THE AMERICAN UNIVERSITY OF PARIS 6, rue du Colonel Combes 75007 Paris, France Fax: (33. 1) 47.53.81.33. aferrer@aup.edu www.aup.edu

Working Paper No. 41

Economic Change in Twentieth Century Turkey: Is the Glass More than Half Full?

Şevket PAMUK Boğaziçi University, Istanbul

Presented by Şevket PAMUK at the American University of Paris Monday the 22nd of January 2007 The Working Paper Series at The American University of Paris is published and sponsored by the Trustee Fund for the Advancement of Scholarship (TFAS)

3

Abstract

The paper begins with an overview of Turkey’s economic growth record since the nineteenth century in both absolute and comparative terms. Turkey’s GDP per capita increased about 10 times since 1820 and about eight times since 1880. In relative terms, the gap in per capita GDP between Turkey and the developed economies widened considerably during the nineteenth century. This gap has stayed roughly unchanged since World War I. In other words, after the big divergence until World War I, Turkey failed to converge during the last century. On the other hand, per capita GDP in Turkey increased faster than the developing country averages from the nineteenth century until the 1970s. Due to the strong performances of China and India, however, it has been lagging behind the developing country averages in recent decades. In trying to explain this growth performance, I examine critically long term structural change, industrialization, economic policy and institutional change. I identify low levels of investment in education, macroeconomic instability and the low quality of institutions as the key reasons for Turkey’s failure to close the gap with the developed countries since 1913 or 1950.

4

Introduction

One metaphor for assessing Turkey’s economic performance in the twentieth century may be to

ask whether the glass is half full or half empty. On the one hand, Turkey has experienced far-

reaching economic changes since the early 1920s. The primarily rural and agricultural economy

of the early twentieth century has transformed into a mostly urban economy. Average or per

capita incomes have increased more than five fold during this period. Other indicators of

standards of living have also improved significantly. Life expectancy at birth has almost doubled

from under 35 years in the interwar era to 69 years. Adult literacy rates have increased from

about 10 percent to about 90 percent. (Table 1)

On the other hand, it would be misleading to judge economic performance only in absolute

terms. The twentieth century, especially its second half, was a period of rapid increases in the

standards of living in most parts of the developing world, of which Turkey is still considered a part.

Increases in per capita incomes in Turkey since World War I have been close to, but slightly

above, world averages and averages for the developing countries. The income per capita gap

between Turkey and the high income countries of Western Europe and North America was about

the same in 2005 as it was on the eve of World War I. Certainly, Turkey has not been one of the

miracle-producing economies of the twentieth century. Moreover, its record in human

development has been weaker than its record in economic growth, close to but perhaps below

averages for the developing world. In addition, these increases or improvements have not all

been achieved at a steady pace. In fact, Turkey’s economy has been plagued by recurring political

and macroeconomic instability that has led to a number of crises, especially in the second half of

the twentieth century. The most severe of these, a financial crisis, occurred in 2001. That the

economy managed to rebound strongly within a few years should perhaps remind us of the above

metaphor.

Also on the positive side, the last decade has witnessed important changes in Turkey’s

relations with the European Union. Although the first agreement for cooperation between Turkey

and what was then the Common Market dates back to 1963, both sides remained doubtful about

Turkey’s integration. Turkey’s first application for membership in 1987 was turned down but it

joined the European customs union in 1996. After a reasonably successful implementation of the

customs union for one decade, formal negotiations for membership in the European Union began

in 2006.

I begin below with several key indicators that offer a summary evaluation of Turkey’s economic

development record since 1923 or 1913 in a comparative framework. The rest of the chapter

attempts to understand that record. In recent years, a growing literature has emphasized the

5

contribution of the social and political environment, and more specifically of institutions defined

as written and unwritten rules and norms, to long term economic change. In the second section, I

will sketch a framework for understanding the linkages between the evolution of institutions and

economic change in twentieth century Turkey. I will then examine, in the third section, world

economic conditions, government economic policies and the basic macroeconomic outcomes for

Turkey in three sub-periods, in order to gain additional insights into its absolute and relative

growth record. With its very large share in employment and total output until recently, agriculture

is of central importance also for understanding long term economic development in Turkey.

Similarly, income distribution, or more generally the distribution of gains, must be part of any long

term evaluation. In the fourth section, I focus on these two themes, agriculture and income

distribution and regional disparities, before offering some concluding remarks in the fifth section.

I. Economic Growth and Development Record

In the 1920s, less than 25 percent of Turkey’s population lived in urban centers with more than

5000 inhabitants. The rural-urban shares remained little changed until after World War II but

Turkey has been experiencing rapid urbanization since then. The proportion of the population

living in urban centers, as defined above, increased to 44 percent by 1980 and to 68 percent by

2005. Rapid urbanization has been accompanied by large shifts within the labor force.

Agriculture’s share in total employment declined from about 80 percent in 1913 and in 1950 to

34 percent in 2005, while industry’s share rose from about 9 to 23 percent, and that of services

increased from 11 to 43 percent. Similarly, agriculture’s share in GDP declined from about 55

percent in 1913 and 54 percent in 1950 and to 11 percent in 2005. Share of industry has

increased from about 13 percent in 1913 to 26 percent in 2005 while the share of services has

increased from 34 to 64 percent during the same period. (Table 1 and Graph 1)

The beginning date or base year for long-term comparisons of economic growth (1913 vs.

1923) requires an explanation. A decade of wars beginning in 1912 had resulted in a dramatic

20 percent decline in population and as much as 40 percent decline in per capita incomes by

1922. As a result, the GDP per capita levels for Turkey were sharply lower than long-term trend

values in the early 1920’s,. For this reason, the year selected for long-term comparisons makes a

big difference. While I provide values for both base years in Table 1, for most comparisons I will

use 1913, which is also used in most international comparisons.

Per capita incomes in Turkey and the rest of the Ottoman Empire rose during the nineteenth

century. Nonetheless, the gap between the high income countries of Western Europe and the

United States and the developing world, including the Ottoman Empire, widened considerably

during the century before World War I, due to the rapid rates of industrialization in the former

group. GDP per capita in the area within present-day borders of Turkey was approximately 1200

6

dollars in 1913. (Table 1) This was 29 percent of the level of GDP per capita in the high income

countries of Western Europe and the United States, calculated on a population-weighted basis,

and 168 percent of the GDP per capita income in the developing countries of Asia, Africa and

Latin America, also calculated on a population-weighted basis and for the same year.

Two world wars and a great depression later, per capita income in Turkey in 1950 was more

than 30 percent higher, at 1620 constant or inflation-adjusted dollars. This was equal to 24

percent of the per capita income of the high income countries and 188 percent of the per capita

income in the developing countries. By 2005, GDP per capita in Turkey had reached 7500 dollars,

an increase of more than five fold since 1913. This figure corresponded to about 30 percent of

the level of GDP per capita in the high income countries of Western Europe and the United States,

and approximately 225 percent of the GDP per capita income of the developing countries for the

same year. In other words, average incomes in Turkey have increased at about the same rate as

those in high income countries since 1913. Turkey has not been able to close any of this large

gap. At the same time, increases in average incomes in Turkey since 1913 have been slightly

faster than those in the developing world. If 1923 were chosen as the base year, Turkey’s long

term record would look considerably better. (Table 1)

In Graph 2, I provide per capita GDP series for Turkey and a number of other regions and

continents as percentages of the average for Western Europe and the United States for the period

since 1913. This graph allows further insights into Turkey’s comparative economic record in the

twentieth century. It shows that while its growth record was better than the averages for Latin

America, Middle East and Africa as a whole, Turkey has lagged well behind Southern Europe and

East Asia since 1950. (To the Editor: please allow full page for Graph 2)

However, GDP per capita is not an adequate measure of economic development or more

generally of standards of living. For this reason, the Human Development Index (HDI), a broader

measure first introduced by the United Nations in 1990, has become quite popular. HDI has three

components, longevity as measured by life expectancy at birth, knowledge as measured by a

weighted average of adult literacy and years of schooling and income as measured by GDP per

capita. Estimates for HDI for Turkey and other countries are available for the benchmark years of

1950 and 1975, as well as for the period since 1990. Recently, I made a separate estimate for

Turkey in 1913, making use of the data cited above. These estimates allow us to obtain an

overview of the standards of living in twentieth century Turkey and insert it into a comparative

framework. (Table 2)

It is not easy to compare the evolution of HDI of developing countries with those of developed

countries today or in the past. For this purpose, I present in the last column of Table 2 a measure

for the extent to which countries have reduced the distance between their level of HDI of 1950

and the maximum attainable score of 1. While Turkey and many other developing countries with

7

low initial levels have experienced large increases in HDI since 1950, the developed countries

have generally shown larger increases when measured as percent of maximum possible increase.

In terms of this latter measure, Turkey has done better than African and Eastern European

countries, about the same as Latin American countries, and has lagged behind East Asian

countries since 1950.

Changes in life expectancy at birth, or e(0), provide a dramatic example of changes in twentieth

century Turkey. The earliest period for which we have estimates of e(0) is for the 1930s when the

figure was 30 years. Life expectancy at birth had increased to 47 years by 1950 and to 62 years

by 1980. In 2004, the latest year for which we have the estimates, e(0) stood at 70 years; 68

years for men and 73 years for women. (Table 1) While official estimates are not available for

adult literacy in the early years of the republic, it can be safely assumed that the rate did not

exceed 10 percent in the 1920s. In 1935, the literacy rate for individuals over age 15 was 19

percent: 31 percent for men and only 8 percent for women. By 1950, the adult literacy rate had

increased to 28 percent; 47 percent for men and 13 percent for women. In 2005, it stood at 89

percent; 95 percent for men and 82 percent for women. (Table 1)

Since 1913 and especially since 1950, levels and improvements in life expectancy in Turkey

have been comparable to those in other developing countries with similar levels of income.

However, since 1913 and 1950 education levels in Turkey as measured by literacy, years of

schooling and school enrollment have been lagging significantly behind education levels in

developing countries with similar levels of GDP. At the same time, the incidence of poverty in

Turkey has been lower in comparison to developing countries with similar levels of income. These

contrasts can be clearly observed in a comparison of Turkey with countries in Latin America since

1913 and 1950. Levels of schooling in Turkey have been below the averages for the larger Latin

American countries throughout the twentieth century. The lagging performance in education is not

a matter for the historical record alone, however. This deficit will make itself increasingly felt in

the decades ahead. For further increases in GDP per capita, Turkey will need a better educated

labor force and significant increases in the technology and knowledge component of its economy.

Along with other Muslim majority countries, Turkey also lags behind developing countries with

comparable levels of per capita income in indices aiming to measure gender equality and socio-

economic development of women.i One other reason why many of Turkey’s human development

measures have been lagging behind is the large regional differences in these indicators between

the mostly Kurdish southeast and the rest of the country, as discussed in Section IV below.

II- Institutional Change and Economic Growth

For decades it was believed that economic growth results in part from the accumulation of

factors of production and improvements in their quality through investment in machines and skill

8

formation, and in part from increases in productivity derived from advances in technology and

organizational efficiency. In recent years, however, a useful distinction is being made between the

proximate and the ultimate sources of economic growth. The former relates to the contributions

made by the increases in factor inputs and productivity as cited above. The latter refers to

aspects of the social and economic environment that influence the rate at which inputs and

productivity grow. A growing literature emphasizes the importance of institutions or written and

unwritten rules of a society and policies such as property rights and their enforcement, norms of

behavior, political and macroeconomic stability, which affect the incentives to invest and

innovate. In this new perspective, the basic function of institutions is to provide certainty in

economic activity. More complex economic structures will not emerge unless institutions can

reduce the uncertainties associated with such structures. Recent research has also revealed very

large differences in total productivity levels between countries. It appears more than half of the

differences in levels of per capita production are due to the productivity obtained from the same

amount of resources rather than from the accumulation of more machines or skills per person.ii

In this context, the quality of institutions is increasingly seen as the key to the explanation of

economic growth and long-term differences in per capita GDP. Economic institutions also

determine the distribution of income and wealth. In other words, they determine not only the size

of the aggregate pie, but also how it is divided amongst different groups in society.

The process of how economic institutions are determined and the reasons why they vary across

countries are still not sufficiently well understood. Nonetheless, it is clear that because different

social groups including state elites benefit from different economic institutions, there is generally

a conflict of interest over the choice of economic institutions, which is ultimately resolved in favor

of groups with greater political power. The distribution of political power in society is in turn

determined by political institutions and the distribution of economic power. For long-term growth,

economic institutions should not offer incentives to narrow groups, but instead open up

opportunities to broader sections of society. For this reason, political economy and political

institutions are considered as key determinants of economic institutions and the direction of

institutional change.iii

The evolution of economic institutions in Turkey and their consequences for economic growth

and distribution of income have not been closely studied. In the next section, I will examine

structural change, industrialization and the basic macroeconomic outcomes in three sub-periods:

the interwar years or the single party era until the end of World War II, the import-substituting

industrialization era after World War II and the globalization era since 1980. I will thus seek to

gain insights not only into Turkey’s record of economic growth and distribution, but also into the

evolution of the economic institutions that played a key role in these outcomes. Briefly, there were

significant institutional changes in Turkey during the interwar period. Ultimately, however, political

9

and economic power remained with the state elites. Despite the rhetoric to the contrary, the

regime remained decidedly urban in a country where the overwhelming majority lived in rural

areas and engaged in agriculture. As a result, these institutional changes did not reach large

segments of the population. Rates of increase of per capita GDP remained low in Turkey as in

most developing countries during this period. Pace of economic growth accelerated in both the

developed and developing countries including Turkey after World War II. With the transition to a

more open political regime and urbanization, urban industrial groups began to take power away

from the state elites. The economic institutions began to reflect those changes. This transition,

however, has not been smooth or easy. For most of the last half century, political and

macroeconomic instability including three military coups and a series of fragile coalitions and the

shortcomings of the institutional environment seriously undermined the economy’s growth

potential. The glass has remained only half full.

III.1 World Wars, the Great Depression and Etatism, 1913-1946

The Ottoman economy, including those areas that later comprised modern Turkey, remained

mostly agricultural until World War I. Nonetheless, per capita incomes were rising in most regions

of the empire during the decades before the war.iv But the destruction and death that

accompanied the Balkan Wars of 1912-13, World War I and the War of Independence, 1920-22,

had severe and long-lasting consequences. Total casualties, military and civilian, of Muslims

during this decade are estimated at close to 2 million. In addition, most of the Armenian populace

of about one and a half million in Anatolia were deported, killed, or died of disease, after 1915.

Finally, under the Lausanne Convention, approximately 1.2 million Orthodox Greeks were forced

to leave Anatolia, and in return, close to half a million Muslims arrived from Greece and the

Balkans after 1922.

As a result of these massive changes, the population of what became the Republic of Turkey

declined from about 17 million in 1914 to 13 million at the end of 1924.v The population of the

new nation-state had also become more homogeneous, with Muslim Turks and the Kurds who

lived mostly in the southeast making up close to 98 percent of the total. The dramatic decline in

Greek and Armenian population meant that many of the commercialized, export-oriented farmers

of Western Anatolia and the eastern Black Sea coast, as well as the artisans, leading merchants

and moneylenders who linked the rural areas to the port cities and the European trading houses

had died or departed. Agriculture, industry and mining were all affected adversely by the loss of

human lives and by the deterioration and destruction of equipment, draft animals and plants

during the war years. GDP per capita in 1923 was approximately 40 percent below its 1914

levels.vi (also Table 1)

10

The former military officers, bureaucrats and intellectuals who assumed the positions of

leadership in the new republic viewed the building of a new nation-state and modernization

through Westernization as two closely related goals. They strived, from the onset, to create a

national economy within the new borders. The new leadership was keenly aware that financial

and economic dependence on European powers had created serious political problems for the

Ottoman state. At the Lausanne Peace Conference (1922-23), which defined, amongst other

things, the international economic framework for the new state, they succeeded in abolishing the

regime of capitulations that had provided special privileges to foreign citizens. The parties also

agreed that the new republic would be free to pursue its own commercial policies after 1929. The

new government saw the construction of new railroads and the nationalization of the existing

companies as important steps towards the political and economic unification of the new state

inside new borders. Despite its rhetoric to the contrary, the regime’s priorities lay with the urban

areas. It considered industrialization and the creation of a Turkish bourgeoisie to be the key

ingredients of national economic development.vii

Nonetheless, the new regime abolished the much-dreaded agricultural tithe and the animal tax

in 1924. This move represented a major break from Ottoman patterns of taxation and a

significant decrease in the tax burden of the rural population. While this decision has been

interpreted as a concession to the large landowners, the new leadership was concerned more

about alleviating the poverty of the small and medium sized producers, which made up the

overwhelming majority of the rural population. In the longer term, the abolition of the tithe and

tax-farming helped consolidate small peasant ownership. The recovery of agriculture provided an

important lift to the urban economy as well. By the end of the 1920s, GDP per capita levels had

attained the levels prevailing before World War I. viii

The Great Depression

The principal mechanism for the transmission of the Great Depression to the Turkish economy

was the sharp decline in prices of agricultural commodities. Decreases in the prices of leading

crops, such as wheat and other cereals, tobacco, raisins, hazelnuts and cotton, averaged more

than 50 percent from 1928-29 to 1932-33, much more than the decreases in prices of non-

agricultural goods and services. These adverse price movements created a sharp sense of

agricultural collapse in the more commercialized regions of the country, in western Anatolia, along

the eastern Black Sea coast and in the cotton-growing Adana region in the south.ix

Earlier in 1929, even before the onset of the crisis, the government had begun to move

towards protectionism and greater control over foreign trade and foreign exchange. By the second

half of the 1930s, more than 80 percent of the country's foreign trade was conducted under

clearing and reciprocal quota systems. x As the unfavorable world market conditions continued,

the government announced in 1930 a new strategy of etatism, which promoted the state as a

11

leading producer and investor in the urban sector. A first five-year industrial plan was adopted in

1934 with the assistance of Soviet advisers. By the end of the decade, state economic

enterprises had emerged as important and even leading producers in a number of key sectors,

such as textiles, sugar, iron and steel, glass works, cement, utilities and mining. xi Etatism

undoubtedly had a long-lasting impact in Turkey, and later in other countries around the Middle

East. However, the initial efforts in the 1930s made only modest contributions to economic

growth and structural change. For one thing, state enterprises in manufacturing and many other

areas did not begin operations until after 1933. Close to half of all fixed investments by the public

sector during this decade went to railroad construction and other forms of transportation. In

1938, state enterprises accounted for only 1 percent of total employment in the country.

Approximately 75 percent of employment in manufacturing continued to be provided by small-

scale private enterprises. xii

Etatism did not lead to large shifts in fiscal and monetary policies, either. Government budgets

remained balanced, and the regime made no attempt to take advantage of deficit finance. In fact,

“balanced budget, strong money” was the government’s motto for its macroeconomic policy. The

exchange rate of the lira actually rose against all leading currencies during the 1930s. The most

important reason behind this policy choice was the bitter legacy of the Ottoman experience with

budget deficits, large external debt and inflationary paper currency during World War I. Ismet

Inönü, the prime minister for most of the interwar period, was a keen observer of the late

Ottoman period and was the person most responsible for this cautious, even conservative, policy

stand. In other words, government interventionism in the 1930s was not designed, in the

Keynesian sense, to increase aggregate demand through the use of devaluations and

expansionary fiscal and monetary policies. Instead, the emphasis was on creating a more

closed, autarkic economy, and increasing central control through the expansion of the

public sector.xiii

Economic Growth and its Causes

Available estimates suggest GDP and GDP per capita grew at average annual rates of 5.4 and

3.1 percent respectively during the 1930s, despite the absence of expansionary fiscal and

monetary policy. (See Table 1 and Graph 2) One important source of the output increases after

1929 was the protectionist measures adopted by the government ranging from tariffs and quotas

to foreign exchange controls, which sharply reduced the import volume from 15.4 percent of GDP

in 1928-29 to 6.8 percent by 1938-39. (Graph 3) Import repression created attractive conditions

for the emerging domestic manufacturers, mostly the small and medium-sized private

manufacturers.

There is another explanation for the overall performance of both the urban and the national

economy during the 1930s, which has often been ignored amidst the heated debates over

12

etatism. Thanks to the strong demographic recovery, agriculture—the largest sector of the

economy, employing more than three fourths of the labor force and accounting for close to half of

the GDP—did quite well during the 1930s. xiv

Given its balanced-budget policy stand, government actions in response to sharply lower

agricultural prices after 1929 were limited to purchases of small amounts of wheat. It is

remarkable that despite the adverse price trends, agricultural output increased by 50 to 70

percent during the 1930s. The most important explanation of this outcome is the demographic

recovery in the countryside. In the interwar period, Anatolian agriculture continued to be

characterized by peasant households who cultivated their own land with a pair of draft animals

and the most basic of implements. With the population beginning to increase at annual rates

around 2 percent after a decade of wars, expansion of the area under cultivation soon followed. It

is also likely that the peasant households responded to the lower cereal prices after 1929 by

working harder to cultivate more land and produce more cereals in order to reach certain target

levels of income, very much like the peasant behavior predicted by the Russian economist

Chayanov. In other words, behind the high rates of industrialization and growth in the urban areas

were the millions of family farms in the countryside, which kept food and raw materials prices

lower until World War II. xv

Difficulties during the War

Although Turkey did not participate in World War II, full-scale mobilization was maintained

during the entire period. The sharp decline in imports and the diversion of large resources for the

maintenance of an army of more than one million placed enormous strains on the economy.

Official statistics suggest that GDP declined by as much as 35 percent and the wheat output by

more than 50 percent until the end of the war. In response, the prices of foodstuffs rose sharply

and the provisioning of urban areas emerged as a major problem for the government. Under

these circumstances, etatism was quickly pushed aside. Large increases in defense spending

were financed by monetary expansion. High inflation, wartime scarcities, shortages and

profiteering accentuated by economic policy mishaps soon became the order of the day.

Measures such as the 1942 Varlik Vergisi, or Wealth Levy, which was applied disproportionately

to non-Muslims, only made things worse.xvi

As declining production and sharply lower standards of living combined with increasing

inequalities in the distribution of income, large segments of the urban and rural population turned

against the Republican People’s Party, which had been in power since the 1920s. In terms of

economics, the war years, rather than the Great Depression and etatism era, thus appear to be

the critical period in the political demise of the single party regime.

Despite two world wars and the Great Depression, per capita levels of production and income

in Turkey were 30 to 40 percent higher in 1950 than the levels on the eve of World War I. (see

13

Table 1 and Graph 2) xvii Around mid-century, the economy was much more inward-oriented than

it had been in 1913. Due to the impact of two world wars and a depression, rural-urban

differences and regional disparities were considerably higher than they had been in 1913.

III.2. The Post-World War II Era, 1946-1980

Domestic and international forces combined to bring about major political and economic

changes in Turkey after World War II. Domestically, many social groups had become dissatisfied

with the single party regime. The agricultural producers, especially poorer segments of the

peasantry, had been hit hard by wartime taxation and government demands for the provisioning

of the urban areas. In the urban areas, the bourgeoisie was no longer prepared to accept the

position of a privileged but dependent class, even though many had benefited from the wartime

conditions and policies. They now preferred greater emphasis on private enterprise and less

government interventionism.xviii

International pressures also played an important role in the shaping of new policies. The

emergence of the United States as the dominant world power after the war shifted the balance

towards a more open political system and a more liberal and open economic model. Soviet

territorial demands pushed the Turkish government towards close cooperation with the United

States and Western alliance. The U.S. extended the Marshall Plan to Turkey for military and

economic purposes beginning in 1948.

