Turkey — It’s the Accounting, Stupid

What can certified public accountants do to help a country catch the global growth train?

June 4, 2001

What can certified public accountants do to help a country catch the global growth train?

Last summer, Turkey’s divided government launched a series of reforms. It called in the IMF to help. Teams of certified public accountants were unleashed on the balance sheets and income statements of Turkey’s banks, most of which are state-owned. The idea was to privatize many of them, once their finances were credibly established — and to create a modern banking system at last.

But by last fall, word was leaking that vast sums of the “loans” on the books of these Turkish banks were uncollectible. The funds had either been loaned recklessly — or drained outright by the politically or financially well-connected. As the word spread, a run on Turkey’s banks developed among insiders trying to get their money out of the banks — and out of the country as quickly as possible.

The run, of course, triggered the crash of the Turkish economy in late 2000. Two weeks ago, the final tally on Turkey’s banks came in — $30 billion was missing or uncollectible! As a concession for the loans, the IMF required a succession of new reform measures, which Turkey has only partly put into place. The IMF’s loan commitments to Turkey now total $19.7 billion. And according to the Financial Times, if Turkey draws on this, it stands to become the biggest debtor to the IMF.

So will Turkey succeed in reforming and privatizing its banks, and then modernizing its economy? One hopes so. The bigger political question, for now, is this: Is it undergoing this agony to mimic or charm the Americans? No way.

It is true that, in today’s world, strong reliance on tough accountants is widely considered a special ingredient of U.S. business practices. But it is equally important to remember that the “technology” of public accounting is a shared global cultural good.

Turkey may have legitimate concerns that the IMF (or the U.S. government) is trying to force American-style accounting principles down its throat. But, in a funny way, these organizations are only reapplying a system of accounting that the Arab world first taught the Western world many centuries ago.

Invented by a mathematical culture which first arose in ancient Egypt, Greece and Phoenicia, accounting was then preserved and enhanced — through the European dark ages — by Moslems in Alexandria, Cairo, Damascus and Fez.

The crash of the Asian tiger economies in 1997 forced the issue of honest public accounting into focus. International bankers and the International Monetary Fund had known all along that there was trouble in the emerging markets. For example, corruptly and incompetently managed Mexican banks were drained of resources so often that they crashed four times between 1972 and 1995.

Then, the banking systems of South Korea, Thailand, Malaysia and Indonesia went down amid a cloud of cronyism and fraud. These four Asian tigers had previously been among the darlings of high-growth development. If corrupt bookkeeping practices stunted growth in these countries, it was probably crippling many more less successful economies as well.

What the global economy actually spreads are the institutions and practices of commercial freedom. And contrary to folklore, none of them are an American monopoly — or even invention. In fact, the primary motive why Turkey embraced more honest accounting was to qualify Turkey for membership — not in the United States, but in the European Union.