribute to the legal framework of the fund.

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