Agriculture-Led Growth, 1947-1962

The shift to a multi-party electoral regime brought Democrat Party to power in 1950.

Undoubtedly the most important economic change brought about by the Democrats was the

strong emphasis placed on agricultural development. Agricultural output more than doubled from

1947, when the pre-war levels of output were already attained, through 1953. xix A large part of

these increases were due to the expansion in cultivated area, which was supported by two

complementary government policies, one for the small peasants and the other for larger farmers.

First, the government began to distribute state-owned lands and open communal pastures to

peasants with little or no land. Secondly, the Democrat government used Marshall Plan aid to

finance the importation of agricultural machinery, especially tractors, whose numbers jumped

from less than 10,000 in 1946 to 42,000 at the end of the 1950s. Agricultural producers also

benefited from favorable weather conditions and strong world market demand for wheat, chrome

and other export commodities, thanks to American stockpiling programs during the Korean War.xx

The agriculture-led boom, meant good times and rising incomes for all sectors of the economy.

It seemed in 1953 that the promises of the liberal model would be quickly fulfilled. These golden

years did not last very long, however. With the end of the Korean War, international demand

slackened and prices of export commodities began to decline. With the disappearance of

favorable weather conditions, agricultural yields declined as well. Rather than accept lower

14

incomes for the agricultural producers, who made up more than two thirds of the electorate, the

government decided to initiate a large price support program for wheat, financed by increases in

the money supply. The ensuing wave of inflation and the foreign exchange crisis, which was

accompanied by shortages of consumer goods, created major economic and political problems

for the Democrat Party, especially in the urban areas.xxi One casualty of the crisis was the political

as well as economic liberalism of the Democrat Party. Just as it responded to the rise of political

opposition with the restriction of democratic freedoms, in most economic issues the government

was forced to change its earlier stand and adopt a more interventionist approach. It finally agreed

in 1958 to undertake a major devaluation and began implementing a IMF and OECD-backed

stabilization program.

To this day, agricultural producers and their descendants, many of whom are now urbanized,

continue to view the Democrat Party government and especially the Prime Minister Adnan

Menderes, a large landowner, as the first government to understand and respond to the

aspirations of the rural population. The Democrat Party also offered the first example of populist

economic policies in modern Turkey. Not only did it target a large constituency and attempt to

redistribute income towards them, but it also tried to sustain economic growth with short-term

expansionist policies, with predictable longer-term consequences. The 1950's also witnessed the

dramatic acceleration of rural-to-urban migration in Turkey. Both push and pull factors were

behind this movement, as conditions in rural areas differed widely across the country. The

development of the road network also contributed to the new mobility.xxii

Import Substituting Industrialization, 1963-1977

One criticism frequently directed at the Democrats was the absence of any coordination and

long term perspective in the management of the economy. After the coup of 1960, the military

regime moved quickly to establish the State Planning Organization (SPO). The idea of

development planning was now supported by a broad coalition: the Republican People's Party

with its etatist heritage, the bureaucracy, large industrialists and even the international agencies,

most notably the OECD.xxiii

The economic policies of the 1960s and 1970s aimed, above all, at the protection of the

domestic market and industrialization through import substitution (ISI). Governments made heavy

use of a restrictive trade regime, investments by state economic enterprises and subsidized credit

as key tools for achieving ISI objectives. The SPO played an important role in private sector

decisions as well, since its approval was required for all private sector investment projects which

sought to benefit from subsidized credit, tax exemptions, import privileges and access to scarce

foreign exchange. The agricultural sector was mostly left outside the planning process.xxiv

With the resumption of ISI, state economic enterprises once again began to play an important

role in industrialization. Their role, however, was quite different in comparison to the earlier

period. During the 1930's when the private sector was weak, industrialization was led by the state

15

enterprises and the state was able to control many sectors of the economy. In the post-war

period, in contrast, the big family holding companies, large conglomerates which included

numerous manufacturing and distribution companies as well as banks and other services firms,

emerged as the leaders.

For Turkey, the years 1963 to 1977 represented what Albert Hirschman has called the easy

stage of ISI.xxv The opportunities provided by a large and protected domestic market were

exploited, but ISI did not extend to the technologically more difficult stage of capital goods

industries. Export orientation of the manufacturing industry also remained weak. Turkey obtained

the foreign exchange necessary for the expansion of production from traditional agricultural

exports and remittances from workers in Europe. The ISI policies were successful bringing about

economic growth, especially in their early stages. GNP per capita increased at the average annual

rate of 4.3 percent during 1963-1977 and at 3.5 percent per annum including the crisis years of

1978-79. Rate of growth of manufacturing industry was considerably higher, averaging more

than 10 percent per annum for 1963-1977. xxvi (Also see Table 1 and Graph 2)

The role played by the domestic market during this period deserves further attention. Despite

the apparent inequalities in income, large segments of the population, including civil servants,

workers, and to a lesser extent, agricultural producers, were incorporated into the domestic

market for consumer durables. Perhaps most importantly, real wages almost doubled during this

period. Behind this exceptional rise lay both market forces and political and institutional changes.

While industrial growth increased the demand for labor, the emigration of more than one million

workers to Europe by 1975 kept conditions relatively tight in the urban labor markets. At the

same time, the institutional rights they obtained under the 1961 Constitution supported the labor

unions at the bargaining table. Large industrial firms, which were not under pressure to compete

in the export markets, accepted wage increases more easily since higher wages served to

broaden the demand for their own products. By the middle of the 1970's, however, industrialists

had begun to complain about the high level of wages and an emerging labor aristocracy.xxvii

While industry and government policy remained focused on a large and attractive domestic

market, they all but ignored exports of manufactures, and this proved to be the Achilles' heel of

Turkey’s ISI. The export sector’s share in GDP averaged less than 4 percent during the 1970s,

and about two thirds of these revenues came from the traditional export crops. (Graph 3) A shift

towards exports would have increased the efficiency and competitiveness of the existing

industrial structure, acquired the foreign exchange necessary for an expanding economy and

even supported the import substitution process itself in establishing the backward linkages

towards the technologically more complicated intermediate and capital goods industries.

There existed an opportunity for export promotion in the early 1970's, especially in the

aftermath of the relatively successful devaluation of 1970. By that time, Turkish industry had

acquired sufficient experience to be able to compete or learn to compete in the international

16

markets. For that major shift to occur, however, a new orientation in government policy and the

institutional environment was necessary. The overvaluation of the domestic currency and many

other biases against exports needed to be eliminated. Instead, the successes obtained within a

protected environment created vested interests for the continuation of the same model. Most of

the industrialists as well as organized labour, which feared that export orientation would put

downward pressure on wages, favored the domestic market oriented model. Moreover, political

conditions became increasingly unstable during the 1970’s. The country was governed by a

series of fragile coalitions with short time horizons. As a result, the government made no attempt

to shift towards export oriented policies or even adjust the macroeconomic balances after the

first oil shock of 1973. xxviii

The Crisis of ISI

The short-lived coalitions chose to continue with expansionist policies at a time when many

industrialized countries were taking painful steps to adjust their economies. Turkey’s existing

policies could be sustained only by a very costly external borrowing schemes. In less than two

years it became clear that the government was in no position to honor the outstanding external

debt stock, which had spiralled from 9 percent to 24 percent of GDP.xxix By the end of the decade

Turkey was in the midst of its most severe balance of payments crisis of the postwar period. As

rising budget deficits were met with monetary expansion, inflation jumped to 90 percent in 1979.

The second round of oil price increases only compounded the difficulties. With oil increasingly

scarce, frequent power cuts hurt industrial output as well as daily life. Shortages of even the most

basic items became widespread, arising from both the declining capacity to import and the price

controls. The economic crisis, coupled with the continuing political turmoil, brought the country to

the brink of civil war. xxx

Perhaps the basic lesson to be drawn from the Turkish experience is that an ISI regime

becomes difficult to dislodge owing to the power of vested interest groups who continue to benefit

from the existing system of protection and subsidies. To shift towards export promotion in a

country with a large domestic market required a strong government with a long term horizon and

considerable autonomy. These were exactly the features lacking in the Turkish political scene

during the 1970s. As a result, economic imbalances and costs of adjustment increased

substantially. It then took a crisis of major proportions to move the economy towards greater

external orientation.

III.3. The Globalization Era since 1980

Against the background of a severe foreign exchange crisis and strained relations with the IMF

and international banks, the newly installed minority government of Süleyman Demirel

announced a comprehensive and unexpectedly radical policy package of stabilization and

liberalization in January 1980. Turgut Özal, a former chief of the State Planning Organization, was

17

to oversee the implementation of the new package. The Demirel government was unable to gain

the political support necessary for the successful implementation of the package, but the military

regime that came to power later that year endorsed the new program and made a point of

keeping Özal in the government, as Deputy Prime Minister responsible for Economic Affairs.

The aims of the new policies were to improve the balance of payments and reduce the rate of

inflation in the short term, and to create a market-based, export-oriented economy in the longer

term. The policy package included a major devaluation followed by continued depreciation of the

currency in line with the rate of inflation, greater liberalization of trade and payments regimes,

elimination of price controls, freeing of interest rates, elimination of many government subsidies,

substantial price increases for the products of the state economic enterprises, subsidies and

other support measures for exports and promotion of foreign capital. Reducing real wages and

the incomes of agricultural producers were important parts of the new policies.xxxi

With the shift to a restricted parliamentary regime in 1983, Özal was elected prime minister as

the leader of the Motherland Party. He soon launched a new wave of liberalization of trade and

payments regimes. These measures began to open up the ISI structures to competition. However,

frequent revisions in the liberalization lists, the arbitrary manner in which they were made, and

the favors provided to groups close to the government created a good deal of uncertainty

regarding the stability and durability of these changes. The response of the private sector to

import liberalization was mixed. While export oriented groups and sectors supported it, the ISI

industries, especially the large scale conglomerates whose products included consumer durables

and automotives, continued to lobby for protection. xxxii

From the very beginning, the program of January 1980 benefited from the close cooperation

and goodwill of the international agencies such as the IMF and the World Bank, as well as the

international banks. For most of the decade these agencies portrayed Turkey as a shining

example of the validity of the orthodox stabilization and structural adjustment programs. In

economic terms, this support translated into better terms in the rescheduling of the external debt

and substantial amounts of new resource inflows. As a result, the foreign exchange constraint

disappeared very quickly and the public sector had less need for inflationary finance at home.

These were undoubtedly indispensable ingredients for the success of the program.xxxiii

One area of success for the new policies was in export growth. Turkey's merchandise exports

sharply rose from a mere 2.6 percent of GDP in the crisis year of 1979 to 8.6 percent of the GDP

in 1990. (Graph 3) Turkey in fact ranked first amongst all countries in rate of export growth

during this decade. Equally dramatic was the role of manufactures, which accounted for

approximately 80 percent of this increase. Among the exports, textiles, clothing and iron and steel

products dominated the market. It is thus clear that the success in export growth was achieved by

reorienting the existing capacity of ISI industries towards external markets. In addition to a steady

18

policy of exchange rate depreciation, the exporters were supported by generous credits at

preferential rates, tax rebates and foreign exchange allocation schemes during this drive.

The impact of the new policies on the rest of the economy was mixed, however. Most

importantly, the new policies did not generate the high levels of private investment necessary for

long term growth. In the manufacturing industry, high interest rates and political instability were

the most important impediments. Even in the area of exports, new investment was conspicuously

absent; most of the increase was achieved with the existing industrial capacity. The response of

foreign capital to the new policies was not very strong either, apparently for reasons similar to

those of domestic capital. xxxiv As a result, the growth performance of the economy was modest.

GNP increased at the annual rate of 4.6 percent and GNP per capita increased at 2.3 percent

during the 1980's. (Table 1 and Graph 2) Moreover, these were obtained at the cost of

accumulating a large external debt, which climbed more than fivefold from less than 10 billion

dollars in 1980 to more than 50 billion dollars in 1990.

Another important area where the record of the new policies was bitterly contested was income

distribution. From the very beginning, the January 1980 package set out to repress labor and

agricultural incomes, and these policies were maintained until 1987 thanks to the military regime

and the limited nature of the transition to multi-party politics. Real wages declined by as much as

34 percent and the intersectoral terms of trade turned against agriculture by more than 40

percent until 1987, although some of this deterioration had occurred during the crisis years of

1978 and 1979.

The agricultural sector, which continued to provide employment to about half of the labor force,

was all but ignored by the military regime and the Motherland Party. The most important change

for the sector was the virtual elimination of subsidies and price support programs after 1980,

which combined with trends in the international markets to create a sharp deterioration in the

sectoral terms of trade. As a result, the agricultural sector showed the lowest rates of output

increase during the post-war era, averaging only 1 percent per year since 1980. Agricultural

output has thus failed to keep pace with population growth for the first time in the twentieth

century.

Turgut Özal was a critical figure in Turkey’s transition to a neo-liberal development model in the

1980s. There can be no question that his bold initiatives helped accelerate the opening and

market orientation of the economy. His legacy is not wholly positive, however. Özal preferred to

govern by personal decisions and decrees and tended to underestimate the importance of rule of

law and a strong legal infrastructure for the effective operation of a market economy. His rather

relaxed attitude towards the rule of law had devastating long-term consequences. The significant

rise in corruption in Turkey during the 1990s should be considered a direct legacy of the Özal

era.xxxv

19

With the transition to a more open, competitive electoral regime, the opposition began to

criticize the deterioration of income distribution and the arbitrary manner in which Özal often

implemented his policies. In response, the government increasingly resorted to old-style populism

and lost its room for maneuver. Public sector wages, salaries and agricultural incomes were

sharply increased. Real wages almost doubled from their decade-low point in 1987 until 1990.

These, in turn, sharply increased the deficits and borrowing requirements of the public sector. xxxvi

A Decade to Forget

The globalization process offered opportunities as well as vulnerabilities to developing

countries. In the case of Turkey, political instability and large public sector deficits that lasted

until 2002 made it increasingly costly to participate in the new environment. In 1989, as the

macroeconomic balances began deteriorate, Özal decided to fully liberalize the capital account

and eliminate the obstacles in the way of international capital flows . He made this shift at least in

part to attract short-term capital inflows, or hot money, to help finance the deficits. In the longer

term, however, the decision to liberalize the capital account before achieving macroeconomic

stability and creating a strong regulatory infrastructure for the financial sector was very costly. As

the economy became increasingly vulnerable to external shocks and sudden outflows of capital,

the 1990s turned into the most difficult period in the post-World War II era.

Public sector deficits continued to widen in the 1990s, with programs directed towards various

segments of the electorate, cheap credit to small businesses, lower retirement age and more

generous retirement benefits and most importantly, high support prices for the agricultural

producers. The war against the Kurdish separatist PKK in southeastern Turkey, which lasted from

1984 until 1999, also imposed a large fiscal burden. Domestic and external borrowing was the

most important mechanism for financing the growing deficits. High interest rates and a pegged

exchange rate regime attracted large amounts of short-term capital inflows. Private banks rushed

to borrow from abroad in order to lend to the government. In addition, large public sector banks

were directed by the governments to finance part of these outlays. Last but not least, monetary

expansion was used as a regular instrument for fiscal revenue.

Along the way, the structural reforms that would have increased the resilience of the economy

to internal and external shocks were pushed aside. Virtually no progress was made in the

privatization of the state economic enterprises. Attempts to sell large state enterprises were often

accompanied by scandals involving leading politicians. The privatization of some of the smaller

public sector banks resulted in very large losses for the state sector as these banks were stripped

of their assets by the well-connected buyers, and the full guarantees on bank deposits made the

public sector responsible for their large losses. Not surprisingly, inflows of foreign direct

investment remained limited.

20

The result was a period of very high inflation, which peaked at more than 100 percent in 1994

and remained above 50 percent per annum through 2001, very high nominal and real interest

rates, steady increases in public debt and increasing vulnerability to external shocks which led to

crises in 1991, 1994, 1998 and 2000-1, the last of which was the most severe. GDP per capita

continued to rise as a long term trend but at a pace lower than the earlier era. (Graph 2) High

inflation and high interest rates made income distribution increasingly unequal, especially in the

urban sector. One significant achievement of the period obtained at some political and economic

cost was the customs union agreement with the European Union that began in 1996.1

By the end of 1999 it was clear that the macroeconomic balances were not sustainable.

Negotiations with the IMF led to a new stabilization program with a pegged exchange rate regime

as the key anchor to bring down inflation. This program was deeply flawed in design, however, as

it ignored significant problems in the financial sector, especially the large deficits of the public

sector banks, which had been used for financing part of the budget deficits. After some initial

successes, the program disintegrated into a full blown banking and financial crisis in 2001. In the

face of massive capital outflows, the government was forced to suspend the program and accept

a dramatic depreciation of the lira. (To the Editor: Please add FN here: Öniş and Aysan,

“Neoliberal globalization”.

In early 2001, the Turkish government invited Kemal Derviş to leave the World Bank and take

up the job of Economy Minister. With IMF support, his team developed a program based around

fiscal discipline and large budget surpluses. The program adopted a floating exchange rate

regime and converted the outstanding liabilities of the public sector banks to long-term public

debt. It also featured some long-term structural reforms, including measures to reform the

vulnerable financial system, and a series of laws that attempted to insulate public sector banks

and state economic enterprises from the interference of politicians and strengthen the

independence of the central bank.

The economy has staged a remarkable recovery since. After declining by 9.5 percent in 2001,

real GDP increased by about 35 percent during the next four years. By the end of 2005, annual

inflation had declined to below 8 percent, a level not seen since the 1960’s. (Graph 2) Nominal

and real interest rates also declined sharply. The credit for this turnaround should begin with

Derviş and the initial program. The AKP government that came to power after the elections of

2002 should also be credited for maintaining fiscal discipline. The generally favorable

international environment, with low interest rates for developing countries, also helped. By 2005,

significant amounts of foreign direct investment had begun to flow into Turkey, and the

government was making some progress in the privatization of the state economic enterprises.

Thanks to economic growth and the large budget surpluses, the debt burden declined from above

21

100 percent of GDP in 2001 to less than 70 percent by 2005. This was mostly a jobless recovery,

however. Despite the substantial increases in output and incomes, unemployment in the urban

areas remained above 13 percent through 2005.

Anatolian tigers

One important outcome of economic liberalization after 1980 has been the increasing export

orientation of the economy. Exports rose from less than 3 billion dollars in 1980 to 70 billion

dollars, or 20 percent of GDP, by 2005. (Graph 3) Most of this increase occurred in textiles, steel,

automotives and other manufactures, whose share in total exports exceeded 90 percent in the

1990s. The rapid expansion of exports of manufactures played a key role in the rise of the

Anatolian tigers, regional industrial centers such as Gaziantep, Denizli, Kayseri, Malatya, Konya,

Çorum and others. With craft traditions and non-unionized workforces, these industrial centers

began to account for a significant share of growing exports in textiles and other labor intensive

industries. Their competitive advantage was bolstered by low wages, long working hours and

flexible labor regimes. Large numbers of small and medium sized family enterprises played a

central role in the rise of these industrial centers. Their rise was achieved with little state support

and little or no foreign investment.

Many of the entrepreneurs in these urban centers have embraced the new liberal discourse. As

latecomers to the private sector, they have been more likely to support an Islamist political party

and organize under an association of Islamic businessmen as a political counterweight to the

Istanbul-based elites. In fact, tensions between the entrepreneurs in the provinces and the

Istanbul region’s industrial elites go back to the 1960’s, when Necmettin Erbakan, the first

Islamist political leader in the post-World War II era, based his political rise on his election as

chairman of the national organization of chambers of commerce.xxxvii Erbakan, however,

appeared to favor various inward oriented industrialization schemes. In contrast, the industrialists

of the Anatolian tigers have been supporting the AKP government and its export oriented policies

in the most recent period.

Similarly, large segments of protected domestic industry had opposed closer ties with Europe in

the 1970’s. In contrast, both the Istanbul industrialists and the entrepreneurs of the Anatolian

tigers have supported European integration since the 1990’s. Turkey’s favorable experience with

export oriented industrialization and the discovery that the customs union, which began in 1996,

did not lead to the destruction of industry as some had feared, both contributed to the change of

attitude. After the acceleration of democratic reforms by the new, AKP-led parliament, the

European Union decided in 2004 to begin membership negotiations with Turkey. It is not clear

when or if Turkey will become a full member of the European Union. Nonetheless, the

membership process is likely to accelerate institutional changes and create a stronger

institutional framework for economic change.

22

IV.1 Agriculture and Structural Change

In the first half of the twentieth century, agriculture accounted for more than 80 percent of

employment and more than half of the GDP in Turkey. Although these shares now stand at 35

percent and 10 percent, respectively, it is clear that any analysis of long-term structural change,

economic growth and income distribution in Turkey needs to examine agriculture closely. (Graph 1)

Total population of Turkey has increased more than fourfold since 1914. Agricultural output

has kept pace, increasing more than fivefold during the same period. xxxviii As a result, Turkey

continues to be mostly self-sufficient in food and agricultural goods today. Agricultural output

declined by as much as 50 percent during the decade of wars after 1914, but began to recover in

the 1920s. Increases in land and labor productivity were modest during this period, but

population and total output began to exceed pre-World War I levels by the middle of the 1930s.

Agricultural output began to increase more rapidly after World War II at about 3 percent per

annum until 1980. This higher rate of growth was supported by rapid increases in the amount of

land under cultivation. Thanks to the availability of land, the total area under cultivation more

than doubled during the decade after World War II. After the land frontier was reached, a shift

occurred towards more intensive agriculture in the 1960s. In this new phase, output rose more

slowly but yields and land productivity increased more rapidly with the use of new inputs,

agricultural machinery and equipment, fertilizers, irrigation and high yielding varieties of seeds.

Total output and land productivity growth have slowed down to 1 percent per annum since 1980,

but labor productivity growth has accelerated due to the more rapid labor movement away from

agriculture in recent years.

In part because of the availability of land and in part due to government policies dating back to

the nineteenth century, small to medium-sized enterprises have dominated agriculture in Turkey,

except in the Kurdish southeast and in a number of fertile valleys opened to cultivation only in the

nineteenth century, such as Çukurova and Söke.xxxix This pattern has encouraged politicians to

use government programs as an electoral instrument since the 1950s. With the manipulation of

the intersectoral terms of trade in favor of agriculture, the incorporation of the rural population

into the national market accelerated. Villages became important markets for textiles, food

industries and gradually, for consumer durables, as well as agricultural machinery and

equipment. In recent decades, non-agricultural activities including tourism and some

manufacturing have begun to expand in the rural areas.

