Emerging regional economies

Published 05.10.2017 20:42

Turkey and Iran's agreement on conducting trade in local currencies is of qualitatively great strategic importance, regardless of its technical level and the trade volume it will cover. The central banks of both Turkey and Iran have already been carrying out a joint study on the issue for a long time. Iran is Turkey's seventh-largest import country, and it also runs a trade deficit. Despite the preferential trade agreement, Turkish-Iranian trade has been rapidly shrinking in volume in recent years and has declined to $10 billion. Moreover, bilateral trade relations have gone through quite a controversial period.

President Recep Tayyip Erdoğan's recent visit to Iran and agreements signed with the country show that Turkish-Iranian relations have entered a new period, both in terms of foreign policy and the economy. The mutual expansion of product range, which will have reduction in tariffs depending on trade in local currencies and preferential trade agreements, will ensure that the targeted $30 billion in trade volume will be achieved in a short time. Beyond this, however, what matters more than mutual trade is the mutual export capital and turning this capital to investments in the real economy. Given that the same is true for Russia, these three major countries in the region are headed towards new cooperation in all areas of the industry, especially energy.

So, will this cooperation turn into a permanent regional economic integration? This is a very critical question and, of course, the answer is not an easy one. First of all, trade volume in local currencies should run smoothly and the trade system should be set up correctly. Beyond that, however, trade in local currencies will be a gradually rising trend not only in our region, but also in all regions in the world, especially those with strong, emerging economies. We can even say that it will soon become essential, as the U.S. economy has now lost its macroeconomic strength and effectiveness to maintain the dollar as an international reserve currency.

In fact, this process started when U.S. President Richard Nixon took the dollar's direct convertibility to gold in 1971. However, the U.S.'s political hegemony maintained the dominance of the dollar as reserve currency until 2000, when the euro was introduced as a supplementary to the dollar. This is because, in the early 1990s, the Soviets and the Eastern Bloc surrendered their economic power to the West and the system was expanded more than the dollar could tolerate. Following the 2008 crisis, the position of both the dollar and the euro as reserve currencies rapidly deepened the global crisis, as both central banks that produced these currencies strove to handle their own crises alone and could not observe the multi-sided global equilibrium.

On the one hand, the U.S. needed a competitive dollar to meet its deficits and compete and, on the other, it needed Asian countries, which had budget surpluses, to save dollars and dollar-based bills to finance its deficits. So, it did not want the dollar to depreciate constantly. This paradoxical situation was reflected all over the world as a threat to financial stability and a crisis risk. Therefore, developing countries were obliged to import the crisis of the countries that produced reserve currencies. The U.S.'s position in the international market turned into net debtor from net creditor over the past 30 years. As a result, the dollar-based international monetary system cannot fulfil the role of balancing the global economy due to the rising global imbalances.

Eliminating exchange rate volatility, ending the obligation to save dollars as an international reserve currency, avoiding the standardization of key indicators (prices) in economies in a single currency and removing the dependency of relations between exchange rates and current account deficits on the dollar will first reduce inflation and then interest rates. Therefore, Eurasia, Latin America and the Asia-Pacific, which have strong developing countries, will be the regions where trade in local currencies will rapidly develop and monetary unions and regional integration will be built rapidly.

In fact, this is a very important opportunity for Turkey to address the issue of economic security, which it has never focused on before, and consider economic security as a major variable of development and wealth issues.

Today, the financing, standards and insurance of global trade, including the credit insurance ecosystem, are in the power of countries that produce global reserve currencies. Trade in local currencies will bolster the commercial and financial integration of developing countries; first on a regional and then on a global scale. Today, the commercial and financial insurance systems are in power of the debt-choked Western countries. This is a major problem and obstacle in terms of global trade and will deepen the global crisis.

From now on, Turkey will rapidly build institutional structures and financial architecture that will develop strong trade relationships in all areas with countries in the region. The coming period will be an era of emerging regional economies in the Asian Pacific, Latin America and Eurasia. This is the real dynamic of the new world order.

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