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Anatolian Tigers and the Emergence of the Devout Bourgeoisie in the Turkish Manufacturing Industry:

An Empirical Analysis

İzak Atiyas, Ozan Bakış and Esra Çeviker GürakarERF Seminar on

The Political Economy of The Private Sector In The Middle EastDecember 21-22, 2016Marrakech, Morocco

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Motivation

• Important component of AKP social base: Emerging devout bourgeoisie, especially in new growth centers in Anatolia, the so-called Anatolian Tigers

• Our objective is to use firm level data to investigate in more detail the emergence of Anatolian Tigers and the devout industrial bourgeoisie

• Main questions: Is there evidence of inclusion? In what form? When? How do economic characteristics of the devout bourgeoisie in manufacturing compare with those of the traditional secular industrial elite.

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Focus• Manufacturing Industry• Especially after mid-1990s possibilities for favoritism

through traditional instruments of protection (trade, discretionary subsidies) limited due to Customs Union with the EU and membership to WTO (1995)

• Different from rent-thick sectors/activities such as public procurement, construction, energy

• We presume that remaining instruments of favoritism in manufacturing (land allocation, uneven application of regulations, «soft» support for export markets) is relatively «benign».

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Data• Anatolian Tigers: Annual Manufacturing Industry Statistics ,

1982-2000 (10+ firms); Annual Industry and Service Statistics (2005-2012) (sample of 20- firms, census of 20+ firms)

• Anatolian Tigers defined as NUTS2 regions where Welfare Party received at least 20 percent of the vote.

• Devout bourgeoisie: data on largest manufacturing firms put together by the Istanbul Chamber of Industry (500 firms for 1980-1996; 1000 firms for 1997-2014.

• Firms identified as belonging to «religious network» (RN) vs «secular network» (SN) based on membership to business associations in 2013: MUSIAD, TUSKON and ASKON for RN; TUSIAD, TURKONFED for SN.

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1980s and 1990s• Pre-1980 legacy: import substitution industrialization; emergence of the

traditional industrial elite – Deals space highly closed; entry barriers as access to foreign exchange, import

quotas and credit• Özal reforms: Trade and financial liberalization, opening of capital account• Fierce political competition especially in the 1990s; significant fragmentation

in both the left and the right• Short lived coalition governments, «populism» (use of public resources for

political competition) resulting in fiscal-driven macro instability in the 1990s• In terms of economic institutions generally a discretionary and non-rule

based environment • But: Customs Union in 1995; Turkey becomes a candidate country in 1999

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Political Islam and the pious bourgeoisie

• Electoral victories by Islamist parties especially at the local level

• Emergence of self-declared Muslim businesses: – liberalization allowed expanded access to foreign

exchange, imported inputs and credit; – access to resources allocated by local governments

• Emergence of «Special Finance Institutions»

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AKP regime in 2002-2011 • Financial crisis in 2001• AKP won elections in 2002 and formed a single party majority government

– Platform of EU orientation• Economic recovery program launched by the previous government adopted

by the AKP• Major reform of economic institutions guided by EU legislation

– Central Bank independence; independent regulatory authorities in banking, telecoms and energy; enhanced fiscal transparency and control; new public procurement law

• A general increase in economic space governed by formal predictable rules– Implementation sometimes discretionary, depending on the sector and area– Eg application of competition law quite rule based– By contrast procurement law started to change right after AKP came to power

• A hybrid regime of state business relations

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Economic growth in the early 2000s

• 2002-2007 per capita gdp growth higher than 3 percent in 6 consecutive years (the only such episode since 1961).

• High TFP growth• Structural change in exports: decline in share of

traditional manufactured exports, increase in share of mid-tech exports– between 2000-2010 share of textiles and garments declined

from 35 to 20 percent, share of machinery and equipment went up from 5 to 9 and of motor vehicles from 6 to 12 percent.

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Tiger share in manufacturing employment

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Tiger share in manufacturing value added

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8

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1982

1983

1984

1985

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1987

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1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

tiger other

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Relative labor productivity 1982-2000 (West=1)

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Thickening of the middle

Table 1: Distribution of employment by plant size (%)

10-19 20-49 50-99 100-249 250-499 500+

West 1980s 5.4 11.2 9.3 14.3 14.0 45.9 1990s 4.0 12.5 11.0 18.6 16.2 37.8

Tiger 1980s 3.6 8.4 6.2 8.9 11.4 61.5

1990s 4.0 10.7 8.7 15.2 12.5 48.9

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2000s: Some evidence of productivity convergence

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Change in distribution of employment across size classes

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Productivity convergence especially among large firms

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Catch-up especially among high-productivity firms

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Who are the high productivity firms?

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Increased Tiger share in exports

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Summary on Tigers

• Thickening of the middle in the 1990s, some evidence of productivity convergence in the 2000s

• Convergence between the West and Tigers is uneven: catch-up among high productivity firms, divergence among low productivity firms

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Share of RN firms increased especially in the 2000s

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60 percent of large RN firms established after 1980s

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Relative to SN firms, RN firms more concentrated in labor intensive industries textile and garments, furniture, as well as basic metals. High SN presence in automotive and chemicals.

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RN firms smaller than SN firms

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RN firms export oriented. However, in 2012, the share of SN firms in total exports of top 1000 firms was 61 percent against 15 percent for RN firms

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RN firms have lower productivity

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Summary• In the 1980s and early 1990s there were already a handful of firms (around 20-25 of the

largest 500 firms) belonging to the RN network that were relatively large (average size close to 80-90 percent of SN), relatively highly export oriented, with labor productivity around 60 percent of their counterparts in the SN

• The share of RN firms increased from less than 5 percent (of largest 500 firms) in the early 1980s to more than 20 percent (of largest 1000 firms, against a share of about 35 percent for SN firms) in the late 2000s.

• New additions are generally smaller than but as export oriented as the incumbent RN firms.

• Firms belonging to the RN network are concentrated in more traditional industries such as food and beverages, textiles and garments and furniture. By contrast, firms belonging to the SN network have relatively more presence in more capital intensive industries such as machinery and equipment and chemicals.

• On average RN firms are smaller than SN firms and the gap is size has increased in the 2000s.

• SN firms still quite dominant in manufacturing

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Post 2011• Weakening of the EU anchor• Desire on the part of Erdogan to centralize political power and

weaken checks and balances• Gezi protests in 2013• But most importantly unraveling of the coalition with the Gulen

movement– Gulen associated prosecutors attacking the undersecretary of the National

Intelligence Organization (an Erdogan associate)– Move to close down Gulen establishments in the education sector– December 2013 graft investigations by Gulenist prosecutors against the

government• The July 2015 coup attempt

– Expropriation of Gulen-associated businesses

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State Business Relations in transition

• SBR moving from a hybrid regime to one where there is less protection against predation?

• The scope of rules-based governance narrowing down– Independence of regulatory agencies as well as the

judiciary already weakened before coup attempt– Prospects for the EU anchor very dim

• Tremendous increase in political uncertainty, violence associated with the Kurdish issue and risks associated with Syria