The large and expensive irrigation project on the Euphrates Valley in Southeastern Anatolia

stands apart from all other rural development schemes since World War II. It originally envisaged

the building of a number of interrelated dams and hydro electrical plants on the Euphrates river in

order to irrigate 1.6 million hectares in the plain of Harran, which would double the irrigated area

23

under cultivation in the country. The project has since evolved into an integrated regional

development program seeking to improve the social and economic fabric of a large and poor

region of the country. Now one of world’s largest and most ambitious regional developments

projects, it includes large investments in a wide range of development-related sectors such as

agriculture, energy, transportation, urban and rural infrastructure. However, until recently the

project has been designed and implemented with a developmentalism-from-above approach, and

without sufficient understanding or concern for the needs of the local population. The absence of

a shared vision between the planners and the intended beneficiaries, namely the local Kurdish

communities, has seriously limited the benefits of the project.xl

Despite the large and persistent productivity and income differences between agriculture and

the rest of the economy, the strength of small and medium-sized land ownership has slowed

down the movement of labor to the rest of the economy. The dominance of small and medium-

sized family enterprises in the rural areas was a legacy of the Ottoman era. After World War II, it

combined with another Ottoman legacy, state ownership of land, to moderate urban inequalities

during decades of rapid urbanization. Many of the newly arriving immigrants were able to use

their savings from rural areas to build low cost residential housing (gecekondu) on state lands in

the urban areas. They soon acquired ownership of these plots.

Large productivity and income differences between agriculture and the urban economy has

been an important feature of the Turkish economy since the 1920s. Most of the labor force in

agriculture are self-employed today in the more than 3 million family farms, including a large

proportion of the poorest people in the country. The persistence of this pattern has not been due

to the low productivity of agriculture alone, however. If the urban sector had been able to grow at

a more rapid pace, more labor would have left the countryside during the last half century. Equally

importantly, governments have offered very limited amounts of schooling to the rural population

in the past. Average amounts of schooling of the total labor force (ages 15-64) increased from

only 1 year in 1950 to about 7 years in 2005. However, average years of schooling of the rural

labor force today are still below 3 years.xli In other words, most of the rural labor force today

consists of undereducated men and women, for whom the urban sector offers limited

opportunities. The pace with which rural poverty and population will diminish in the decades

ahead will depend on the degree to which the countryside experiences institutional changes and

receives greater amounts of education and capital.

IV.2. Income Distribution

Data on income distribution in Turkey have not been not sufficiently detailed and do not easily

allow long-term comparisons. In what follows, I will attempt such comparisons by employing

simple indicators for which long-term series are available. I will examine changes in income

distribution in twentieth century Turkey in three basic components: a) distribution within

24

agriculture, b) agriculture-non-agriculture or rural-urban differences and c) distribution within the

non-agricultural or the urban sector. The relative weights of these three components have clearly

changed over time. Until the 1950s, the first two components were more important. With

urbanization after 1950, the second component and, especially since 1980, the third component

began to dominate country-wide debates and issues and debates of income distribution.xlii

Within the agricultural sector, the evidence on land ownership and land use points a relatively

equal distribution of land, dominated by small and medium sized holdings in most regions.

Despite the limitations of available data, it appears that the Gini coefficients for land distribution

and land use have changed little since the 1950s.xliii Moreover, distribution within the agricultural

sector has been more equal than both the differences between the agricultural and urban sectors

and the distribution within the urban sector.

Evidence for agriculture-non-agriculture differences in average incomes can be obtained from

the national income accounts. These indicate that intersectoral differences were largest in the

interwar period, especially due to the sharply lower agricultural prices during the Great

Depression. The intersectoral differences in average incomes declined in the post-World War II

period, in part because of government policies, but they increased again after 1980. The

acceleration of urbanization and the rapid decline of the agricultural labor force in recent years

have helped raise average incomes in agriculture. (Graph 4)

In the absence of other suitable series for long-term comparisons of income distribution within

the urban sector, I will focus on the share of labor in per capita income. More specifically, I will

follow the index of urban wages divided by output per person in the urban labor force. This ratio

was quite low in the interwar period, because of the low levels of urban wages in relation to urban

output per capita. This suggests a rather unequal distribution of income within the urban sector

until World War II. Share of wages in urban income rose steadily after World War II, however.

Together with the decline in intersectoral differences in average incomes, this pattern indicates

that the post-World War II era until 1980 had a more equal or balanced distribution of income

than other period in twentieth century. (Graph 4) In the globalization era since 1980,

intersectoral differences in per capita incomes rose sharply, but they are declining in recent years

with the rapid contraction of the agricultural labor force. It is clear, however, that the country-wide

pattern in income distribution is now dominated by changes inside the urban sector. Disparities

within the urban sector between labor and non-labor incomes and also between skilled and

unskilled labor incomes have increased since 1980.

It is also interesting that for most of the twentieth century, the second and third components of

the country-wide income distribution, namely intersectoral differences in average incomes and

the distribution of income within the urban sector, have moved together. As the value of these

two indices increased, income distribution tended to get more equal and vice versa (Graph 4).

25

This pattern suggests that governments were able to influence both components of the income

distribution, especially during periods of multi-party electoral politics.

Large regional inequalities are a fourth dimension of income distribution, which especially need

to be taken into account in the case of Turkey. Throughout the twentieth century, large west-east

differences in average incomes have persisted. Until recently, the private sector-led

industrialization process was concentrated in the western third of the country. The

commercialization of agriculture had also proceeded further in the western and coastal areas. In

addition to lower incomes, the eastern third of the country has also been lacking in infrastructure

and services provided by the government, especially for education and health. The development

of tourism in the west, the deterioration of the terms of trade against agriculture, and the rise of

Kurdish insurgency in the southeast during the 1980s further increased the large regional

disparities, adding to the pressures for rural-to-urban as well as east-to-west migration. Future

progress on the Southeast Anatolia Project and the rise of the regional industrial centers may

help reduce these disparities. However, economic development in that part of the country hinges,

above all, on a political resolution of the Kurdish question. xliv

Large east-west differences in average incomes have been accompanied by large and

persistent regional inequalities in human development indicators since the 1920s. The latest

country report for Turkey prepared by United Nations Human Development Program for the year

2002 indicates, for example, that the top 10 (out of 80) high income, western and northwestern

provinces in the country, including Istanbul, had an average HDI equal to 0,825, which was close

to the HDI for East-Central European countries such as Croatia or Slovakia. On the other hand, the

poorest 10 provinces in the mostly Kurdish southeastern part of the country had an average HDI

of 0,600, which was comparable to the HDI of Morocco or India in the same year.xlv

V- Concluding Remarks

Trying to understand Turkey’s economic record in the twentieth century, I began with a

distinction between the proximate and the ultimate sources of economic growth. The former

relates to the contributions made by the increases in factor inputs and productivity. The latter

refers to aspects of the social and economic environment in which growth occurs. In this context,

economic institutions are increasingly seen as the key to the explanation not only of economic

growth and long-term differences in per capita GDP, but also the question of how the total pie is

divided amongst different groups in society. I have emphasized that because there is generally a

conflict of interest over the choice of economic institutions, political economy and political

institutions are key determinants of economic institutions and the direction of institutional

change.

26

Turkey’s transition from a rural and agricultural towards an urban and industrial economy in the

twentieth century occurred in three waves, each of which served to increase the economic and

political power of urban and industrial groups. Increases in the economic and political power of

these groups, on the whole, enabled them to shape economic institutions more in the direction

they desired. Each of these waves of industrialization and economic growth, however, was cut

short by the shortcomings or deficiencies of the institutional environment. The first of these

waves occurred during the 1930s. After a series of legal and institutional changes undertaken by

the new republic, a small number of state enterprises led the industrialization process and the

small scale private enterprises in a strongly protected economy. Etatism promoted the state as

the leading producer and investor in the urban sector. Ultimately, however, political and economic

power remained with the state elites and these economic and institutional changes remained

confined to the small urban sector.

The pace of economic growth was distinctly higher around the world in the decades after World

War II. Turkey’s second wave of industrialization began in the 1960s, again under heavy

protection and with government subsidies and tax breaks. Rapid urbanization steadily expanded

the industrial base. The state economic enterprises continued to play an important role as

suppliers of intermediate goods. The new leaders, however, were the large scale industrialists

and the holding companies in Istanbul and the northwestern corner of the country. With the rise

of political and macroeconomic instability in the 1970s, industrialization turned increasingly

inward and short-term interests of narrow groups prevailed over a long-term vision, culminating in

a severe crisis at the end of the decade.

A third wave that began in the 1980s under conditions of a more open, export oriented

economy widened the industrial base further to the regional centers of Anatolia. The rapid

expansion of exports of manufactures played a key role in the rise of these new industrial centers,

which began to challenge the Istanbul-based industrialists. Once again, however, rising political

and macroeconomic instability, growing corruption and the deterioration of the institutional

environment in the 1990s brought this wave to a sharp halt in 2001.

Ever since the Young Turk era, governments in Turkey have supported the emergence and

growth of an industrial bourgeoisie. Helped by the growth of the urban sector and successive

waves of industrialization, this bourgeoisie has been gradually wresting control of the economy

away from the state elites in Ankara.xlvi For most of the twentieth century the country’s industrial

elites had remained limited to those of the Istanbul region. With the rise of the Anatolian tigers,

the economic base of the bourgeoisie has been expanding socially and geographically. The AKP

government of the recent years has been supported by these emerging elites in the provinces.

The political and economic power of the workers, as well as their share in the total pie, was on

the rise after World War II, especially during the ISI era after 1960. In the most recent era of

27

globalization, however, economic and institutional changes have combined to reduce the power

of the workers and trade unions. Similarly, agricultural producers enjoyed a sharp increase in

influence, if not power, with the shift to a multi-party political regime in the 1950s. Their influence

and their ability to shape economic institutions have been declining gradually but steadily,

however, with the decline in the share of agriculture in both the labor force and total output.

While economic power has clearly shifted from Ankara to Istanbul and more recently towards

industrial groups in the provinces, the shift in political power and the move towards more pluralist

politics have been far from easy or simple. Too often during the last half century, Turkey’s political

system has produced fragile coalitions and weak governments which have sought to satisfy the

short term demands of various groups by resorting to budget deficits, borrowing and inflationary

finance. The political and macroeconomic instability also led to the deterioration of the

institutional environment. Rule of law and property rights suffered, and public investment

including expenditures on education declined sharply. The weak governments have been too

open to pressures from different groups or even individual firms or entrepreneurs seeking favors.

As a result, the pursuit of favors or privileges from local and national governments has been a

more popular activity for the producers than the pursuit of productivity improvements or

competition in international markets.

The crisis of 2001 ushered in significant institutional changes, especially in the linkages

between politics and the economy, with new attempts to insulate the latter from short term

interventions in the political sphere. It remains to be seen, however, whether these institutional

changes will be effective and durable or whether politics and the institutional environment will

regress to their earlier ways. For most of the last century, Turkey has been considered to have a

high economic potential. Similarly, it remains to be seen whether Turkey will remain a country

with high economic potential, or whether more of this potential will be realized. It is precisely at

this juncture that Turkey’s integration to the European Union assumes critical importance. It is not

clear when and if Turkey will become a full member of the European Union. Nonetheless, the

membership process is likely to create a stronger institutional framework for economic change.

For the economy, the key contribution of the goal of membership will be the strengthening of the

political will to proceed with the institutional changes that may raise the water level in the glass

and carry Turkey’s economy to a new level.

28

R E F E R E N C E S Daron Acemoglu, Simon Johnson and James A. Robinson, “Institutions as a Fundamental Cause of Long-Run Growth”, in P. Aghion and S. N. Durlauf (eds.), Handbook of Economic Growth, Elsevier, 2005, 385-471. Ayhan Aktar, "Varlık Vergisi Nasıl Uygulandı ?", Toplum ve Bilim, No. 71, 97-147. Tosun Aricanli and Dani Rodrik, "An Overview of Turkey's Experience with Economic Liberalization and Structural Adjustment", World Development , 18, 1343-1350, 1990. C. Emre Alper and Ziya Öniş, “Financial Globalization, the Democratic Deficit and Recurrent Crises in Emerging Markets”, Emerging Markets Finance and Trade, 30, 2003, 5-26. Sumru Altug and Alpay Filiztekin, “Productivity and Growth, 1923-2003” in S. Altug and A. Filiztekin (eds.), The Turkish Economy: The Real Economy, Corporate Governance and Reform, Routledge Curzon Studies in Middle Eastern Economics, 2005. Sencer Ayata, “Bir Yerel Sanayi Odağı olarak Gaziantep’te Girişimcilik, Sanayi Kültürü ve Ekonomik Dünya ile İlişkiler”, in S. İlkin, O. Silier, M. Güvenç (eds.), İlhan Tekeli için Armağan Yazılar, Tarih Vakfi, Istanbul, 2005, 559-590. Henry J. Barkey, The State and the Industrialization Crisis in Turkey, Westview Press, Boulder, Colorado, 1990. Behar, Cem (1995), The Population of the Ottoman Empire and Turkey, 1500-1927, State Institute of Statistics, Ankara. Boratav, Korkut, "Kemalist Economic Policies and Etatism" in A. Kazancıgil and E. Özbudun (eds.), Atatürk : Founder of a Modern State , C. Hurst, London,1981, 165-90. Korkut Boratav, Türkiye Iktisat Tarihi, 1908-2002, Seventh Edition, Ankara, 2003. Korkut Boratav,"Inter-class and intra-class relations of distribution under structural adjustment : Turkey during the 1980s", in Tosun Aricanli and Dani Rodrik (eds.), The Political Economy of Turkey : Debt, Adjustment and Sustainability, Macmillan, London, 1990. Korkut Boratav, Oktar Türel and Erinç Yeldan, "Dilemnas of Structural Adjustment and Environmental Policies under Instability: Post-1980 Turkey”, World Development, 24, 1996, xx. Ayşe Buğra, State and Business in Modern Turkey: A Comparative Study, SUNY Press, Albany, 1994 Ayşe Buğra, “Class, Culture and State, An Analysis of Interest Representations by two Turkish Business Associations”, International Journal of Middle East Studies, 30, 1998, 521-39. Tuncer Bulutay, Yahya S. Tezel and Nuri Yildirim, Türkiye Milli Geliri, 1923-1948, 2 volumes, University of Ankara Publications, Ankara, 1974. Merih Celasun, "Income Distribution and Domestic Terms of Trade in Turkey, 1978-1983", Middle East Technical University Studies in Development , Vol. 13, pp. 193-216, 1986. Merih Celasun and Dani Rodrik, "Debt, Adjustment and Growth: Turkey", in Jeffrey D. Sachs and Susan Collins (eds.), Developing Country Debt and Economic Performance, Vol. 3, 617-808, University of Chicago Press, 1989. N. F. R. Crafts, “The Human Development Index and changes in standards of living: Some historical comparisons”, European Review of Economic History, Vol. 1, 1997, 299-322. N. F. R. Crafts, “The Human Development Index, 1870-1999: Some revised estimates”, European Review of Economic History, Vol. 6, 2002, 395-405.

29

Ali Çarkoglu and Mine Eder, “Development alla Turca: The Southeastern Anatolia Development Project (GAP)” in F. Adaman and M. Arsel (eds.), Environmentalism in Turkey, Between Democracy and Development, Ashgate Publishers, Aldershot, 2005, 167-184. Kemal Dervis and Sherman Robinson, "The Structure of Income Inequality in Turkey in Turkey, 1950-1973", in E. Özbudun and A. Ulusan (eds.), The Political Economy of Income Distribution in Turkey, Holmes and Meier, New York, 1980 . Diaz-Alejandro, Carlos (1984), "Latin America in the 1930s", in R. Thorp (ed.), Latin America in the 1930s, The Role of the Periphery in the World Crisis, London, Macmillan, 17-49. Vedat Eldem, Osmanli Imparatorlugu'nun Iktisadi Şartlari Hakkinda Bir Tetkik , İş Bankasi Publications, Istanbul, 1970. Bent Hansen, Egypt and Turkey : The Political Economy of Poverty, Equity and Growth, published for the World Bank by Oxford University Press, Oxford and New York, 1991. Tevfik Güran, Agricultural Statistics of Turkey during the Ottoman Period, State Institute of Statistics, Ankara, 1997. Elhanan Helpman, The Mystery of Economic Growth, Harvard University Press, cambridge, Mass., 2004. Albert O. Hirschman, "The Political Economy of Import-Substituting Industrialization in Latin America", Quarterly Journal of Economics, Vol. 82, pp. 1-26. Reşat Kasaba, “Populism and Democracy in Turkey, 1946-1961”, in E. Goldberg, R. Kasaba and J.S. Migdal (eds.), Rules and Rights in the Middle East, Democracy, Law and Society, Seattle, University of Washington Press, 1993, 43-68. Gülten Kazgan, "Türk Ekonomisinde 1927-35 Depresyonu, Kapital Birikimi ve Örgütleşmeler" in Iktisadi ve Ticari Ilimler Akademisi Derneği, Atatürk Döneminin Ekonomik ve Toplumsal Sorunları , Istanbul, 1977, 231-74. Çağlar Keyder, State and Class in Turkey , A Study in Capitalist Development, Verso, London and New York, 1987. Angus Maddison, Two Crises, Latin America and Asia : 1929-38 and 1973-83, OECD Development Centre Studies, Paris, 1985. Angus Maddison, The World Economy, A Millenial Perspective, OECD Development Studies Centre, Paris, 2001. Angus Maddison, The World Economy: Historical Statistics, OECD Development Studies Centre, Paris, 2003. Şerif Mardin, "Turkey: The Transformation of an Economic Code", in E. Özbudun and A. Ulusan (eds.), The Political Economy of Income Distribution in Turkey, Holmes and Meier, New York, 1980, 23-53. Justin McCarthy, Muslims and Minorities, The Population of Ottoman Anatolia and the End of the Empire , New York University Press. New York and London, 1983. Vedat Milor, “The Genesis of Planning in Turkey, New Perspectives on Turkey, 4, 1990, 1-30. Ziya Öniş, “Turgut Özal and his Economic Legacy: Turkish Neo-Liberalism in Critical Perspective”, Middle Eastern Studies, 40, 2004, 113-34. Ziya Öniş and Ahmet Faruk Aysan,, “Neoliberal globalisation, the nation state and financial crises in the semi-periphery: a comparative analysis”, Third World Quarterly, 21, 2000, 119-139.

30

Ziya Önis and Steven B. Webb, "Democratization and Adjustment from Above", in Stephan Haggard and Steven B. Webb (eds.), Voting for Reform : Democracy, Political Liberalization and Economic Adjustment, Oxford University Press, 1994, 128-84. Işık Özel and Şevket Pamuk "Osmanlı'dan Cumhuriyet'e Kişi Başına Üretim ve Milli Gelir, 1907-1950", Mustafa Sönmez (ed.), 75 Yılda Paranın Serüveni, Tarih Vakfı Yayınları, Istanbul, 1998, 83-90. Şevket Pamuk, "Intervention during the Great Depression, Another Look at Turkish Experience", in Ş. Pamuk and Jeffrey Williamson (eds.), The Mediterranean Response to Globalization Before 1850, Routledge Press, London and New York, 2000, 321-339. Şevket Pamuk, "War, State Economic Policies and Resistance by Agricultural Producers in Turkey, 1939-1945", in F. Kazemi and J. Waterbury (eds.), Peasants and Politics in the Modern Middle East, University Presses of Florida, 1991, 125-42. Şevket Pamuk, “Agricultural Output and Productivity Growth in Turkey since 1880”, in P. Lains and V. Pinilla (eds.), Agriculture and Economic Development in Europe since 1870, Routledge Press, 2007 (forthcoming). Şevket Pamuk, “20. Yüzyıl Türkiyesi için Büyüme ve Bölüşüm Endeksleri”, İktisat, İşletme ve Finans, Dergisi, 235, October 2005, 1-15. Şevket Pamuk, “Estimating Economic Growth in the Middle East since 1820”, The Journal of Economic History, 66, 2006, 809-28. Dani Rodrik, Arvind Subramanian and Francesco Trebbi, “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development”, Journal of Economic Growth, 9, 2004, 131-65. Şeref Saygili, Cengiz Cihan and Hasan Yurtoglu, “Productivity and Growth in OECD Countries: an Assessment of the Determinants of Productivity”, Yapi Kredi Economic Review, 12, 2001, 49-66. Shorter, Frederic C., "The Population of Turkey after the War of Independence", International Journal of Middle East Studies , 17, 1985, 417-41. İlkay Sunar, "Demokrat Parti ve Populism", in Cumhuriyet Dönemi Türkiye Ansiklopedisi, 8, 1984, 2076-86. Ilhan Tekeli and Selim Ilkin, 1929 Dünya Buhranında Türkiye'nin Iktisadi Politika Arayışları, Orta Doğu Teknik Üniversitesi, 1977, Ankara. Ilhan Tekeli and Selim Ilkin, Uygulamaya Geçerken Türkiye'de Devletçiliğin Oluşumu , Orta Doğu Teknik Üniversitesi, Ankara,1982. Tezel,Yahya S., Cumhuriyet Döneminin Iktisadi Tarihi (1923-1950), Second Edition, Yurt Yayınları, Ankara, 1986. Toprak, Zafer, Türkiye'de "Milli Iktisat", 1908-1918 , Yurt Yayınları, Ankara, 1982. Turkey, State Institute of Statistics, Statistical Indicators, 1923-2002, Ankara, 2003. Turkey, Devlet Planlama Teşkilati, “Türkiye Ekonomisinde Sermaye Birikimi, Büyüme ve Verimlilik, 1972-2000”, Publication Number 2665, Ankara, 2002. UNDP, Turkey 2004, Human Development Report, Ankara, 2004. John Waterbury, "Export Led Growth and the Center-Right Coalition in Turkey, Comparative Politics, Vol. 24, 1991, 127-45. Erik J. Zürcher, Turkey, A Modern History, I.B. Tauris, London, 1993.

31

i Based on The World Bank, World Development Report, and United Nations Development Programme, Human Development Report, recent years.

ii There is growing evidence that this generalization applies to Turkey as well: Saygili, Cihan and Yurtoglu, “Productivity and Growth”; Turkey, Devlet Planlama Teşkilati, “Türkiye Ekonomisinde”; Altug and Filiztekin, “Productivity and Growth”.

iii Acemoglu, Johnson and Robinson, “Institutions”; Rodrik, Subramanian and Trebbi, “Institutions Rule”, also Helpman, The Mystery.

iv Pamuk, “Estimating”.

v Based on Behar, Population, Shorter, Population, Eldem , Osmanli and McCarthy, Muslims.

vi Özel and Pamuk, “Osmanlidan Cumhuriyete”, based on a comparison of the Turkish agricultural statistics of the 1920s as summarized in Bulutay et. al., Türkiye Milli Geliri with the Ottoman agricultural statistics before World War I as given in Güran, Agricultural Statistics.

vii Mardin, “Turkey: The Transformation”.

viii Özel and Pamuk, “Osmanlıdan Cumhuriyete”.

ix Tekeli and Ilkin, 1929 Dünya Buhraninda, 75-92 and Tezel , Cumhuriyet Döneminin, 98-106.

x Tezel, Cumhuriyet Döneminin, 139-62.

xi Boratav, “Kemalist Economic Policies”, 172-89 ; Tezel, Cumhuriyet Döneminin, 197-285 ; Tekeli and Ilkin, Uygulamaya Geçerken .

xii Tezel, Cumhuriyet Döneminin , 233-37.

xiii Pamuk, “Intervention”, 332-34.

xiv Shorter,“Population of Turkey”.

xv Pamuk,“Intervention”, 334-37.

xvi Pamuk, “War, State Economic Policies” and Aktar, “Varlik Vergisi”.

xvii Özel and Pamuk, “Osmanlıdan Cumhuriyete”.

xviii Keyder, State and Class, 112-14; Boratav, Türkiye Iktisat Tarihi, 93-101.

xix State Institute of Statistics, Statistical Indicators.

xx Hansen, Egypt and Turkey, 338-44 and Keyder, State and Class in Turkey , 117-35.

xxi Sunar, "Demokrat Parti ve Populizm”.

xxii Zürcher, Turkey, A Modern History, 235 ; Keyder, State and Class , 135-40 ; and Kasaba, “Populism and Democracy”.

xxiii Milor, The Genesis of Planning”.

xxiv Hansen, Egypt and Turkey, 352-53; Barkey, The State and the Industrialization Crisis, chapter 4; Öniş and Riedel, Economic Crises and Long Term Growth, 99-100.

xxvxxv Hirschman, "The political economy".

32

xxvi State Institute of Statistics, Statistical Indicators; also Çeçen, Dogruel and Dogruel, "Economic Growth", 38-44.

xxvii Hansen, Egypt and Turkey, 360-78 ; State and Class, chap. 7 ; Barkey, The State and the Industrialization Crisis, chap. 5.

xxviii Barkey, The State and the Industrialization Crisis, 109-167.

xxix Celasun and Rodrik, “Debt, Adjustment and Growth”.

xxx Keyder, The State and Class, chapter 8.

xxxiAricanli and Rodrik, “An Overview ”.

xxxii Önis and Webb, Political Economy of Policy Reform, 33-38.

xxxiii Aricanli and Rodrik, “An Overview ”, 1348-50.

xxxiv Boratav, Türel and Yeldan, in World Development ; Aricanli and Rodrik, "An Overview", 1347-48.

xxxv Öniş, “ Turgut Özal”.

xxxvi Önis and Webb, Political Economy of Policy Reform,38-47; also Waterbury, Export-led growth".

xxxvii Ayata, “Gaziantep’te Girişimcilik”; Bugra,“Class, Culture and State”.

xxxviii These long term trends are taken from Pamuk, “Agricultural Output”.

xxxix Keyder, The State and Class, 177-40.

xl Çarkoglu and Eder, “Development alla Turca”.

xli My calculations based on State Institute of Statistics, Statistical Indicators data on school enrollment and graduation.

xlii This section is based on Pamuk, “20. Yüzyil Turkiyesi”.

xliii Hansen, Egypt and Turkey, pp. 275-80 and 495-501.

xliv Çarkoglu and Eder, “Development alla Turca”.

xlv UNDP, Turkey 2004.

xlvi Keyder, The State and Class and Bugra, State and Business.

Table 1 : Economic and Human Development Indicators for Turkey, 1913-20051913 1923 1950 1980 2005

Population (mill.) 17 13 21 45 72Share of urban pop (5000 inhab) in total pop (percent) 28 24 25 44 68Share of agriculture in the labor force (percent) 80 85 84 51 34Share of agriculture in GDP (percent) 55 42 54 26 11Share of industry in GDP (percent) 13 11 13 21 26

GDP per capita, PPP adj. in 1990 US dollars 1200 710 1620 4020 7500GDP per capita as percent of (W. Europe+US) 29 16 24 25 30GDP per capita as percent of developing countries 168 n.a. 188 219 225GDP per capita as percent of World 79 n.a. 77 89 117

Life expectancy at birth (years) 30 ? n.a. 47 62 69Adult Literacy (ages above 15 in percent) 10 n.a. 32 69 89

Annual Growth Rates (in percent) 1913-50 1923-50 1950-1980 1980-2005 1913-2005 1923-2005

Population 0.6 1.8 2.6 1.9 1.6 2.1GDP per capita 0.8 3.1 3.1 2.5 2.0 2.9

Total agricultural output 1.0 4.5 2.9 1.2 1.7 2.9Total industrial output 3.1 5.8 7.7 5.8 5.3 6.5

Notes: The inclusion of women working in the family farm in the labor force but the exclusion of urban women workingat home from the labor force tends to overstate the share of agriculture in Turkish employment statistics.Per capita GDP in constant US dollars is the basic indicator for examining long term increases in average incomes. These series are calculated with a purchasing power parity adjustment in order to take into account the fact that price levels tend to be lower and the same dollar income purchases more in lower income countries.Sources: For Turkish data except per capita GDP: State Institute of Statistics,Statistical Indicators, 1923-2002; for GDP per capita series: Maddison, The World Economy, 2001 and 2003; Eldem, Osmanlı, Özel and Pamuk, "Osmanlidan Cumhuriyete" and Pamuk, "Estimating".

Table 2: Changes in the Human Development Index, 1913-2003

Change in 1950-2003Country 1913 1950 1975 2003 as percent of possible

Western Europe 0.580 0.707 0.848 0.935 77.8North America 0.643 0.774 0.861 0.945 75.7Japan 0.466 0.676 0.851 0.943 82.4China n.a. 0.225 0.522 0.755 68.4India 0.143 0.247 0.406 0.602 47.1Africa n.a. 0.271 n.a. 0.549 38.1

Greece 0.625 0.800 0.912 76.5Russia 0.345 0.694 n.a. 0.795 33.0Bulgaria 0.403 0.607 n.a. 0.808 51.1Argentina 0.511 0.526 0.784 0.863 71.1Mexico 0.270 0.484 0.688 0.814 64.0Brazil 0.249 0.448 0.641 0.792 62.3South Korea n.a. 0.459 0.687 0.901 81.7Malaysia n.a. 0.407 0.614 0.796 65.6Thailand 0.388 0.603 0.757 0.778 44.1Indonesia n.a. 0.337 0.467 0.697 54.3Tunisia n.a. 0.303 0.512 0.753 64.6Iran n.a. 0.331 0.507 0.736 60.5Egypt n.a. 0.291 0.433 0.659 51.9Nigeria n.a. 0.194 0.326 0.453 32.1

Turkey 0.190 0.382 0.592 0.750 59.5

Notes: Regional or continental averages are weighted by the population of the individual countries. For definition of HDI, see the text. In the last column, the maximum possible improvement in HDI is 1-(HDI in 1950).Sources: Crafts (1997) and (2002) for 1913-1975 values except for Turkey in 1913 and United Nations Development Programme, Human Development Report 2005 for 2003 values.

Graph 1: Share of Agriculture in GDP and Labor Force in Turkey, 1910-2000

0

10

20

30

40

50

60

70

80

90

100

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Graph 2: GDP Per Capita as percent of (US+W.Europe), 1900-2000

0

10

20

30

40

50

60

70

80

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Turkey/(W.Eur+US) S. Europe 5 /(W.Eur+US) LA 8 / (W.EUR+US)

S. Korea / (W.Eur+US) Africa Middle East

Graph 3: Degree of Openness of Turkey's Economy, 1913-2005 (exports / GDP) and (imports / GDP), in percent

0

5

10

15

20

25

30

35

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

exports/GDP imports/GDP

Graph 4: Indices for Income Distribution in Turkey, 1923-2000

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1920 1930 1940 1950 1960 1970 1980 1990 2000

NON-AG'L Wages / NON-AG'L GDP per person

AG'L Value Added per cap/ NON-AG'L VA per cap

AUP Visiting Scholars Working Paper Series Calendar 2006 February 8, 2006 • James ANGRESANO Albertson College of Idaho Title: China's Development Strategy: A Game of Chess that Countered Orthodox Development Advice February 22, 2006 • Nada MORA American University of Beirut Title: The Effect of Bank Credit on Asset Prices: Evidence from the Japanese Real Estate Boom during the 1980s March 7, 2006 • Renato FLORES Fundação Getulio Vargas, Rio de Janeiro University of Antwerp Title: Integration Options for MERCOSUL-An Investigation using the AMIDA Model. March 14, 2006 • Emanuel KOHLSCHEEN University of Warwick Title: Why are there Serial Defaulters? Quasi-Experimental Evidence from Constitutions March 16, 2006 • Alicia GARCIA-HERRERO Banco de España Title: What Explains the Low Profitability of Chinese Banks? March 28, 2006 • Ricardo HAUSMANN Kennedy School of Government, Harvard University Title: Global Imbalances or Bad Accounting? The Missing Dark Matter in the Wealth of Nations April 5, 2006 • Agnes BENASSY-QUERE Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) University of Paris X-Nanterre

Title: ECB Governance an Enlarged Euro-zone

April 12, 2006 • Vincent TIBERJ CEVIPOF - Institut d’Etudes Politiques (Sciences Po.) Title: Antisemitism in an Ethnically Diverse France April 26, 2006 • Carlos ELIZONDO Ambassador of Mexico to the Organization of Economic Cooperation and Development (OECD) Title: Challenges and Opportunities of Mexico’s membership in the OECD May 2, 2006 • Pierre CAHUC Université Paris I CREST-INSEE Title: Civic Attitudes and the Design of Labor Market Institutions: Which Countries can Implement the Danish Flexicurity Model? May 4, 2006 • Lee ALSTON University of Colorado at Boulder Director, Program on Environment and Behavior Institute of Behavioral Science Research Associate, NBER Title: A Framework for Understanding the New Institutional Economics October 16, 2006 • Guillaume DAUDIN Edinburgh University OFCE, Sciences Po Chaire Finances Internationales, Sciences Po Title: A History of Distance November 21, 2006 • Christophe BERTOSSI French Institute of International Relations (Ifri)

Title: How does the French Republic deal with Ethno-Cultural and Religious Diversity? November 21, 2006 • Javier SANTISO United Kingdom Department for International Development (DFID)

Title: Parliaments and Budgeting: Understanding the Political Economy of the Budget in Latin America

December 5, 2006 • Michel WIEVIORKA École des Hautes Études en Sciences sociales (EHESS) Centre d'Analyse et d'Intervention Sociologique (CADIS)

Title: Racisme : Changements dans le Phénomène, Changements dans l'Analyse

Papers Presented in Academic Years 2003/2004/2005 November 24, 2003 • Juan J. CRUCES Universidad de San Andrés (Buenos Aires, Argentina) Title: The Term Structure of Country Risk and Valuation in Emerging Markets December 11, 2003 • Daniel COHEN Ecole Normale Supérieure, Paris OECD Development Centre Title: Why Are Poor Countries Poor? A Message of Hope which involves the resolution of the Becker/Lucas Paradox January 28, 2004 U • Martin GRANDES Département et Laboratoire d'Economie Théorique et Appliquée (DELTA) Ecole Normale Supérieure, Paris Ecole des Hautes Etudes en Sciences Sociales (EHESS) Title: Convergence and Divergence of Sovereign Bond Spreads: Theory and Facts from Latin America February 4, 2004 • Jérôme SGARD Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) Université de Paris-Dauphine Title: The International Financial Architecture & Sovereign Bankruptcies February 18, 2004 • Stephen HABER Stanford University Title: Related Lending and Economic Performance: Evidence from Mexico

February 19, 2004 • Federico STURZENEGGER Universidad Torcuato Di Tella (Buenos Aires, Argentina) Haute Ecole de Commerce, HEC (France) Title: Culture and Social Resistance to Reform: A Theory about the Endogeneity of Public Beliefs March 4, 2004 • Paul DE GRAUWE Catholic University of Leuven (Leuven, Belgium) Title: A Theory of Bubbles and Crashes March 17, 2004 • Pablo MARTIN ACENA Universidad de Alcala (Madrid, Spain) The American University of Paris Title: Spain in Conflict: The Financing of the Civil War, 1936-1939 March 25, 2004 • Thierry VERDIER Département et Laboratoire d'Economie Théorique et Appliquée (DELTA) Ecole Normale Supérieure, Paris Title: Globalization and the Empowerment of Talent April 14, 2004 • David GALENSON University of Chicago Title: A Portrait of the Artist as a Very Young or Very Old Innovator: Creativity at the Extremes of the Life Cycle April 22, 2004 • Michael BORDO Rutgers University Title: Good vs. Bad Deflation: Lessons from the Gold Standard Era April 23, 2004 - 16:30 • Javier SANTISO Banco Bilbao Vizcaya Argentaria, (BBVA, Spain) Chief Economist for Latin America Title: Wall Street and Emerging Democracies: Financial Markets and the Brazilian Elections

April 29, 2004 • Erik WRIGHT University of Wisconsin Title: Deepening Democracy September 23, 2004 • James GALBRAITH The University of Texas at Austin Title: Unemployment, Inequality and the Policy of Europe: 1984-2000 September 30, 2004 • Eric HERSHBERG Princeton University Title: Industrial Upgrading: Economies Seeking to Prosper under Conditions of Globalization October 13, 2004 • Felipe LARRAIN Catholic University of Chile Title: Short vs. Long Recessions October 28, 2004 • Michel ROCARD European Parliament President of Committee on Culture, Youth, Education, Media and Sports Former French Prime Minister Title: Transatlantic Relations November 24, 2004 • Francesca BEAUSANG London School of Economics and Political Science Title: Outsourcing and the Internationalization of Innovation: A Development Opportunity? December 2, 2004 • Marc FLANDREAU Institut d’Etudes Politiques (Sciences Po) Observatoire Français des Conjonctures Economiques (OFCE) Title: The Making of Global Finance 1880-1913 December 9, 2004 • Richard PORTES Centre for Economic Policy Research, CEPR (London) London Business School Columbia University Title: Towards a Lender of First Resort

February 10, 2005 • Herbert FRIED Brown University Title: Old Science, New Science: Rubbing Shoulders with Religion and Literature April 27, 2005 • Jorge CARRERA University of La Plata Title: Privatization Discontent and Its determinants: Evidence from Latin America May 3, 2005 • Dr. Jérôme DESTOMBES London School of Economics and Political Science Title: From Long-Term Patterns of Seasonal Hunger to Changing Experiences of Everyday Poverty: North-Eastern Ghana C. 1930-2000 May 9, 2005 • Peter LINDERT University of California Title: Growing Public: Is the Welfare State Mortal or Exportable?

Copies of the Working Papers and the Calendar of the Series are available on The American University of Paris web site: www.aup.edu For any other information please contact: Adriana Ferrer The American University of Paris 6, rue du Colonel Combes 75007 Paris, France e-mail: aferrer@aup.edu Telephone : (33.1) 40.62.07.21 fax: (33.1) 47.53.81.33

METU Studies in Development 34 (December), 2007, 251-286

Global dynamics, domestic coalitions and a reactive state: Major policy shifts in post-war Turkish

economic development1

Ziya Öniş Koç University, Department of International Relations, 34450, Sarıyer/ Đstanbul, Turkey

Fikret Şenses Middle East Technical University, Department of Economics, 06531, Ankara, Turkey

Abstract The main objective of this study is to propose an analytical framework to

explain the major policy shifts that has characterized post-war Turkish economic development; divided into four phases, starting respectively in 1950, 1960, 1980, and 2001. Its main contribution is to incorporate external and internal factors into this framework within a broadly political economy perspective, attaching particular significance to the role of economic crises in moving from one phase to the other. While the role of external agents is identified as the main factor behind policy shifts, the role of domestic coalitions in support of policy regime in each phase is also recognized. Drawing attention to the role of state in the impressive recent growth of countries such as China, India, and Ireland, the paper argues that there is still room for the state taking on a developmental role. The paper recommends that Turkey follows a similar path by improving state capacity not only with respect to its regulatory role but also in more developmental spheres, encompassing its redistributive and transformative role on the basis of a domestically-determined industrialization strategy.

Keywords: State capacity, policy transformations, crises, multilateral institutions, distributional conflicts, regulation. JEL classifications: O1, O5, F5.

1 This study is a forerunner of work in progress on a book by the authors on the post-war

economic development of the Turkish economy. The authors wish that this essay and its Turkish version, which will be produced in due course, will generate a lively debate among students of the Turkish economy. The authors wish to extend their thanks to the two anonymous referees of this journal for their constructive comments.

Ziya ÖNĐŞ – Fikret ŞENSES 252

1. Introduction

Turkish economic development in the post-war period has been characterized by significant structural transformation. At the same time, however, one can identify significant continuities such as cycles of populist expansionism, periodic crises and encounters with the IMF as one moves from one major policy phase to the other. The objective of the present study is to propose a conceptual framework for understanding the major policy shifts which have occurred in post-war Turkish economic development, notably in the context of multi-party democracy which represents a major departure from the single party government of the inter-war period. The proposed framework aims to account for this simultaneous mix of structural transformation and underlying continuities. Our central thesis is that Turkey, in the economic realm, represents a case of reactive state behavior. From a comparative perspective, reactive state behavior, which also appears to have characterized the policy stance of major Latin American countries such as Brazil, Mexico and Argentina, differs sharply from the more pro-active state strategies aimed at industrial transformation, which seems to characterize the development experiences of key East Asian hyper-growth cases such as Japan, South Korea and Taiwan, and more recently the case of China. Parallel to the notion of the reactive state, our central contention is that the main impetus for policy transformation in Turkey has originated from external dynamics, with key external actors playing a central role in accomplishing the transition from one policy phase to another. There is no doubt that there exist certain limits concerning the ability of external actors or external forces to engineer policy transformation. External dynamics need to be integrated with domestic factors to provide a coherent explanation of major policy shifts. To be more precise, there must be a supporting domestic coalition of actors to render a major policy regime, such as import-substituting model of industrialization (ISI) in the 1960s and the 1970s or the neo-liberalism and market-based development during the 1980s and beyond, the hegemonic policy regime during a specific period. Periodic macroeconomic or financial crises have a particular role to play in our analytical schema in the sense that they signify that a particular policy regime is no longer sustainable and needs to be replaced by a new policy regime. Crises also strengthen the hand of external actors and break down the resistance of key elements of the previous domestic

METU STUDIES IN DEVELOPMENT 253

coalition. They also facilitate the emergence of a new domestic coalition favoring the implementation of the new policy regime in line with the overriding impetus provided by the major external actors. Crises also serve the function of breaking-down the distributional stalemate which emerges towards the end of each policy phase, thereby facilitating the transition to a new dominant policy regime.

There is a vast literature on the post-war economic development of Turkey which has greatly enhanced our understanding of its pattern, main phases, as well as the main problems and issues involved.2 We build on this stock of knowledge and attempt to cover the whole of the post-war period, by integrating the post-2001 crisis developments into our analysis. By bringing the internal and external factors that have affected economic development and incorporating political developments and the role of economic crises into our proposed analytical framework, we make a modest effort to provide a more comprehensive treatment of the major structural transformations involved in the context of the shifting development discourse.

The analytical framework proposed is discussed in detail in sections 2 and 3. Then, the framework proposed is employed as a basis for explaining the four basic policy regimes that seem to characterize post-war Turkish experience in the era of multi-party democracy from 1950s to the present era in Section 4. Section 4, in effect, represents the substantive empirical component of the paper where the specific linkages between external actors and influences and supporting domestic coalitions are given precise meaning in the context of individual policy epochs. Although our analysis effectively ends with the transition to the latest policy regime in the post-2001 period, we briefly speculate about this period and consider the question of whether a real rupture has taken place, which differentiates this particular phase from earlier phases in the history of Turkish economic policy. In sections 5 and 6, we extend our discussion beyond the specific Turkish experience to the general realm of comparative development performance. Our central message in the present context is that the nature and quality of state intervention continues to be a critical variable in accounting for differences in development performance in the age of neo-liberal globalization, and notably, in terms of differentiating between cases of hyper-growth and moderate growth cases among late-industrializing economies. Section 7 concludes. 2 See, for instance Hershlag (1968), Tezel (1994), Boratav ( 2003), Keyder (1987),

Kepenek and Yentürk (2005), Kazgan (2001), Yentürk (2003) and Yeldan (2001).

Ziya ÖNĐŞ – Fikret ŞENSES 254

2. Explaining major policy shifts in the context of reactive state behavior: An analytical framework

“Late development” is a characteristic which is not unique to developing countries in the post-war context. Many countries currently classified in the advanced industrialized country category were confronted with similar problems of catching up with the leading countries of their time.3 France and Germany in the 19th century and Japan in the immediate post-war period are typical cases of currently advanced industrialized countries which have been confronted with the challenge of late industrialization. Recent research reveals that none of the successful cases of late-industrialization, especially during the critical take-off phase of development, were integrated to the world market under free trade conditions. Active state-backed industrialization and the nurturing of a private entrepreneurial class under state protection constituted a critical element of their successful catching up process.4 Clearly, the balance between state actors and private business shifts over time and the pendulum swings in favor of powerful private actors as these countries reach a certain level of maturity in their industrialization process. Hence, the fact that states play an exceptionally important role in the process of late industrialization given the fundamental initial weaknesses of a late developing country in terms of its technological, educational and entrepreneurial capacities is a commonly accepted proposition. What is important in the present context, however, is that states themselves can exhibit considerable variation in the process of late industrialization. The very differences in the nature of such states, the mode of their interactions with key elements of their societies can result in significant differences in the nature and quality of state intervention. The natural corollary of this is that such differences tend to produce significant contrast in development performance among individual countries over time.

Our focus in this study is on a specific sub-set of state behavior or mode of intervention in the context of late industrialization. The sub-set of states that we have in mind are the kind of “reactive states”, 3 See Gerschenkron ( 1962) for a detailed exposition of the concept of late development.

For a more recent application of the concept in the East Asian context as well as other national settings see Amsden ( 1989, 2001).

4 See Chang (2002) and Shafaeddin (2005) for details on the industrialization experience of some of these countries and in particular the role of the state in this process.

METU STUDIES IN DEVELOPMENT 255

which tend to be more representative of late development in the context of Turkey or the key countries of Latin America representing a sharp contrast with the pro-active or the developmental states that seem to be a key feature of the East Asian region. At a certain level of abstraction, there is a certain similarity between the experiences of the so-called reactive states and the more strategically-oriented, pro-active developmental states of the East Asian region. In the case of reactive states, one can also discern significant elements of interventionism in the direction of correcting market failures both directly through an extensive public enterprise sector, especially in the early stages of development, as well as through indirect intervention in the operation of the market mechanism using a large range of instruments. Perhaps, the central difference between the reactive states and their more pro-active counterparts in East Asia, for example, is that the former are characterized by a much lower degree of “state autonomy”. In other words, reactive states tend to be more fragmented and enjoy a much lower degree of relative autonomy from key domestic constituencies such as the emerging industrialists. Hence, their ability to overcome sectional conflicts and concentrate their attention on longer-term strategic goals such as developing internationally competitive export industries tend to be more limited. Moreover, reactive states tend to move closely with the dominant norms in policy behavior accepted in major centers of international decision making. Reactive state behavior by definition means going along with the acceptable line of policy thinking as opposed to deviating from such norms in certain critical respects.

Our explanations of major policy shifts in late industrializing countries, which display the common characteristic of reactive state behavior, are based on the following integrated set of propositions.

Proposition one: External actors or influences play a disproportionately important role in accounting for major policy shifts.

There is no doubt that the role of external actors or influences needs to be disaggregated for proper analysis. Take the case of key external actors. This naturally includes the case of the leading or hegemonic power in the international system which in the post-war context has been the United States. There is no doubt that the United States as the global hegemon has played and continues to play a critical role in the case of late developing countries, although its power nowadays is increasingly challenged by a group of countries

Ziya ÖNĐŞ – Fikret ŞENSES 256

such as China which are in the process of moving from the “semi-periphery” to the “center” of the international economic system. The United States has exerted its economic influence both directly through economic and military assistance, and also indirectly through key international organizations such as the IMF, the World Bank, the OECD, the WTO and so on-institutions over which it can exercise a disproportionate degree of influence. Moreover, the global hegemon can influence the development trajectories of individual countries not only through its manipulation of material incentives but also through the development of ideas. Dominant thinking on development typically originate from the “center”, in which the academic and policy making elite in the United States occupy a central position. Powerful ideas on development then tend to be institutionalized and transmitted to the periphery at particular moments of time through key international organizations. In the context of neo-liberalism, for example, strict conditionality of IMF stabilization policies and structural adjustment loans of the World Bank have been the most effective mechanisms transmitting these ideas to the developing country context.

Proposition two: External influences do not refer exclusively to the global hegemon or to key multilateral organizations. Key regional organizations as well as powerful private actors also play a critical role.

This proposition assumes particular validity in the European context where the European Community or more recently the European Union has performed and continues to perform a central role in transforming the economic and political structures of countries in the European periphery, notably those countries which enjoy the concrete prospect of EU membership. Regional dynamics are also operative in other parts of the world, although they are not as institutionalized and powerful as in the EU context. Regional factors tend to interact with global forces. Given that Trans-Atlantic interdependence has been the norm in the post-war period, global and regional forces have tended to move in the same direction and have generally tended to strengthen the impact of one another. At the same time, the relative strength of global pressures and regional dynamics have tended to vary over time for individual countries as well as displaying significant variations across the spectrum of developing countries. Moving beyond the regional realm, powerful private actors also constitute a significant external force. The force of private actors

METU STUDIES IN DEVELOPMENT 257

has become increasingly striking over time reaching the peak of its influence in the era of financial globalization. The set of private actors which has now a major role in the policy process includes not only powerful transnational corporations (TNCs) investing directly in developing countries but also a large number of other private foreign investors, often small investors, actively participating in the capital markets of developing countries. The transnational financial alliance also includes, last but not the least, international banks and private rating agencies, which regularly monitor the policy process in individual countries. Through their analysis of the credit-worthiness of individual countries, such agencies are able to exert a disproportionate impact over the policy process of individual countries. Aggregating all these elements together, we may be able to refer to a “transnational power bloc”, which forms the driving force or the central element in explaining the dominance of particular policies as well as policy shifts over time. The danger here is that we may exaggerate the degree of unity and coherence of this “transnational power bloc” and, in the process, fail to pay sufficient attention to the possible conflicts of interest between the different segments constituting this power bloc.

Proposition three: External dynamics per se are insufficient to explain major policy shifts. The development of a supportive domestic policy coalition is crucial in this context.

In spite of the fact that global or regional forces have become increasingly important in accounting for policy shifts over time, the effectiveness of such forces in terms of accomplishing a major shift in policy requires the parallel development of a supportive domestic coalition. In this context we need to make a distinction between the narrowly-based “policy-coalition” of interests which directly benefit from the shift of policy regime and the benefits associated with the newly-instituted policy regime.5 To give an example, in the case of import-substituting industrialization, the policy coalition included the key bureaucratic agencies such as the planning bureaus which assumed a central importance during the course of implementing the strategy, state enterprise managers, domestically oriented industrialists benefiting from protectionism and other subsidies as well as organized labor employed in key import-substituting sectors. In some cases, for

5 For an insightful examination of the role of domestic coalition building in Turkish

economic development in the 1980s, see Waterbury (1992).

Ziya ÖNĐŞ – Fikret ŞENSES 258

example in the case of Brazil and Mexico, inward-oriented TNCs have become a central element of the ruling ISI policy coalition. Hence, we may talk of a “domestic power bloc” in line with a “transnational power bloc” with the qualification once again that there may be significant tensions or conflicts of interests between the different elements constituting this power bloc. The important point to emphasize is that the emergence of a dominant policy coalition may not be enough in sustaining the policy especially in the context of more open and democratic regimes. Unlike the case of authoritarian regimes, the narrow policy coalitions needs to be extended and enlarged to build successful electoral coalitions to render the policy regime sustainable. To provide a specific example, the narrow ISI policy coalition in a broadly democratic environment (for example, Turkey in the 1960s and the 1970s) had to be enlarged to include agricultural interests and to some extent small and medium sized enterprises, which were not formally part of the ISI coalition. Clearly, the enlargement of the policy coalition creates additional complications which we shall consider in the following section.

Proposition four: Transnational actors or “policy entrepreneurs” may play an important conduit role in terms of linking the interests of the transnational and domestic policy coalitions or “power blocs”. The importance of these actors becomes particularly significant in the context of institutionalizing neo-liberal globalization during the more recent era.

In explaining major policy shifts and the institutionalization of the new policy regime, there is a need for an intermediating set of actors, which play a central role in tying the interests of the external and domestic components of the broad transnational coalition and helping to build mutual trust among the key actors involved in the process. Typically, individuals who have been educated in dominant academic establishments and/or have worked in major multilateral financial institutions are typically brought in to leadership positions in their home countries. Striking examples of this phenomenon in the Turkish context include Turgut Özal in the first wave of neo-liberal restructuring in Turkey during the 1980s and “Özal’s princes”, the key American-educated bureaucrats who occupied major positions in the new layers of neo-liberal bureaucracy such as the Privatization Administration, public sector banks and the Central Bank during the

METU STUDIES IN DEVELOPMENT 259

same period ( Öniş, 2004). The case of Kemal Derviş, at the time serving as a vice president at the World Bank, who was called in to serve as the economic overlord and to head of the “strong economy program” in the aftermath of the 2001 crisis is equally striking. Latin American experiences with neoliberal restructuring are full of examples of critical individuals who have played a similar role between the transnational and domestic policy elites. Perhaps the best-known examples include Domingho Cavallo, the key technocrat who played a central role in instituting the Argentine neo-liberal program, and notably the convertibility plan, of the 1990s; Pedro Aspe who was a central figure in Mexican neo-liberal restructuring, and finally the “Chicago Boys”, the Chicago University educated group of technocrats who played a central role in the first wave of neo-liberal restructuring in the highly authoritarian setting of Pinochet’s Chile during the 1970s.

3. Crises, policy choices and path dependence

Periodic macroeconomic crises play an integral role in our explanation of major policy shifts over time for a number of important reasons:

(a) Crises often constitute a clear signal that the underlying policy regime is unsustainable. Macroeconomic or financial crises in Turkey, Latin America and elsewhere often manifest themselves as balance of payments or external debt crises with the natural implication that the existing policy regime is unable to generate the foreign exchange resources needed to sustain the economy at a steady growth path. Typically, however, deeper forces are at work forming the background to such crises. Major economic crises, as the Turkish experience in the late 1970s, in 1994 and in 2000-2001 clearly illustrates, are also fiscal and distributional crises. An unsustainable fiscal deficit in itself is a sign that there are major distributional pressures on governments originating from various segments of society such as business, labor, and farmers and so on which governments increasingly fail to handle. Attempts by major interest groups in society to claim a larger share of the pie naturally lead to a situation where government expenditures increase more rapidly than government revenues. Large fiscal deficits become a major driving force in the emergence of a chronic inflationary process which undermines the competitiveness of the economy vis-à-vis the external competitors. In such an environment, the balance of payments situation becomes increasingly vulnerable with stagnant exports,

Ziya ÖNĐŞ – Fikret ŞENSES 260

rising imports and falling foreign exchange reserves. For example, Turkey’s growing fiscal deficits in the face of growing distributional claims from different segments of society together with attempts to push import-substituting industrialization into intermediate and capital goods in the 1970s increased the import dependence of the economy. Heavy import-dependence in the face of stagnant exports brought about a severe balance of payments crisis and the subsequent collapse of this model of industrialization by the end of the decade. In the more recent era of financial globalization, the problems have been compounded by the fact that such economies have become heavily dependent on fragile flows of short-term capital. Hence, it is not surprising that countries, which find themselves in a vicious circle of fiscal and distributional crises, tend to be even more vulnerable to a balance of payments crisis in an environment of heavy capital mobility and dependence on short-term capital flows. No wonder, therefore, that the frequency of crises has increased in the age of financial globalization as the post-1980 experience of Turkey clearly testifies.

(b) Frequent crises highlight the institutional weaknesses of countries in terms of their ability to manage underlying distributional conflicts or pressures. We may hypothesize that countries, which are in the middle of the spectrum between the two extremes of established authoritarian regimes and established democracies find themselves in a particularly vulnerable situation in this context. One of the deficiencies of countries, which are in the process of moving from democratic transition to democratic consolidation is the absence of sufficiently strong institutional checks and balances. The presence of such checks and balances would allow governments to manage the underlying distributional conflicts within the parameters of parliamentary democracy, a process which would also help them to contain fiscal deficits within permissible levels. It is also important to bring into the picture the distinction that we have already introduced between narrow policy coalitions and the broad electoral coalitions in this context. Established authoritarian regimes such as South Korea in the 1960s enjoyed a natural advantage in the sense that strategic policy choices could be made through the consent of the narrow policy coalition (namely state and business elites) without the need to engineer a broad electoral coalition. In the Turkish case, in contrast, the narrow policy coalition during the same-period was not sufficient to sustain the strategy. The narrow policy coalition had to be supported by the build-up of a broader electoral coalition. Within the

METU STUDIES IN DEVELOPMENT 261

parameters of an emerging parliamentary democracy, Turkey faced the dilemma that the build-up of such a broad electoral coalition raised acute problems of distributional management and fiscal disequilibrium which, in turn, helped to undermine the sustainability of the basic strategy adopted.

(c) Crises play a transformative role by ending the existing distributional stalemate and by allowing the emergence of a new policy coalition to emerge especially by empowering external actors relative to domestic actors. Major crises have significant distributional repercussions. For example, the crisis of the late 1970s was resolved in the early 1980s by the collapse of the ISI coalition. The major distributional burden of the shift from an ISI based model to an export-based strategy in Turkey fell on wage and salary-earners and the agricultural sector. The crisis has enabled key external actors such as the IMF, the World Bank and the OECD to play a major transformative role as a new export coalition gradually replaced the previous ISI coalition and the most dramatic policy shifts in this process involved the exclusion of organized labor. In the absence of crises, the existing coalition supporting a particular policy regime tends to display considerable resistance to change in spite of the fact that there might be clear signs indicating that the existing policy regime might no longer be viable or sustainable. This was clearly the case in Turkey towards the late 1970s. A major shift to an export-oriented strategy failed to materialize until the country actually experienced a major economic breakdown.

(d) Crises also imply that countries postpone major policy choices with the result that action is delayed and the policy choice becomes more limited once the crisis actually occurs. The experience of East Asian economies is quite instructive here in the sense that such countries have been able to accomplish major policy choices voluntarily without actually experiencing major economic crises. A good example is South Korea’s voluntary transition to export-oriented growth strategy in the early 1960s at a time when most late industrializing countries opted for a prolonged import-substituting strategy. This relatively early shift enabled South Korea to engineer a major breakthrough in terms of export performance, which proved to be the foundation of its hyper-growth experience allowing it to prosper much more rapidly than the vast majority of late developing countries. By similar logic, one can conjecture that if Turkey had been able to accomplish a voluntary transition to an export-oriented growth strategy in a planned fashion during the early 1970s, as opposed to a

Ziya ÖNĐŞ – Fikret ŞENSES 262

forced transition in the form of a reactive response to a major crisis, Turkey’s development performance would have reached a higher plateau as a result. Delayed policy response, which takes place after a crisis actually occurs, means that the range of policy options tends to be much more limited especially in an environment where key external actors like the IMF assume disproportionate power and importance. To provide a concrete example in this context, in the absence of crises countries such as Malaysia and Chile were able to experiment successfully with “heterodox policy instruments” such as controls on short term inflows or outflows of capital. In contrast, such an instrument was not a realistic choice for Turkey in the aftermath of the 2001 crisis when an IMF-backed stabilization program took central stage.

(e) Crises are inherently costly in social, political and humanitarian terms. Even though we recognize the transformative impact of crises, we should also underline the fact that crises tend to be extremely costly in terms of their human and socio-political consequences. In many Latin American countries and Turkey, major macroeconomic crises have been associated with the breakdown of democratic regimes and their replacement by highly repressive military regimes. The interruption of the democratic process in this manner has no doubt represented a major setback for the efforts of these countries to make the transition to becoming a full democracy. Even in the more recent cases of crises, where the democratic regimes have tended to be more robust than in the past, the main burden of adjustment has tended to fall disproportionately on the weaker segments of society. What is quite striking from this discussion is that the emergence of major policy shifts and the rise of the associated policy coalitions do not involve simply a technical, but also an intensely political process.

4. Major policy shifts in Turkey during the multi-party era: Towards an integrated explanation

The objective of the present section is to construct an empirical counterpart to the analytical framework developed in the previous sections. Our aim is not to provide a comprehensive overview of each policy phase. Instead, what we aim to do is to paint a stylized picture of the four main policy phases that we identify (Table 1) in order to illustrate the relevance or the applicability of our explanatory framework, particularly means of explaining the transition from one particular phase to another. We consider each policy phase in turn.

METU STUDIES IN DEVELOPMENT 263

4.1. Transition from the etatism of the Inter-war period to Agriculture-Led Integration to the World Economy: The Democrat Party Era of the 1950s

1950s mark a new era in the political and economic development of contemporary Turkey. This is a period which effectively constitutes the beginning of representative democracy in Turkey. In other words, it represented the end of the monopoly of single party government that characterized the inter-War period. The significance of the period also originates from the fact that “etatism”, the state-led industrialization strategy, as the hegemonic strategy of the inter-War era is replaced by a new economic strategy which placed primary emphasis on liberalization and a strategy of integration into the world market on the basis of agricultural exports. The emphasis of the new economic model of the 1950s was on agricultural development with a parallel focus on the development of transport and communication networks. The industrialization objective, confined to some progress in light consumption goods such as food and textiles, was relegated very much to the background. The aim of the new strategy was clearly to facilitate a process of integration both in domestic markets and to the global economy. In accounting for this major change of direction during our first policy phase, both external and domestic factors were at work. During the post-war period, the United States emerged as the new hegemonic power and in the new Cold War context, with the Soviet Union posing a major security threat, Turkey found itself firmly located in the Western camp. In retrospect, the shift to the new strategy highlighted Turkey’s very first encounter with the notion of “aid conditionality” meaning external resources will be available on the condition that policy changes required by the donor are made. Turkey in the 1950s became an important recipient of Marshall Aid provided by the US to important allies in the emerging Cold War context. Yet, access to aid necessitated a major shift of direction in terms of economic strategy. The key international institution that played an intermediating role in this context was the IBRD (namely the World Bank). The “Thornburg Report” (Thornburg et al. 1949) and the subsequent country report produced under the auspices of the IBRD ( IBRD, 1951) represented major critiques of the etatist strategy and outlined the key elements of reform. The strategy that the newly elected Menderes government adopted in 1950 was very much in line with the recommendations of the Thornburg Report.

Ziya ÖNĐŞ – Fikret ŞENSES 264

Although a major impetus for change originated from the drastically transformed international context of the post-war period, it would nevertheless be unfair to place all the emphasis on external actors and influences. Important changes have also been taking place domestically which also helped to undermine the etatist strategy towards the end of the 1940s. The newly elected Democrat Party under the leadership of Adnan Menderes represented a broad coalition of interests involving major landowners and commercial interests on the one hand and the broad spectrum of peasants and farmers, on the other. Rapid expansion of the cultivated land area accompanied by rapid mechanization and generous price support policies by the government were key instruments of this strategy. This broad domestic coalition6 also welcomed the new strategy proposed by the key external actors. Even though there was an element of conditionality imposed by the external actors involved, important domestic constituencies also provided significant support to this policy. The changing political environment in the early years of parliamentary democracy enabled the new political elite to implement this strategy quite effectively. Indeed, the early years of the 1950s represented one of the most favorable growth episodes in the history of the Turkish economy. The period, however, also marked the beginning of a pattern which was to be repeated frequently during the course of successive decades. After a promising beginning, aided by some aspects of a generally favorable external environment such as the buoyant demand in world markets for Turkish agricultural exports during the Korean War as well as favorable weather conditions, the strategy encountered increasing problems during the course of the decade. Growing fiscal disequilibrium and rising inflation helped to undermine the balance of payments equilibrium with the result that a major economic crisis became inevitable by the late 1950s. Turkey experienced its very first encounter with the IMF in 1958, a decade or so later than its encounter with the World Bank. The collapse in the economic realm was not the only consequence for Turkey; the nascent democratic regime was interrupted by the military coup of 1960, too.

6 We should note that this domestic coalition whose roots could be traced back to at least

the formation of the Democrat Party in 1946 was characterized right at the outset by its strong pro-market, pro-private sector and pro-agriculture stance.

METU STUDIES IN DEVELOPMENT 265

Table 1

Key Turning Points in Turkish Economic Development and the Principal Driving Forces

Phases Global Context and the Key External Actors

Dominant Development Discourse

Domestic Policy Coalitions

Phase I: Transition from

Etatism to Agriculture-

based Integration to the

World Economy: The

Agrarian Populism of the

1950s

US as the new hegemonic power; World Bank/IBRD is the key actor; Direct US aid under the Marshall Plan based on policy guidelines provided by the IBRD

Benefit of integration and participation in the capitalist world economy; advantage of market-based development as opposed to the inefficiency of Soviet style central planning hand in hand with the emergence of structuralist development economics recognizing the role of state in development

A coalition of major land owners and peasants favoring an agriculture–based strategy; as well as the emerging industrial bourgeoisie; the ruling party representing this new coalition of interests

Phase II: Transition from

a broadly liberal policy

regime to a protectionist

import-substituting

industrialization strategy

in the 1960s and the 1970s

OECD/World Bank; EEC becoming important but still in the background in the Transatlantic alliance dominated by the US

“National developmentalism” in a mixed economy context; the existence of pervasive market failures and the need for systematic state intervention and planning for rapid industrialization became the occupied mode of thinking

Emerging industrialists, the big bureaucratic agencies responsible for implementing the national developmentalist model as well as organized labor form the backbone of the new ISI coalition

Phase III: Collapse of ISI

and the rise of the Neo-

liberal Model with

emphasis on

Liberalization and De-

regulation: The post-1980

era until the outbreak of

the 2000-2001 crisis

World Bank, the IMF and the OECD; geo-strategic importance of Turkey in the ongoing Cold War context in the 1980s; EU became more important in the 1990s, but still a weak anchor

The emergence of Washington Consensus; emphasis shifts from market to government failures in development with the logical corollary that correct policy involves extensive liberalization and privatization

Export-oriented industrialists, including small and medium sized enterprises in the so-called Anatolian Tigers, financial interests as well as elements of the new neo-liberal bureaucracy

Phase IV: Neo-liberalism

with a Regulatory State

Component:The

Post-2001 period

IMF and the EU as the dominant actors with the World Bank somewhat in background; continued strategic importance of Turkey for the US in the post-Cold War and the post 9/11 global context

The emergence of the post-Washington Consensus; shift of emphasis to the need for an effective regulatory state as the basic ingredient of market based reforms

Export-oriented big business becoming increasingly transnational in its operations; forming an alliance with a growing group of transnational investors; export oriented small and medium sized businessmen with financial interests; growing segments of the new regulatory bureaucratic agencies, institutions like the Competition Board, Central Bank, and the Bank Regulations and Supervisory Board occupying the prestigious positions on the bureaucratic arm of the neo-liberal state apparatus.

Ziya ÖNĐŞ – Fikret ŞENSES 266

4.2. The Transition to protectionism and domestic market-based industrialization strategy of the 1960s and the 1970s: the ISI era

In retrospect, Turkey’s shift of direction in the 1960s after only a decade seems rather surprising and requires an explanation. Clearly, several influences were operative which collectively explain this dramatic U-turn in a neo-etatist direction. Again starting with the external context, we may conceptualize the Turkish experience in the 1960s as Turkey’s delayed encounter with the “Keynesian Revolution” in the West. The new Constitution of 1961 had a major emphasis on the extension of social rights and the idea of planned economic development. This new outlook clearly endorsed the key role of the state as a major agent of economic and social transformation and highlighted the impact of the Keynesian Revolution which had a deep impact in the United States and Western Europe in the 1950s and the 1960s. Furthermore, the major international institutions such as the World Bank increasingly found itself more receptive to the ideas of infant industry protectionism, at least on a temporary basis, as well as the idea of planned development as a means of fostering rapid industrialization and development. For the United States, the need to increase the pace of development in the periphery of the capitalist world economy was firmly rooted in the logic of Cold War rivalry, with the threat of the spread of communism creating an important impetus for the tolerance of more interventionist strategies in the emerging states of the developing world. The growing power of TNCs originating in the US, finding a lucrative base for investment in the large and protected home markets of the newly industrializing countries such as Brazil and Mexico also explain in part the growing receptivity on the part of the United States to the adoption of ISI-style development strategies. Hence, turning to the Turkish experience, the changing external context produced a favorable environment for the adoption of a new strategy and the fact that the old strategy had been discredited by a major financial crisis also helped to produce the necessary space within which the new strategy could be institutionalized. The key external actor which was directly involved in the policy process and the development of the new planning bureaucracy was this time the OECD, with Jan Tinbergen, the Nobel Prize winning economist, initially playing a central role in the design of Turkish five year plans.

METU STUDIES IN DEVELOPMENT 267

Again, however, we need to turn our attention to the domestic context to provide the necessary balance. In the domestic sphere, we observe the emergence of an ISI or a national developmentalist coalition which favored the new strategy. This new coalition embodied the rising industrialists of the 1960s, who were making the transition from landownership or commercial entrepreneurship to industrial entrepreneurship, a process which, indeed had started earlier, under the creeping protectionism of the late 1950s. The coalition also embodied key elements of the bureaucratic elite which had been marginalized during the Menderes era, but has managed to regain its status following the military intervention of 1960. Last but not least, organized labor, which received significant benefits in terms of expansion of social rights under the new Constitution of 1961, became another member of this nascent coalition. In contrast, farmers and peasants, for example, were excluded from the basic ISI policy coalition, but given the numbers involved, governments in power under the constraints of parliamentary democracy had to resort to policies to bring the agricultural population into their broad electoral coalitions, particularly in the periods leading to general elections.

The approach involving planned industrialization or planned development was often portrayed as a reaction to the uncoordinated expansionism of the Menderes era. The basic logic was to industrialize, moving stage by stage to higher levels of industrialization without undermining balance of payments equilibrium. The strategy was quite effective over the period 1963-1977 in terms of accomplishing relatively high rates of economic growth and substantial structural change. Industrial entrepreneurship in Turkey was clearly the product of this particular phase of national development, during which both the private enterprises and state economic enterprises played a significant and complementary role. Again, the problem as in the previous era was that governments were not able to achieve sustainable growth. Rather reminiscent of the pattern of the late 1950s, the Turkish economy experienced another wave of fiscal disequilibrium and rising inflation. The outcome was a much deeper balance of payments and debt crisis in the late 1970s, judged by the standards of the previous crisis. This crisis may also be explained by the fact that Turkey encountered deep external shocks in the form of successive oil price hikes in the 1970s. The crisis pinpointed once again the deficiencies of Turkish democracy and the inability of governments in power to manage distributional conflicts within the institutional boundaries of parliamentary democracy in such

Ziya ÖNĐŞ – Fikret ŞENSES 268

a way that the management of these conflicts would be compatible with the goals of fiscal equilibrium and sustained economic growth.

In line with our discussion, the Turkish state’s policy during the 1960s and the 1970s was very much in line with our notion of the “reactive state”. Turkey followed the route of the majority of late industrializing countries during this period in terms of pursuing a prolonged import-substituting industrialization strategy. In this respect, Turkish development experience was much more in conformity with Latin America than East Asia. Arguably, we can classify the Turkish state as a fragmented developmental state enjoying a much lower degree of autonomy relative to the key societal actors such as the big business as compared with its East Asian counterparts in South Korea and Taiwan. Unlike the case of the East Asian states, the bureaucratic arm of the domestic policy coalition never had the upper hand. Indeed, the East Asian states were able to display a much more pro-active behavior in terms of their ability to engineer major shifts in the direction of export–oriented industrialization without actually experiencing the types of crises that Turkey or the major Latin American countries have experienced.

4.3. The collapse of the ISI model and Turkey’s encounters with Neo-liberalism and the Washington Consensus: The 1980s and the 1990s

The third policy phase in our analytical schema corresponds roughly to the first two decades of neo-liberalism. Our general framework involving the combination of external dynamics and domestic coalitions is once again relevant in this context. Starting again with the external realm, the late 1970s are marked with disillusionment with the Keynesian Consensus in the North and the parallel process of formidable difficulties with the application of ISI strategies in the South. The late 1970s mark the rise of neo-liberalism as the hegemonic development discourse. The major Washington institutions increasingly embrace the basic message of neo-liberalism and incorporate the key neo-liberal principles of market-liberalization and privatization into their conditional policy packages. Indeed, Turkey is one of the countries which become a testing ground for neo-liberal principles in the early 1980s. Key international institutions like the IMF, the World Bank, and the OECD have been collectively involved in Turkey’s neo-liberal restructuring process. The collective power of these actors to instigate policy change became even more

METU STUDIES IN DEVELOPMENT 269

striking once the previous model had been discredited through a major crisis in the late 1970s and the country became heavily dependent on external financial inflows. The collective interests of major international institutions in Turkish restructuring process were compounded by the country’s geo-strategic significance for the United States and its Western allies in a period marked by the Soviet invasion of Afghanistan signaling the continuation of the Cold War contest.

On the domestic front, we also observe the collapse of the ISI coalition and its gradual replacement by a new export-oriented policy coalition. A distinctive characteristic of the domestic coalition during this phase was that it was basically built during and under the spurt of the policy transformation itself whereas in the previous phases the domestic coalition was developing before the policy change.7 The twin forces of heavy external involvement under severe crisis conditions and the subsequent military intervention were instrumental in preparing the ideal ground for the flourishing of the neo-liberal model. The key members of the ensuing coalition were the components of the business community, especially parts of big business, which were able to make the transition from domestic markets to exports as well as elements of the new bureaucracy which became central to the implementation of the neo-liberal program. Turgut Özal was the leading transnational policy entrepreneur, occupying central stage in this particular coalition during the first decade of neo-liberal reforms in the 1980s. Sidelined from this coalition were components of big business which were unable to adjust to the new environment as well as elements of the “classical” or the “etatist” components of the economic bureaucracy such as the State Planning Organization (SPO). Perhaps the biggest loser in the new era was organized labor whose fortunes experienced major setbacks, especially during the early years of export-oriented growth when it was faced with severe repression and a sharp fall in real wages. In the early years, there was a considerable rift within the business community with respect to export versus domestic market coalition. This rift became less pronounced over time as the neo-liberal policy coalition expanded to include a

7 Two prior short-lived attempts at export orientation in the early 1950s and early 1970s

notwithstanding, it can safely be argued that a pro-export orientation constituency was notable for its absence when the ISI model collapsed at the end of the 1970s. As Ebiri (1980) has documented in detail, the most influential segments of Turkish society just before the transition to the neo-liberal model in 1980 were in favor of the previous model. If anything, there were only isolated voices favoring an alternative path. See Krueger (1974) and Tekin ( 2006 ) on Turkey’s attempts at liberalization and export orientation before 1980.

Ziya ÖNĐŞ – Fikret ŞENSES 270

larger segment of both big and small businesses which became increasingly export-oriented in their operations. The new policy coalition also included financial interests or the so called “rentiers” who clearly benefited from financial liberalization and high and rising domestic real interest rates. The fortunes of these groups improved further with opportunities to lend to the state at high interest rates as the government felt growing pressure to finance its rising fiscal deficits.

In terms of economic performance, the period again was characterized by a boom-bust cycle rather reminiscent of the previous decades. Following a major recovery process in the early 1980s, a process in which external assistance played an instrumental role, the process became increasingly unsustainable and prone to crises in the context of the 1990s. Once again, this highlighted the weaknesses in the regulatory capacities of the Turkish state and its inability to manage distributional conflicts within a broadly democratic environment. The Turkish state again displayed reactive behavior in conforming to the norms of the Washington Consensus rather wholeheartedly by opening up the capital account regime in 1989, without achieving the necessary degree of macroeconomic stability and the tight regulation of the financial system. This constituted a sharp contrast with the experience of some other late-comers such as India and China which were much more gradual and selective in their approach to capital account liberalization. Particularly the second decade of neo-liberalism for Turkey represented the unhappy face of the Washington Consensus. The combination of fiscal instability and premature capital account liberalization in the absence of an adequate regulatory framework were largely responsible for the eruption of successive economic crises in 1994, 2000 and 2001. These crises have severely undermined Turkey’s overall economic performance, especially judged by the performance of some of the key “emerging markets”, notably those in Asia and the post-communist Eastern Europe.

4.4. Neo-liberalism with a regulatory state component: The post-2001 era

The crisis of 2001 in Turkey was perhaps instrumental in ending the years of the Washington Consensus and marking the beginning of a new encounter with some of the key principles embodied in “Post-Washington Consensus”. A mix of changing global dynamics and a

METU STUDIES IN DEVELOPMENT 271

parallel shift in domestic policy coalitions are at the heart of this transition to the new phase of the Turkish neo-liberal experiment. In terms of global dynamics, there is no doubt that there has been a broad disillusionment with Washington Consensus in action. Apart from its poor record in dealing with widespread poverty on a world scale, the frequency of crises in emerging markets during the 1990s, in particular, has raised very serious question marks against one of the core principles of the Washington consensus, namely wholesale financial and capital account liberalization. Especially, in the aftermath of the major Asian financial crisis of 1997, the IMF has faced a serious identity crisis. This identity crisis, in turn, has been associated with a shift of emphasis in the direction of strengthening institutions and the regulatory arm of the state. This shift of emphasis is also clearly reflected in the post-2001 restructuring process of Turkey with major attention paid to creating powerful regulatory institutions in the realm of banking and finance as well as enhancing the power and autonomy of existing key institutions such as the Central Bank.

In discussing the post-2001 restructuring process a useful formulation might be the IMF-US-EU nexus. The active involvement of the IMF in Turkey’s post-2001 process was once again shaped by the security concerns of the US which became all the more important in the post- 9/11 global environment. Furthermore, a distinct feature of the period was that the EU itself, for the first time, became a major source of economic and political change in Turkey, following the critical turning point in December 1999 involving the transition of Turkey to full candidate country status for full-membership. Becoming effective at the beginning of 1996, the Customs union agreement represented an important landmark in Turkish economic history. Despite this fact, it is fair to say the real impact of the EU, in terms of both its conditions and incentives, is effectively felt in Turkey during phase IV, once the prospect of full membership became a concrete possibility. The combination of IMF and EU conditionality has tended to reinforce one another. At the same time, the EU conditions have helped to generate a major wave of democratization reforms in Turkey. These are also important in terms of their economic repercussions in the direction of improving institutional quality and the rule of law, which probably would not have been possible if the IMF alone was involved in the restructuring process.

Ziya ÖNĐŞ – Fikret ŞENSES 272

Turning to the domestic plane, the new policy phase of policy regime had significant backing from key elements of big business as well as small and medium sized interests. Both elements favored a properly regulated macroeconomic environment as a necessary condition for achieving stability and sustainable growth, even if they were not equally enthusiastic about the prospects of tight regulation of the banking system. The business component of the coalition was extended to include much stronger foreign investor presence compared to the previous policy phases as Turkey has started to attract both significant long-term foreign investment as well as short-term investment during the recent era. Furthermore, a new element of the reorganized or reconstituted domestic policy coalition is the group of important autonomous regulatory institutions pointing to a significant shift of power within the internal organization of the state itself to these new forms of bureaucratic institutions.

An interesting question to consider which is somewhat beyond the scope of the present essay is whether the current policy phase in Turkey represents a major rupture or a real break with the past, putting an end to the cycle of periodic crises and breakdowns resulting in a new policy phase in line with the changing global context. This is a somewhat speculative question considering that we are still in the process of living through this particular policy phase. An optimistic assessment would suggest that Turkey’s economic performance has significantly improved in recent years judged by its ability to achieve high growth in a low inflation environment, which renders the achievement of sustained growth over time a stronger possibility than has been the case in the previous eras. What may also make one more optimistic about the future is that Turkey has been able to attract significant flows of long-term investment for the first time in its post-war development trajectory. Furthermore, the EU anchor, in spite of its problems, constitutes a long-term external anchor. This again presents a certain contrast with the experience of the previous decades in the context of which key international institutions have acted as temporary rather than long-term anchors, with their transformative impact often being restricted to the immediate or, at most as in the context of the 1980s to medium-term post-crisis restructuring process. On a less optimistic note, one could also draw attention to elements of fragility that continue to exist in the Turkish economy such as a large current account deficit and a heavy domestic and external debt burden. One should also take into account the fact that Turkey has benefited enormously, like all other emerging markets, from the unusually

METU STUDIES IN DEVELOPMENT 273

favorable global liquidity conditions in the post-2001 era. Clearly, a possible reversal of these conditions could undermine the optimistic scenario concerning the future path of the Turkish economy. Likewise, the inability of the economy to generate sufficient productive employment despite rapid rates of growth, in the face of strong supply-side pressures in the labor market, leaves unemployment as a major problem for the foreseeable future. Finally, the persistence of severe inequalities at all levels and deep-seated poverty may present a formidable obstacle for the sustainability of the recent favorable picture.

The foregoing analytical framework, while by and large embracing the main structural transformations in post-war Turkish economic development, still suffers from a number of shortcomings, warranting several caveats. First, there are the well-known difficulties of dividing a long period into distinct phases. Individual phases may not always show a uniform pattern over time. For example, although there is sufficient ground to describe Phase 1 as market based, one should not overlook the fact that there was a great deal of intervention by the government in industrial policy through the import and exchange rate regimes and also in the free functioning of the market mechanism through extensive price controls. Likewise, external factors, which were on the whole favorable in the first decade of Phase 2, present an altogether different picture in the second decade as relations with the United States turned sour following the Turkish intervention in Cyprus, adversely affecting Turkey’s relations with the IMF and the international financial community. Second, the factors to which we have attached primary importance in explaining the movement of the economy from one phase to another are accompanied and augmented by powerful exogenous events, having differential impact on the course of the economy. For example, the Korean War facilitating buoyant demand for Turkish agricultural exports in Phase 1, labor migration from Turkey to Western Europe and the concomitant inflow of sizable workers’ remittances as well as successive oil shocks in Phase 2, Iran-Iraq war providing an impetus for Turkish exports, the hostilities in the Eastern and Southeastern regions of Turkey over the Kurdish question, and the devastating earthquake in the industrial heartland of the country in Phase 3, and finally 9/11 in Phase 4 constitute some of these factors that in different ways have had a bearing on the nature and duration of each phase. Likewise, the interruption of Turkey’s transient democracy on several occasions by military intervention, most notably in 1960, 1971 and

Ziya ÖNĐŞ – Fikret ŞENSES 274

1980, although not altogether independent of developments in the real economy should also be included among such exogenous events shaping development. Third, the broad coalitions that have characterized each phase were not altogether free of inner tensions. For example, in Phase 2, the deep conflicts that bedeviled the First-five year plan even at the preparation stage8 escalated in later years to stormy tensions between business interests and an increasingly vociferous organized labor.

Upon closer examination, several additional characteristics of post-war Turkish economic development based on the four-phase analytical framework presented above emerge. First, Turkey has moved very much with the tide of the dominant development discourse and acted in a similar fashion with the bulk of countries at a similar level of development. In contrast, countries, which have moved against the tide in some important respects, have been the most successful, as the experiences of South Korea and Taiwan in Phase 2 and India and China in Phases 3 and 4 have amply demonstrated. Such observations call for the need to examine Turkish economic performance in different phases within a comparative framework with other countries at a similar stage of development. Although it is beyond the scope of this paper to indulge into such comparisons,9 efforts in that direction may shed some light, for example, on the reasons behind Turkey’s laggard record with respect to its production and labor market structure and key human development indicators.

Second, Phase 2 stands out from the other three phases in some important respects. It is, especially in the first decade of this phase that Turkey comes nearest to showing some of the characteristics of a developmental and proactive state. Although external agents are at work, they are very much in the background. External assistance is provided to support domestically determined development objectives as stated in five year plans. Moreover, the political regime is more open than in the other phases. The domestic coalition is also distinctive in the sense that it includes broad segments of society, including labor. Third, although each phase has sufficient distinct characteristics facilitating the delineation of one from the other, one should not overlook the fact that, notwithstanding certain discontinuities, they together represent a continuum, explaining a country’s development over more than half a century. In this process, there has, however, been a remarkably sharp change in the attitude of 8 See Milor (1990) on this issue. 9 See Pamuk (2007) for a general account in this respect.

METU STUDIES IN DEVELOPMENT 275

domestic policy makers towards external influence in economic policy making. While the agriculture-based development strategy recommended by the World Bank was generally accepted in Phase 1, the relations between the World Bank and the Turkish government were not altogether amicable with the Turkish government showing a great deal of sensitivity to interference by the World Bank in domestic economic policy-making.10 Likewise, the relations between the IMF and the Turkish government were far from being harmonious. The Turkish government was notorious in its failure not to stick to the initial agreements with the IMF for long in both Phase 1 and Phase 2. The relations between the IMF and the Turkish government reached their nadir at the end of Phase 2, at the height of the crisis in the late 1970s when the Turkish government showed considerable resistance to come to an agreement with the IMF. There was a sharp turnaround in the attitude of the Turkish government towards both of these institutions in Phase 3 so much so that these two institutions took central stage in the design of economic policies in Turkey’s transition to the neo-liberal framework and increased their conditionality beyond the economic sphere in Phase 4, amidst charges in some quarters that Turkish economic policy-making is now altogether in their domain.

5. The Turkish experience in a broader setting: The continued importance of state capacity

Turning from the Turkish experience to the general realm, the central diagnosis underlying the neo-liberal resurgence in development theory, which subsequently gave rise to the “Washington Consensus”, was that “state failure” was the root cause of weak economic performance. The natural corollary of this line of thinking which dominated the practice of key multilateral institutions such as the IMF and the World Bank was to reduce the weight of the state in economic affairs and expand the domain of the market. In a way, “the state” and “the market” were juxtaposed in dichotomistic terms: the “retreat of the state” was a necessary condition in the enlargement of the realm of the “free market”.11 What is interesting is that the accumulating evidence on economic performance in the era of global neo-liberalism during the past two decades reveals a paradox. “State capacity”, in one way or another, has been quite central in the 10 This sensitivity at times took a sharp turn with the Turkish government asking the

World Bank office in Turkey to be closed and on a different occasion ordering a World Bank policy document to be actually destroyed.

11 See Öniş and Şenses (2005) for details.

Ziya ÖNĐŞ – Fikret ŞENSES 276

experience of the more successful set of countries in the new era, managing to capitalize on the potential benefits and minimizing the risks associated with the novel environment of neo-liberal globalization. Similarly, it was weak state capacity which accounted for the relatively less impressive economic performance of countries like Argentina and Turkey. The latter have failed to convert early surges in growth to a process of sustained economic growth which would enable them to converge steadily towards the living standards of advanced economies.

A similar dichotomy can be observed in the literature on globalization versus the nation state. Early and simplistic accounts suggested that the process of globalization would necessarily undermine the power and influence of the nation state in a way as to render the nation state obsolete over time. There is no doubt that the forces of globalization have placed major constraints on national economies and have, indeed, rendered certain specific instruments of economic policy quite redundant.12 In the current international context, individual states find it increasingly difficult to implement old-style protectionism, industrial policies based on direct targeting of specific sectors, tight exchange controls over capital controls, extensive redistribution through large welfare states and the like. The fact that certain specific instruments are no longer implementable does not imply that the state, by definition, has lost all its relevance. In fact, the evidence increasingly suggests that state intervention, but through novel mechanisms and institutions, is the key to economic success in the experience of the emerging outliers ranging from China to India and Ireland in the new global context.

Another key element that needs to be firmly integrated to the discussions of state capacity is the impact of the process of regionalization taking place concurrently with the process of globalization. There is a tendency in simplistic accounts to assume that the process of regionalization is likely to undermine state autonomy and render the nation state quite obsolete. Again, there is no doubt that the process of regionalization, particularly in the context of formal arrangements like the European Union, results in a transfer of sovereignty in important ways from the nation state to supra-national institutions. But at the same time, active participation in regional

12 For an early study drawing attention to the limitations on the policy space of

developing countries see Öniş (1998). For more recent attempts in the same direction concentrating mostly on the limitations imposed by the WTO on the policy autonomy of developing countries, see Wade (2003) and Akyüz (2007).

METU STUDIES IN DEVELOPMENT 277

experiments, such as membership of the EU, may help in improving state capacity, which also enables individual states to cope more effectively with the pressures and challenges of globalization. Hence, the issue of state capacity, in the current international context, should be approached in a triangular fashion in which the complex interactions between states, regional entities and the global context need to be taken into account and investigated explicitly.

6. Pro-active versus reactive states: Interpreting the experiences of hyper-growth cases in the age of neo-liberal globalization

Our central contention is that state capacity matters in the age of neo-liberal globalization and following Linda Weiss (1998) state capacity needs to be disaggregated into three distinct components: (a) the developmental or transformative capacity (b) the regulatory capacity and (c) the redistributive capacity or more broadly the ability to build social cohesion. What Weiss refers to as the “transformative capacity” of the state, namely “the ability to coordinate industrial change to meet the changing international competition”, is in fact the development functions and capacities of the state (Weiss, 1998, p.7). According to Weiss, whose account is clearly influenced by the experience of Asian developmental states, “state capacity in this context refers to the ability of policy-making authorities to pursue domestic adjustment strategies in co-operation with organized economic groups, upgrade or transform the industrial economy” (Weiss, p.5). What is interesting in this definition is that there is no reference to specific instruments. The nature of the instruments may change both in line with the depth of development in the domestic industrialization process as well as the changing nature of the global economy and the constraints imposed by multilateral institutions. The focus on the transformative or the developmental capacity is important. But at the same time, it is incomplete in so far as it fails to take into account the other two dimensions of state capacity. These are also quite crucial in terms of the ability to generate sustained economic growth with social cohesion in the current international context and to avoid costly financial crises in the process and the distributional conflicts that often accompany them.

A cursory examination of comparative evidence suggests that the more successful states in the neo-liberal era have been pro-active states which have deviated from neo-liberal norms in certain crucial

Ziya ÖNĐŞ – Fikret ŞENSES 278

respects. There is no doubt that success is not associated with a process of self-enclosure and inward-orientation. Economies that have managed to generate high growth have been generally open, outward-oriented economies, which have tried to capitalize on export opportunities in the world market and long term foreign investment. At the same time, the opening up of this process has been based on a gradual and controlled liberalization process. The early success of South Korea and Taiwan was based on selective industrial policy designed to create successful export industries. The more recent examples of China, India and Vietnam also point towards the importance of industrial strategies. Whilst all of these are outward-oriented models, with external competitiveness as their points of reference, none of these could be described as typical examples of free market models.

The Irish case, recently described as “the Celtic Tiger”, is a striking case of a country which has helped to develop the innovative capacities of domestic firms whilst trying to derive maximum opportunities from foreign investment opportunities at the same time. The Irish state has been quite successful in terms of integrating local firms into international networks. The pro-active policies of the Irish state, through new institutions such as the Irish Development Agency, has also been instrumental in attracting high-tech foreign investment to Ireland with a significant spin-off into the country’s long-term industrial performance. (O’Donnell, 2004). In addition to providing developmental and transformational capacities for both national firms and transnational corporations in terms of a high quality labor force and physical and legal infrastructure, the Irish state has also displayed strengths in the other key spheres of state capacity. It has been active in terms of developing a competitive and regulatory environment conducive for investment. In addition, the “social partnership” model, in the context of which the Irish state was an important actor once again, was quite conducive for the achievement of social and political stability needed for long-term productive investment. There is no doubt that the regional context was also important in Ireland’s ability to benefit disproportionately from the globalization process. Many European and American firms have taken up the opportunity to serve the European market from a low-cost and nearby location and have consequently taken the decision to restructure production in Ireland.

METU STUDIES IN DEVELOPMENT 279

The key lesson here, which is certainly not unique to Ireland but constitutes a common denominator in other successful European cases, such as the recent revival of the Swedish model to successful Asian cases, is that the real economy matters. In line with this view, states try to adopt pro-active policies through various direct and indirect mechanisms to upgrade the performance of national firms as well as attracting in competition with other states the right kinds of FDI needed for long-term transformation. As the experience of Ireland clearly testifies, the approach towards FDI is not a passive policy of creating the right environment, but a strategy that goes beyond this and tries to actively encourage the desired types of FDI through a variety of promotion and inducement mechanisms.

Yet another important feature of the more successful pro-active states is that they are able to experiment with heterodox instruments such as controls over short-term capital flows. The evidence suggests that a number of important hyper-growth cases such as Malaysia and more recently other Asian economies which have actually experienced the crisis in 1997, such as South Korea, have successfully experimented with controls over short-term capital flows (Weiss, 2004). What is interesting here is that the more successful economies are the ones which are able to move beyond the confines of orthodox international financial institutions such as the IMF and experiment with heterodox policies of their own, a process that is associated with a virtuous cycle of crisis-free growth. Whilst the traditional developmental state has been undergoing a drastic transformation in recent years, there is no evidence that it has been totally dismantled. In fact, it is argued that it was the strength of the real economy, itself, a by-product of the developmental capacities of the Korean state, which has been quite instrumental in the strong post-crisis recovery process of the Korean economy (Weiss, 2004).

In contrast, the relative under-performers or moderate performers, meaning those countries that have failed to realize their true economic potential considering the post-war era as a whole, such as Argentina and Turkey have been characterized by reactive states and weak state capacities in comparative terms. For the past quarter century, these states have been reactive in the sense that they have tried single-mindedly to follow the precepts of orthodox, neo-liberal recipes without in any way attempting to go beyond these recipes and experimenting with alternative forms of openness and degrees of integration into the global economy. All out openness rather than controlled openness have characterized their strategies. In retrospect,

Ziya ÖNĐŞ – Fikret ŞENSES 280

state capacity has been weak in all three spheres. First, there was insufficient emphasis in developing the strength of the real economy. Second, key regulatory reforms which would have helped to prevent major economic crises have been delayed. Third, the states concerned were not able to engineer social cohesion over long periods of time. Consequently, their development trajectories, in a liberalized capital account environment, depended heavily on inflows of short-term capital and a process of fragile, debt-led growth with costly repercussions.

Having made these points, we need to qualify our arguments on reactive states in three important respects. Firstly, a reactive state does not necessarily mean a mild or a benign state. It is a well-known fact that both Argentina and Turkey during critical phases of their post-war development have experienced breakdowns of democracy and highly repressive state behavior involving forced exclusion of popular groups from the political process. Secondly, countries with reactive states have enjoyed boom periods of rapid growth and during those periods they have managed to accomplish the kind of growth rates comparable to star performers. The problem, however, was that these boom periods were short-lived and often ended with a crises, which, in turn, helped to reduce the overall rate of growth by a considerable margin over time. Thirdly, countries like Turkey and Argentina have been performing unusually well in the recent era. Again, it is too soon to say whether this growth will be the kind of robust or durable growth which has characterized the experiences of the hyper growth cases. There is also an interesting problem of interpretation regarding the rather favorable recent macroeconomic performance of these two countries. Is it due to the improvement in the regulatory capacities of these states or have they been benefiting disproportionately from the unusual boom conditions in the international economy in recent years?

Finally, an interesting question to pose in this context is whether there exists a link between state capacity and regime type in the current global context. Our basic conjecture here is that countries at the two polar ends of the spectrum namely established authoritarian regimes and established democracies appear to display superior state capacities. They are able to generate the kind of focus needed in terms of the development of longer-term supply-side policies as well as providing a more stable environment for long-term productive investment. In contrast, interim democratic regimes, with Argentina and Turkey clearly falling into this category, find it particularly difficult to develop the kind of state capacities needed to benefit from

METU STUDIES IN DEVELOPMENT 281

the globalization process on a substantial scale. The encounters of interim democratic regimes with financial globalization are typically associated with costly consequences. This observation immediately highlights the importance of a favorable regional context in terms of helping to break this deadlock. The incentives provided by potential EU membership are quite critical in terms of facilitating the transition from an interim democracy to an established democracy and helping the process of institution building and the implementation of the rule of law which are likely to have a dramatic impact on the process of building state capacity and long-term economic performance in countries located in this category. The new Eastern European members of the EU such as Poland have clearly benefited from this process and have found themselves placed on a crisis-free growth trajectory through a parallel process of democratization and institutional economic reforms from the mid-1990s onwards. A similar process is currently occurring in the Turkish context and arguably places Turkey on a more favorable path compared to Argentina, where regional pressures for reform under MERCOSUR are weaker compared with the mix of conditions and incentives provided by the EU.

7. Concluding observations

The present study has attempted to accomplish two separate but interrelated objectives. The first objective was to propose a general framework based on global-domestic interactions to account for the four major policy shifts in post-war Turkish development experience. The second objective was to highlight the importance of the distinction involving reactive versus pro-active states in accounting not only for major policy shifts over time but also for the differences in the development performances of individual late industrializing countries. Furthermore, we have argued that the reactive versus pro-active state distinction is not only valuable for comparative-historical analysis but also continues to be relevant in the current era of neo-liberal globalization.

The recent experience of countries like Turkey suggests that even reactive states can experience significant state transformation and a parallel improvement in state capacity with the primary impetus for change originating from external forces. There is no doubt that the regulatory arm of the Turkish state has improved considerably in the aftermath of the major financial crisis of 2000-2001. The crisis itself was instrumental in terms of building a broad domestic coalition in

Ziya ÖNĐŞ – Fikret ŞENSES 282

favor of stronger macroeconomic and financial regulation. Perhaps even more significant was the fact that the crisis empowered key external actors such as the IMF and the EU to push strongly in the direction of regulatory reforms and the development of the associated institutional capacity needed to implement such reforms. This brings us to a major element which differentiates the fourth and the most recent policy phase in Turkey from the earlier policy phases, namely the existence of a long-term external anchor in the form of the concrete prospect of EU membership. The transformative impact of the EU, which was clearly evident in other national contexts in Europe’s Southern and Eastern periphery during the 1980s and the 1990s, was also very much in evidence in the recent Turkish context in the interrelated and mutually reinforcing realms of regulatory and democratization reforms. On the assumption that Turkey will continue to make further progress on the path to an established or a fully consolidated democracy, we are likely to be much more optimistic about its ability to make a radical break away from the boom-bust cycles which have been such a striking feature of its post-war development experience.

Despite the existence of powerful external anchors, there is still need for decisive action on the domestic front, which would in the first place lead domestic actors to have a much bigger say in their interaction with the anchors. Although there has been increased transparency in the relations of Turkey with the international organizations such as the IMF, there is still little knowledge available about what goes on behind the scenes during negotiations, in particular on the effectiveness of domestic negotiators in putting forward an alternative case. A similar situation applies with respect to relations with the EU, the other powerful anchor. Turkey’s attempts to become a full member going back to nearly half a century during which Turkey has been the passive and docile partner forcing the doors to enter at all cost without many scruples about the terms of entry, are again facing some reluctance on the part of established member states.

Based on the accumulated wisdom of the rich development experience at home and abroad and recognizing the limitations imposed by the international environment, Turkey should develop a more balanced development strategy, a strategy in which domestic agents occupy a more central and pivotal role and are engaged in a complementary relationship with external agents as opposed to a strategy which is primarily driven by external agents themselves. The

METU STUDIES IN DEVELOPMENT 283

fact that there is still a variety of approaches in terms of foreign trade, foreign investment, R&D as well as macroeconomic and exchange rate policies13, despite the more or less uniform application of neo-liberal economic polices through much of the developing world for more than a quarter century, should encourage domestic policy makers in this endeavor. In line with its determination to become an established democracy, the main objectives and instruments of the strategy should be developed with the full participation of major stakeholders. There is sufficient domestic expertise to give Turkey’s integration with the international economy a more developmentalist focus. Rather than accepting the continuous retreat of the state from economic life, it should seek ways and means to develop state capacity in all of its three forms.

Although some important steps have been taken in recent years to develop regulatory capacity, it is, yet, early to see the effectiveness of the new regulatory institutions in action. Simply transferring institutions from one context to another does not guarantee their effectiveness in the new environment.14 The establishment of independent regulatory institutions in the post-2001 crisis era was by no means a harmonious process free of political interference. While a lot of the effort for regulation in financial markets requires concerted international action, countries like Turkey which are particularly vulnerable to the speculative whims of financial investors should not be reticent in imposing defensive mechanisms.

It is the other two aspects of state capacity that require even more urgent action. In terms of transformative capacity there is need for effective industrial policy to broaden the industrial base towards skill and technology intensive branches. This should in due course help Turkey’s current export structure, based on a handful of commodities headed by textiles and clothing to change to incorporate higher value added products with better prospects in world markets. The limitations imposed on nation states to implement independent macroeconomic and industrial polices through multilateral rules and obligations, especially in the post-WTO international environment notwithstanding, there is room for maneuver for individual developing

13 See Akyüz (2007) on this point. 14 Competition Board, for example, established in 1995 long before the new independent institutions, established after the 2001 crisis has not yet received wide acclaim in terms of its effectiveness.

Ziya ÖNĐŞ – Fikret ŞENSES 284

countries15, especially in the sphere of incentives directed to research and development and regional development.

The redistributive capacity remains the weakest link in this respect with inequality at virtually all levels but especially in terms of gender based and regional inequalities placing Turkey among high inequality countries in terms of distribution of income and human development. Although there has been much talk about poverty alleviation, efforts in this direction have remained miniscule in the face of the scale and gravity of the problem. The biggest obstacle here remains in the redistributive component requiring in the final analysis the more active organization and participation of the lower income sections of the population in the political process. Turkey’s success in developing state capacity simultaneously in these three spheres no doubt depends on its ability to create the supportive institutional framework and the emergence of a domestic coalition favoring such a transformation.

References

AKYÜZ, Y. (2007), “Global Rules and Markets: Constraints over Policy Autonomy in Developing Countries”, paper prepared for the International Institute for Labor Studies of the ILO, Geneva.

AMSDEN, A. (1989), Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press.

AMSDEN, A. (2001), The Rise of “the Rest”: Challenges to the West from Late-industrializing Economies, New York: Oxford University Press.

BORATAV, K. (2003), Türkiye Đktisat Tarihi, 1908-2005, Istanbul: Imge Kitabevi Yayınları.

CHANG, H. (2002), Kicking away the Ladder: Development Strategy in Historical Perspective, London: Anthern.

EBIRI, K. (1980), “ Turkish Apertura, Part I”, METU Studies in Development, 7 GERSHENKRON, A. (1962), Economic Backwardness in Historical Perspective: A

Book of Essays, Cambridge MA.: Harvard University Press. HERSHLAG, Z. Y. (1968), Turkey: The Challenge of Growth, Second Edition, Leiden:

Brill. IBRD (1951), The Economy of Turkey: An Analysis and Recommendations for a

Development Program, Washington DC: International Bank for Reconstruction and Development.

KAZGAN, G. (2001), Tanzimattan 21’inci Yüzyıla Türkiye Ekonomisi: Birinci Küreselleşmeden Đkinci Küreselleşmeye, Istanbul: Istanbul Bilgi Üniversitesi Yayınları.

15 See Akyüz (2007) in this context.

METU STUDIES IN DEVELOPMENT 285

KEPENEK, Y. and YENTÜRK, N. (2005), Türkiye Ekonomisi, 11.inci Baskı, Istanbul: Remzi Kitabevi Yayınları.

KEYDER, Ç. (1987), State and Class in Turkey: A Study in Capitalist Development, London: Verso.

KRUEGER, A. O. (1974), Foreign Trade Regimes and Economic Development-Turkey, New York: Columbia University Press for NBER.

O’DONNELL, R. (2004), “Ireland: Social Partnership and the ‘Celtic Tiger’ Economy”, in J. Perraton, and B. Clift,eds., Where are National Capitalisms Now? Basingstone Hampshire: Macmillan, 50-69.

MILOR, V. (1990), “The Genesis of Planning in Turkey”, New Perspectives on Turkey, 4, 1-30.

ÖNĐŞ, Z. (1998), “Globalization and the Nation State: The Possibilities and Limits of State Intervention in Late Industrialization” in Z. Öniş, State and Market: The Political Economy of Turkey in Comparative Perspective, Istanbul: Boğaziçi University Press, 375-391.

————(2004), “Turgut Özal and His Economic Legacy: Turkish Neo-liberalism in Critical Perspective”, Middle Eastern Studies, 40(4), 113-134.

ÖNĐŞ, Z. and ŞENSES, F. (2005), “Rethinking the Emerging Post-Washington Consensus”, Development and Change, 36 (2), 263-90.

PAMUK, Ş. (2007), “Economic Change in Twentieth Century Turkey: Is the Glass more than Half Full?”, in R. Kasaba, ed., Cambridge History of Modern Turkey, forthcoming.

SHAFAEDDIN, M. (2005), “Towards an Alternative Perspective on Trade and Industrialization Policies”, Development and Change, 36(6), 1143-1162.

TEKĐN, A. (2006), “Turkey’s Aborted Attempt at Export-led Growth Strategy: Anatomy of the 1970 Reform”, Middle Eastern Studies, 42(1), 133-163.

TEZEL, Y. S. (1994), Cumhuriyet Dönemi Đktisat Tarihi, Istanbul: Türkiye Ekonomik ve Toplumsal Tarih Vakfı.

THORNBURG, M., SPRY, G. and SOULE, G. (1949), Turkey: An Economic Appraisal, New York: Twentieth Century Fund.

WADE, R. (2003), “What Strategies are Viable for Developing Countries Today? The WTO and the Shrinking of the Development Space”, Review of International Political Economy, 10(4), 621-644.

WATERBURY, J. (1992), “Export-led Growth and the Center-Right Coalition in Turkey”, Comparative Politics, 24(2), 127-145.

WEISS, L. (1998), The Myth of the Powerless State. Ithaca, New York: Cornell University Press.

————(2004), “Developmental States Before and After the Asian Crisis” In Perraton, J. and B. Clift,eds., Where are National Capitalisms Now? Basingstone Hampshire: Macmillan, 154-168.

YELDAN, E. (2001), Küreselleşme Sürecinde Türkiye Ekonomisi: Bölüşüm, Birikim ve Büyüme, Istanbul. Đletişim Yayınları.

YENTÜRK, N. (2003), Körlerin Yürüyüşü: 1990 Sonrası Türkiye Ekonomisi ve Krizler, Istanbul: Istanbul Bilgi Üniversitesi Yayınları.

Ziya ÖNĐŞ – Fikret ŞENSES 286

Özet

Küresel dinamikler, ülkeiçi koalisyonlar ve reaktif devlet: Türkiye’nin savaş sonrası kalkınmasında önemli politika dönüşümleri

Bu çalışmanın temel amacı, Đkinci Dünya Savaşı sonrası dönemde Türkiye’nin iktisat politikalarında yaşanan önemli dönüşümleri açıklamaya yönelik bir kavramsal ve analitik çerçeve geliştirmektir. Bu amaç doğrultusunda bu uzun dönem, 1950, 1960, 1980 ve son krizin simgelediği 2001 yıllarında başlayan dört ayrı alt dönem çerçevesinde incelenmektedir. Bu alt dönemleri birbirinden ayrıştıran dönüşümler, en başta hakim dış güçlerin ve onların etkisi altındaki uluslararası kuruluşların belirlediği dış dinamikleri edilgen bir biçimde izleyen reaktif devlet temelinde açıklanmaktadır. Sadece dış dinamiklerin yeterli olamayacağı noktasından hareketle, ülke içinde dış kaynaklı etkileri destekleyen koalisyonların önemi üzerinde durulmaktadır. Bu dönemde sık sık ortaya çıkan ekonomik krizlerin bir alt-dönemden diğerine geçişteki etkileri de, önerilen analitik çerçevenin temel unsurlarından birini oluşturmaktadır. Đç ve dış dinamikler ve dönemin siyasal gelişmeleri iktisadi etmenlerle birlikte ele alınarak dönüşümlerin bütüncül bir çerçevede açıklanılmasına çalışılmaktadır. Çalışmanın son bölümlerinde, Türkiye’deki gelişmeler mukayeseli kalkınma performansı temelinde değerlendirilmektedir. 1960 sonrasında Kore ve daha yakın dönemde de Hindistan ve Çin’in kalkınmacı ve pro-aktif devlet önderliğindeki yaklaşımlarının ekonomik performans açısından, Türkiye’nin de içinde bulunduğu reaktif devlet odaklı ülkelere karşı bariz üstünlüğüne dikkat çekilmektedir. Son dönemde ekonomik performanslarıyla ön plana çıkan ülkelerin dışa dönük, ancak serbest piyasa koşullarına doğrudan bağlılık yerine, devletin kalkınmacı rolünü önemseyen ülkeler olduğuna işaret edilmektedir. Neoliberal küreselleşme sürecinde kalkınmacı ulus devletlerin rolünün önemli ölçüde aşınmasına ve ellerindeki araçların önemli bir kısmının etkisini kaybetmiş olmasına karşın, devletin bu dönemde de hala etkili bir rol oynayabileceğine dikkat çekilmektedir. Bu süreçte devletin rolünün sadece kurumsal düzenlemeler ve regülasyonla sınırlı olmadığı, bunun da ötesinde bölüşüm sorunlarına duyarlı ve sanayide rekabet gücünü artırıcı yönde etkili bir rol oynayabileceği vurgulanmaktadır. Bu farklı işlevlerin başarıyla yerine getirilmesinde temel etkenlerin devlet müdahalesinin yön ve kalitesi olduğu noktasından hareketle, Đrlanda örneğinde olduğu gibi yeni mekanizma ve kurumların önemine işaret edilmektedir. Türkiye’nin de benzer bir doğrultuda hareket ederek, iktisat politikalarının belirlenmesinde ve uygulanmasında, devletin rolünü dışlamadan kendi tercihleri doğrultusunda belirlenen sanayileşme stratejisi ekseninde kalkınmacı bir rol izlemesi önerilmektedir.

Anahtar kelimeler: Devlet kapasitesi, politika dönüşümleri, krizler, uluslararası kurumlar, bölüşüm sorunları, düzenleme.

45

Ziya Öniş*

CRISES AND TRANSFORMATIONS IN TURKISH POLITICAL ECONOMY

This paper attempts to provide a general framework to understand the broad features of Turkish political economy by focusing on key crises and their po-litical and economic consequences. Attention is drawn to the transformative impact of the major crises in terms of both shifts in the broad thrust of eco-nomic policies and the nature of Turkish private sector development. The pa-per concludes by underlining the importance of democratic consolidation as a means of overcoming the cyclical nature of economic growth experienced so far, with its far-reaching and costly political and human consequences.

* Ziya Öniş is Professor of International Relations at Koç University, Istanbul. The paper originated from a talk given to students at Bahçeşehir University. The author would like to thank Şahin Alpay, Fikret Şenses, Ali Burak Güven, Merve Çalımlı, and Mustafa Kutlay for their contributions in preparing this paper.

46

VOLUME 9 NUMBER 3

The Nature of Post-War Economic Growth

here is a debate on the beginnings of modern economic growth in the Turkey. The years between 1908 and 1922 are often identified as a turning point in terms of the development of a national entrepre-neurial class. Similarly, the decade of the 1930s is identified as critical in terms of Turkey experiencing its first wave of import-substituting

industrialization (ISI) policies with the state assuming a leading entrepreneurial role. The Great Depression of the 1930s created opportunities for the first major wave of industrial growth in many countries of the periphery, including Turkey.1 Yet, the real breakthrough came in the 1950s. The previous decades provided the precon-ditions for sustained economic growth by creating the beginnings of a domestic industrial base driven by an emerging private entrepreneurial class and managerial elite in the public sector. However, significant structural change and economic transformation are primarily post-war phenomena.

Turkey is a case of moderate economic growth. The post-war growth has been on average in the order of four to five percent per annum. If long-term perfor-mance is taken into consideration, it is obvious that although there have been periods or spurts of high growth, they have not been sustainable. Periods of high growth were followed by periodic economic crises which pulled the average rate of growth down by a significant margin.2 Graph 1 illustrates the volatile nature of economic growth in Turkey. To a certain extent, the Turkish experience resembles Latin American patterns in terms of a common experience of prolonged import substituting industrialization and forced transition to export-oriented growth fol-lowing a major economic crisis. Turkey, like its major Latin American counterparts, has experienced considerable economic and political instability. Chronic inflation was the norm in Turkey for nearly three decades from the early 1970s onwards. Similarly, Turkey has experienced costly breakdowns of its democratic regimes and painful military interludes. Nevertheless, by Latin American standards Turkey represents a case of “stable instability” since Turkey has not gone through as extreme hyperinflationary waves as Brazil or Argentina encountered. Moreover, military interludes in Turkey, whilst costly in terms of their consequences, were shorter than Latin American standards.

ZİYA ÖNİŞ

1 Korkut Boratav, Türkiye İktisat Tarihi 1908-2007, (Ankara: Imge Kitabevi, 2009)2 Ziya Öniş and Fikret Şenses, “Global Dynamics, Domestic Coalitions and a Reactive State: Major Policy Shifts in Post-War Turkish Economic Development”, METU Studies in Development, Vol. 34 No. 2, 2007, pp. 251-286.

TURKISH POLICY QUARTERLY

www.turkishpolicy.com47

Source: GNP data at constant prices are obtained from TUIK, İstatistik Göstergeler-1923-2007.

Turkey has failed to match the kinds of growth that the East Asian “tigers” have accomplished on a sustained basis during their crucial take-off phase which ena-bled their per capita incomes to converge with the levels of advanced economies. In spite of a major transformation of its economic structure over the past six dec-ades, Turkey is still in the “emerging markets” category with some distance to go to meet the living standards of advanced economies.

More recently, the Turkish experience has resembled the pattern of the post-communist EU member states of Eastern Europe. The key element in this context is a pattern of externally driven economic growth based on significant inflows of foreign capital and a powerful external anchor in the form of EU membership. The recent global financial crisis, however, has exposed the limitations of this model. Countries which had more balanced economic structures with high domestic sav-ing ratios have been able to weather the storm more effectively than Turkey or new EU member states.

Finally, the Turkish experience draws attention to the links between quality of de-mocracy and long-term economic performance. In terms of its political regime, Turkey is a moderate performer which has already achieved democratic transition but still falls short of democratic consolidation. Such countries find it more diffi-cult to maintain economic and political stability compared to some countries with deeply rooted authoritarian regimes (i.e. China) or most established/fully consoli-dated democracies. This, in turn, has a negative influence over long term growth performance. In retrospect, Turkey’s democratic deficits have been a source of economic and political instability and have exerted a downward bias on the coun-try’s economic performance.

TURKEY’S POLITICAL ECONOMY

48

VOLUME 9 NUMBER 3

Major Policy Phases and Transformation of Turkish Capitalism

Turkey’s post-war development experience may be conceptualized in terms of four major policy phases.3 The 1950s correspond to the liberal turn in Turkish economy involving an attempt to reverse the statist and protectionist policies of the inter-war era. The emphasis especially in the early part of the decade was on integrating with the post-war international economy reconstructed under U.S. he-gemony, as a producer and exporter of agricultural products. The second phase, under successive five-year plans implemented during the 1960s and 1970s, rep-resents a shift to national developmentalism and ISI-based strong protectionism of the domestic market. This phase resulted in the institutionalization of the domestic market. The third phase, the 1980s and the 1990s, corresponds to Turkey’s en-counter with neoliberal policies and the logic of the Washington consensus which is based on the liberalization of key sectors of the economy. The fourth and final phase constitutes the regulatory phase of neo-liberalism with policy-makers em-phasizing strong regulatory institutions and paying more attention to social protec-tion. This phase reflects Turkey’s encounter with the emerging post-Washington consensus. Major policy shifts are typically associated with deep economic and political crises accompanied by costly human consequences. At each stage, cri-ses mark the breakdown of the previous model and create the conditions for a new policy coalition to support a revised model of development.

Turkish development experience has historically been based on an alliance be-tween the state and national capital, with foreign capital playing a secondary role, at least until recently. One of the striking features of these four broad policy phases is that they correspond to different stages in the transformation of domestic capi-tal (Table 1). Turkish big business was transformed over time from an agrarian or commercial orientation (early 1950s) to domestic market based industrial capital (the 1960s and the 1970s). This was followed by a shift towards export-orientation in phase three (the 1980s and the 1990s) and the growing “transnationalization” of Turkish big business in the final phase (the post-2001 era). Another interest-ing pattern concerns the development of small and medium sized business. The coalition of winners from neo-liberal globalization expanded from the early 1990s onward to include small and medium term enterprises from inner Anatolia, the so called “Anatolian tigers”. The stage by stage transformation of Turkish capitalism is a crisis-ridden process which involves a radical reordering of state-society rela-tions and frequent crises and breakdowns of democracy along the way.

ZİYA ÖNİŞ

3 Öniş and Şenses (2007), p. 265.

TURKISH POLICY QUARTERLY

www.turkishpolicy.com49

There is also a high degree of continuity and overlap between the different policy phases. For example, before it became the official development policy, in the post-war period, in the late 1950s, ISI started to be implemented in a piecemeal man-ner, with governments resorting to pro-tectionism as a short-term response to growing balance of payments. A sig-nificant level of continuity with the initial two policy phases exists, most visible in the emphasis on the mixed economy, and the nature and scale of the state enterprise sector. Similarly, the transi-tion to neo-liberalism was associated with significant “export protectionism” (i.e. heavy subsidies to promote ex-ports) in the 1980s, clearly represent-ing a line of continuity with the previous policy phases. Yet another element concerns the transnationalization of Turkish big business, meaning the growing ability to invest beyond the home base and enter into strategic alliances with foreign partners, a process which started in earnest with Turkey’s Customs Union with the EU in the mid-1990s. This point also reflects the considerable continuity in the neo-liberal era in terms of its em-phasis on de-regulation and integration into global markets.

Each policy phase may be usefully decomposed into several sub-phases. For ex-ample, the ISI period may be analyzed in terms of two separate phases involving the early and the more difficult phases of ISI, with the latter broadly corresponding to the post-1973 era. The Washington Consensus era may also be decomposed into sub-phases with the critical decision to open the capital account fully in 1989 proving to be a watershed event. Another interesting pattern is that, following each crisis, there is a concentration of power in the technocratic elite which becomes the principal agent in accomplishing the major policy shift. In the early phase of Turkish neo-liberalism, during the 1980s, a narrow bureaucratic elite under the leadership of Turgut Özal played a key role in the policy transformation process. More recently, following the 2001 crisis, a similar re-concentration of power oc-curred with Kemal Derviş and his economic team playing a key role in the transi-tion to regulatory neo-liberalism. The difference between the two periods is that the former case involved a re-concentration of power in an authoritarian environ-ment, whereas in the latter case the shift occurred within a democratic environ-ment, as a coalition government assigned a transnational technocrat armored with extraordinary ministerial powers.

TURKEY’S POLITICAL ECONOMY

“Turkish development experience has historically

been based on an alliance between the state and

national capital, with foreign capital playing a secondary role, at least until recently.”

50

VOLUME 9 NUMBER 3

Table 1: Principal Policy Phases and Transformation of Turkish Big Business

Economic Crises and Political Breakdowns

The political implications of economic crises and the economic implications of political crises have been extensively studied by students of Turkish political econ-omy.4 In the present paper the focus is on the former. A cursory examination of Table 2 suggests a strong association between major economic crises and politi-cal crises in the Turkish context. Major economic crises in Turkey had significant political consequences.

The contrast between the pre-neoliberal era of 1950-1980 and the post-1980 neoliberal era can be discerned from Table 2. The former has been characterized by two major economic crises each involving a deep balance of payments crisis and subsequent recourse to IMF assistance. Both crises could be classified as “crises of economic governance” exposing the limits to trying to achieve economic

ZİYA ÖNİŞ

1

Policy Phase Transformation of Big Business 1950-1959

Liberalization and agriculture-based integration to the world economy

Agrarian and commercial orientations in the early part of the decade; the rise of industrial capital towards the end of the

decade 1960-1979 The neo-etatist era;

import-substituting industrialization and natural developmentalism

under five year plans

The consolidation of domestic market oriented industrial capital under heavy

protectionism

1980-2001 Neo-liberal restructuring and deregulation in the age of Washington consensus;

liberalization and integration into the world economy. The period itself can be divided into several sub-phases; Turkey’s encounter

with financial globalization following the 1989 capital account opening

decision

The rise of export-oriented capital; broadening of the neoliberal coalition in the 1990s to include small and medium sized export-oriented capital (Anatolian

tigers); beginnings of transnationalization of Turkish big

business especially with the Customs Union.

2001 and Beyond

Regulatory neo-liberalism in the age of post-Washington

consensus; the growing power of independent

regulatory agencies

Accelerated transnationalization of Turkish big business;

growing role of foreign direct investment especially in the context of

banking and privatization of state economic enterprises

4 Ümit Cizre-Sakallıoğlu and Erinç Yeldan, “Politics, Society and Financial Liberalization: Turkey in the 1990s”, Development and Change, Vol. 31, 2000, pp. 481-508; Hurşit Güneş, Siyasal Krizlerin Ekonomik, Ekonomik Krizlerin Siyasal Temelleri İlişkilerin İç İçeliği: Türkiye Örneği (1950-2002), (Istanbul: Osmanlı Bankası Arşiv ve Araştırma Merkezi, 2009), pp. 101-126.

TURKISH POLICY QUARTERLY

www.turkishpolicy.com51

stability within the framework of democratic institutions in a country going through early stages of institutionalizing and consolidating its democratic regime. The eco-nomic crisis of 1958 was accompanied by a military coup in 1960. Similarly, the deeper economic crisis of 1978-1979 was followed by a military coup in 1980. The interesting anomaly is the military intervention of 1971 which occurred in the absence of a deep economic crisis, again highlighting the fact that the relationship between economic crises and military coups are complex and multi-dimensional in nature.5 Military coups were also accompanied by a major restructuring of the developmental model. The 1960 coup paved the way for the institutionalization of development planning and the ISI strategy. The 1980 coup played an important role in Turkey’s radical neo-liberal restructuring. The military interlude of 1980, perhaps more so than the previous interludes, had drastically negative human consequences. In the short-term, it was effective in overcoming “the crisis of gov-ernance” of the late 1970s by force and dismantling the distributional stalemate of the late 1970s by engineering a major decline in real wages which clearly fa-cilitated the transition to an export-oriented economy. This kind of shift was not unique to Turkey. In Brazil, Argentina and Chile, the underlying crisis of the ISI model and the associated political and distributional stalemate resulted in similar military interventions with drastic consequences. From a longer term perspective, the military intervention of 1980 left a deep imprint on the subsequent political tra-jectory of Turkey in undermining the country’s “democratic capital”6 by imposing an authoritarian constitutional framework, de-institutionalizing the party system, and presenting a major setback for the country’s quest for EU membership.

TURKEY’S POLITICAL ECONOMY

5 Even in this context, one could refer to a slowing down of economic growth towards the end of the 1960s . Indeed a major devalua-tion in 1970 preceded the military intervention of 1971.6 Sumru Altuğ, Alpay Filiztekin and Şevket Pamuk, “Sources of Long-term Economic Growth for Turkey, 1880-2005”, European Review of Economic History, Vol. 12 No. 3, December 2008, pp. 393-430.

52

VOLUME 9 NUMBER 3

Table 2: Major Economic Crises and Political Breakdowns

The links between economic crises and political breakdowns appear to be much more blurred and indirect during the post-1980 neoliberal era. For example, there was no collapse of democracy following the 1994 crisis. A subtle link can be es-tablished between the negative distributional consequences of the 1994 crisis, the rise of the Islamist Welfare Party and the “post-modern coup” of February 1997 aimed at dismantling the coalition government that had the Welfare Party

1

Major Economic Crises

Political Breakdowns

1958

Fiscal and balance of payments crisis followed by an IMF

stabilization program

Collapse of democracy with a majority

government in power; A military coup in 1960 partly linked to economic crisis and the ensuing

IMF program

1978-1979

Fiscal and balance of payments crisis as well as a deepening crisis

of the ISI model; radical restructuring in association with the

IMF, WB and the OECD.

Significant economic and political instability under coalition governments in the late 1970s

followed by a military coup in 1980; the longest military interlude (1980–1983)

1994

The first major crisis of the neo-liberal era; fiscal and balance of

payment crisis followed by an IMF program

Contributed to the rise of the Islamist Welfare Party; tangential link to the so called “post-

modern coup” of February 1997 which was a reaction to the Welfare Party as the dominant component of the coalition government at the

time.

2000-2001

The second and third crises of the neo-liberal era with the 2001 crisis

being the most profound of the three crises; fiscal and balance of payment crisis coupled with major structural problems in the banking

sector; radical restructuring in association with the IMF, WB and

the EU

No breakdown of democracy. The crisis in line with the EU membership process stimulated a

wave of major democratization reforms. The three parties forming the coalition

government faced heavy defeats in the ensuing elections of November 2002.

2008-2009

The fourth and the unusual crisis of the neo-liberal era; crisis of the real sector with negative growth and

rising unemployment

No direct and pronounced political impact although the government lost part of it firm majority in the ensuing local government

elections of March 2009; political crises are frequent during the 2000-

2009 period, but are not directly linked to economic crises.

ZİYA ÖNİŞ

TURKISH POLICY QUARTERLY

www.turkishpolicy.com53

as its dominant partner. Yet, the link is much less clear and direct than the previ-ous wave of military interventions. The post-1980 military interventions were much more indirect in nature and did not involve an explicit take-over of power by the military.

The most severe crisis of the neo-liberal era, the 2001 crisis, was accompanied by a major wave of democratization reforms as part of formal Europeanization pro-cess. This process effectively started with the Customs Union in the mid-1990s and gathered further momentum in 1999 with the EU’s Helsinki decision recogniz-ing Turkey as a candidate country. The economic crisis had a deep political impact by penalizing the three parties in the incumbent coalition government in the 2002 elections. However, the political impact was certainly not in the form of a military coup. Finally, the latest case was the “e-intervention” by the military in April 2007 on the eve of the election of the new president. This occasion was not motivated by economic factors; rather it was an attempt to counter the alleged threats to the secular nature of the regime.

The framework presented above enables us to draw two broad conclusions. First, the development and maturation of Turkish democracy over time, in spite of its continued shortcomings, helps to limit the power of the military by breaking the previously observed linkage between economic crises and direct military interven-tions. Second, the military continues to be an important political actor in Turkish politics in the post-1980 era. However, its interventions tend to be more subtle and indirect and much more oriented towards overcoming existentialist threats to the regime such as the secular character of the constitutional order. Accordingly, “crises of identity” replace “crises of governance” as the principal source of politi-cal instability or breakdowns.

Single-Party versus Coalition Governments and Linkage to Instability

A striking feature of Turkey’s political economy is the link between the type of government and overall economic performance. Majority governments have clear-ly outperformed coalition governments in terms of economic growth. Turkey’s growth spurts have been associated with majority governments in the dominant center right tradition (Table 3), which started with the Democrat Party (the DP) in the 1950s and continued with the Justice Party (the AP) in the second half of the 1960s. The Motherland Party (the ANAP) was the successor to this tradition dur-ing the early years of Turkish neo-liberal experience. More recently, the Justice and Development Party, with some qualification concerning its Islamist origins, constituted the latest stage of the line of majority governments in the center right tradition since 2002. The growth figures in Graph 1 clearly illustrate the trend of stronger economic expansion in Turkey during these four episodes.

TURKEY’S POLITICAL ECONOMY

54

VOLUME 9 NUMBER 3

“Narrow policy coalitions” such as the ISI coalition of the 1960s and the 1970s encompassing major industrialists, bureaucrats and organized labor are numeri-cally not strong enough to generate winning electoral coalitions in the context of multi-party democracy. Center-right parties in Turkey have been successful in ex-tending the domain of narrow policy coalitions to broad electoral coalitions. These parties have used patronage politics to distribute resources to wide segments of society.7 They have also successfully appealed to religious and nationalist senti-ments to generate widespread political support. The problem with these govern-ments, however, is that they have proved to be inherently unsustainable. The DP, after a golden age period in the early 1950s, progressively lost its early momentum in terms of both economic performance and electoral popularity. Indeed, the pe-riod ended with a major economic crisis and then the collapse of the democratic regime. Similarly, the golden age of the AP (1965-1971) came to a halt with a military intervention in 1971. The military interlude of 1971-1973 was followed by a major wave of economic instability under weak coalition governments in the late 1970s, again culminating with a major economic crisis in the late 1970s and the subsequent breakdown of democracy in 1980. A similar pattern was evident in the neo-liberal era. The golden age of ANAP was the period from 1983 to1987, when the party started to lose its popularity. There was no military takeover as in the earlier phases. However, the end of ANAP rule signified a new wave of coali-tion governments in the 1990s associated with varying degrees of economic and political instability, leading to three successive economic crises in 1994, 2000 and 2001. The AKP so far proves to be an exception in that the party is still in office af-ter eight years. The AKP has also been more successful in containing fiscal deficits compared to its predecessors. Nevertheless, the second phase of the AKP rule since 2007 has been less impressive in terms of political stability, reform orienta-tion and economic performance compared to its golden age during 2002-2005.

ZİYA ÖNİŞ

7 Ersin Kalaycıoğlu, “Turkish Democracy: Patronage versus Governance”, Turkish Studies, Vol. 2, No. 1, (Spring 2001), pp. 54-70.

TURKISH POLICY QUARTERLY

www.turkishpolicy.com55

Table 3: Single-Party versus Coalition Governments and Linkage to Economic Instability

1

Type of Government

Period Economic

Performance Sustainability

A. Single-Party Governments (center-r ight)

Democratic Party

1950–1960

Fast growth, especia l ly in ear ly years

Decl in ing popular i ty after 1958. Weakening of economic growth and r is ing inf lat ion culminated in an economic and pol i t ical cr is is fo l lowed by a mi l i tary take-over.

Justice Party 1965–1971

Reasonably good growth

Not sustainable.

Per iod ends with a mi l i tary coup.

Motherland Party

1983–1991

Reasonably good growth based on an export boom

Weakening of economic performance and r is ing instabi l i ty

towards the end of the 1980s. The party loses i ts e lectoral edge

and the per iod is fo l lowed by a wave of coal i t ion governments.

The Justice and Development

Party

2002–2010 and beyond

Good growth coupled with s ingle dig it

inf lat ion for the f i rst t ime for

several decades

Weakening of economic

performance dur ing the second phase of the government; s igns

of weakening popular i ty. However, the support base is st i l l

robust; i t appears to be more durable than previous center-

r ight governments, but may lose i ts e lectoral edge in the force of

cont inuing economic and pol i t ical chal lenges.

B. Coal i t ion Governments

Four governments, the duration of

the longest two years

1973–1980

Weak

performance; low growth;

r is ing instabi l i ty

Short-durat ion of governments

Seven

governments, the duration of

the longest three and a half years

1991–2002

Weak

performance; s ignif icant instabi l i ty

Short-durat ion of governments

TURKEY’S POLITICAL ECONOMY

56

VOLUME 9 NUMBER 3

Turkey has the experience of a record number of coalition governments. These governments correspond to three relatively short periods: namely the early 1960s, the second half of the 1970s and throughout the 1990s. The number and short duration of governments is clearly evident from the following figures. Four separate coalition governments were in office between November 1961 and October 1965. Five separate coalition governments occupied office between October 1973 and September 1980. More recently, seven coalition governments have occupied of-fice over a comparatively longer period from November 1991 to November 2002.

Out of these three separate waves, the experiences of the late 1970s and the 1990s proved to be extremely unstable, both in political and economic terms. Indeed, the two major economic crises of the post-war era, from 1978-1979 and 2000-2001, both erupted at the end of successive waves of coalition governments. Compared to single-party majority governments, coalition governments have found it much more difficult to impose macroeconomic discipline and create an environment of political stability conducive to long-term economic growth.

The experience of the most recent coalition government, involving the Democratic Left Party (the DSP), the Nationalist Action Party (the MHP) and the ANAP, is in-teresting and raises difficult questions for interpretation. Certainly, it is the longest coalition government in office with a period of three and a half years. During its early phase, the government failed to undertake the drastic measures needed and failed to prevent the dual crises of 2000 and 2001. Yet, in the aftermath of the 2001 crisis, this government was also responsible for some of the major economic and democratization reforms in recent Turkish history. This scenario offers sup-port to the interpretation that coalition governments, in principle, are capable of undertaking major economic and political reforms. The obvious qualification is that economic and political reforms were largely driven by key external actors such as the IMF and the EU and a deep crisis empowered external actors by helping to break resistance to reform among key segments of the coalition government.8

“The fact that coalition governments in Turkey have been largely unsuccessful should not necessarily imply that coalition governments are always prone to economic and political instability.”

8 Ziya Öniş, “Beyond the 2001 Financial Crisis: The Political Economy of the New Phase of restructuring in Turkey”, Review of Interna-tional Political Economy, Vol. 16 No. 3, August 2009, pp. 409-432.

ZİYA ÖNİŞ

TURKISH POLICY QUARTERLY

www.turkishpolicy.com57

The fact that coalition governments in Turkey have been largely unsuccessful should not necessarily imply that coalition governments are always prone to eco-nomic and political instability. There are successful cases of coalition governments in countries such as Italy, Belgium and the Netherlands that have been quite ef-fective in terms of managing their economies and contributing to political stability. Moreover, such governments have managed to retain office over long periods of time. This comparison suggests that the problem lies not with coalition govern-ments per se but with the quality of democracy or the level of democratization. Turkey’s democratic deficits in terms of the weakness of democratic institutions and checks and balance mechanisms as well as the weakness of democratic cul-ture are at the heart of the problem. As liberal democracy is consolidated in Turkey over time, it is no longer inevitable that future coalition governments will necessar-ily be associated with endemic political and economic instability.

The unstable nature of center-right governments in Turkey highlights a problem not unique to center right majority governments per se, and points towards the underlying weaknesses of the democratic regime and its institutions. The fiscal crises successive center right governments have failed to control in their quest to build large electoral coalitions are a clear manifestation of the weaknesses of the democratic regime. In line with the strengthening of democratic institutions and policymaking mechanisms, this pattern is likely to change. The AKP government, in spite of its shortcomings, has a better record than its predecessors in terms of managing the economy and imposing macroeconomic discipline.

The Unique Nature of the 2008/2009 “Crisis”

Turkey found itself in a unusual situation following the onset of the global financial crisis in September 2008. Unlike “the global crises of the periphery” of the 1990s, the 2008 crisis was a “global crisis of the center”. The crisis, originating from the United States, was rapidly transmitted to Europe and the rest of the world. Turkey suffered from a fall in capital inflows as well as a dramatic loss in export revenues, the latter being the result mainly of a demand shock from the European Union. Together with several Eastern European countries, Turkey was among the most affected group in the emerging markets category, with a collapse of growth and a parallel increase in unemployment in 2009.

The 2008-2009 crisis was quite different from the previous crises experienced by Turkey (Table 4). The previous crises were typically domestically generated crises, although external shocks and dynamics had a magnifying impact. They were the products of the expansionary phase of the “populist cycles”.9 A combination of

9 Ziya Öniş, “Domestic Politics versus Global Dynamics: Towards a Political Economy of the 2000 and 2001 Financial Crises in Turkey”, in Ziya Öniş and Barry Rubin (eds.), Turkish Economy in Crisis, (London: Frank Cass, 2003), pp. 1-30.

TURKEY’S POLITICAL ECONOMY

58

VOLUME 9 NUMBER 3

large fiscal and current account deficits were at the heart of each major crisis. Typi-cally, the crises manifested themselves as balance of payments crises; however, underlying each crisis was a deeper problem of the “fiscal crisis of the state”. Again, each crisis necessitated external financial assistance for the subsequent recovery process making the encounter with the IMF and the World Bank inevitable. Key ex-ternal actors were heavily involved in the post-stabilization and restructuring process of Turkey, with the role of the EU being particularly pronounced after 2001. Financial assistance from external actors was linked to “policy conditionality” which contrib-uted to the subsequent recovery process, but also limited some of the heterodox policy choices such as controls over short term capital flows that Turkey could im-plement in the absence of a major crisis. What made the 2008-2009 experience rather unusual was that the Turkish economy did not find itself in an immediate crisis situation. There was no balance of payments crisis requiring immediate IMF assis-tance. The robustness of the banking and financial sector improved considerably following the reforms in the aftermath of the 2000-2001 crisis. The fact that Turkey did not experience a single bank failure in the aftermath of the global financial crisis helped to boost the confidence of policymakers that Turkish economy was in strong shape and would be marginally affected by the crisis. The policymakers’ mindset was clearly conditioned by previous experience; the contours of the 2008-2009 experience did not seem to conform to the previous pattern. If there was no balance of payments crisis, no bank failure and no immediate need to sign an IMF stand-by agreement, the logical conclusion was that Turkey had largely avoided a crisis which originated from outside and was largely beyond its own control. Given this perception, it was not surprising that the government’s policy response was much more reactive rather than pro-active. Several measures have been implemented to alleviate the impact of the crisis, the most important element being the engineering of temporary cuts in consumption taxes to stimulate consumption. The recovery in economic growth illustrates the short-term bias in government’s policy response. Certainly, we do not observe in the Turkish context the kinds of vigorous growth-oriented fiscal stimulus packages implemented in the vast majority of G-20 countries in the aftermath of the global financial crisis.10

The one element of pro-active response by the AKP government to the crisis in-volved its assertive foreign policy. A key element underlying these foreign policy initiatives was a search for new markets and economic opportunities in Turkey’s im-mediate neighborhood, notably in the Middle East and North Africa. Key private sec-tor associations such as TOBB and TUSKON were actively involved in this process. Perhaps, we can add a fifth phase to Table 1 representing the transnationalization of small and medium-sized Anatolian capital in response to the latest crisis, driven largely by external forces.11 Pro-active foreign policy, however, may not be sufficient to bring about a sustained improvement in Turkey’s economic fortunes in the ab-sence of equally pro-active macroeconomic and industrial policies.

10 Ziya Öniş and Ali Burak Güven, “Global Crisis, National Responses: The Political Economy of Delay and Divergence in Turkey”, New Political Economy, Vol. 18 No. 5, 2011 (forthcoming).11 Ziya Öniş, “Multiple Faces of the New Turkish Foreign Policy: Underlying Dynamics and a Critique”, Insight Turkey, 2011 (forthcoming).

ZİYA ÖNİŞ

TURKISH POLICY QUARTERLY

www.turkishpolicy.com59

Table 4: Turkey’s 2008–2009 Crisis versus Previous Economic Crises

The AKP government has managed to maintain its popularity in the face of nega-tive growth and a parallel increase in unemployment during the course of 2009. The party lost part of its large electoral coalition in the municipal elections of March 2009, but still maintains a comfortable majority. The continued electoral support for the AKP was due to the weakness of the opposition parties, which failed to capitalize on the downturn of the economy. The principal opposition parties, no-tably the Republican People’s Party (CHP), focused primarily on political issues such as the nature of the regime and the threats to the secular constitutional

1

Previous Crises

2008 - 2009 Crisis

Source of the Crises

Predominantly domestically generated crises although

negative external shocks also had some impact.

Predominantly externally generated although weaknesses of the domestic economic

performance also had an impact.

Nature of the Crises

Typically a combination of fiscal and balance of payment crisis together with banking sector problems in 2000-2001; financial and fiscal

crises with significant negative ramifications for the real

economy.

Absence of a balance of payment crisis and

bank failures; weakening fiscal stance but not sufficiently to create a major crisis; leading to

policy makers’ failure to diagnose it as a “crisis” in the real sense of the term; external demand shocks creating a crisis of the real

sector.

Relations with the IMF

Crises inevitably led to IMF

stabilization programs. Other key external actors were also involved. The implementation of IMF programs also limited

the options available to governments such as a tax on

short-term capital flows.

No immediate need for the IMF; the government postponed an IMF program and displayed this as a sign of strength and

the ability to implement an independent stance and a sign of national sovereignty.

Nature of post-crisis Recovery

Typically quite rapid due to a

combination of previously delayed major policy

adjustments and significant external financial assistance.

V-shaped recovery in the short-run ; Turkey bounced back from the crisis in 2010. Yet, a

return to a high growth trajectory may prove to be more difficult in the face of an unfavorable

external environment and continuing structural weaknesses.

TURKEY’S POLITICAL ECONOMY

60

VOLUME 9 NUMBER 3

order. Furthermore, the AKP government was quite effective in terms of its politi-cal management of the economic crisis. The government was able to present the crisis as a purely externally generated phenomenon in spite of the fact that the performance of the Turkish economy was on a downward course from early 2007 onwards. Indeed, Turkey experienced a mini-populist cycle in the period leading up to the parliamentary election of July 2007 and in the period leading up to the municipal elections of March 2009, even though growing fiscal instability was not in the order of previous cycles in terms of its ability to cause a crisis on its accord. The government capitalized on the strength of the banking sector and presented an image of the Turkish economy which had progressively become much more robust over time. Similarly, the government continually delayed the signing of an IMF program in spite of pressures from big business that a program would be desirable in terms of enhancing confidence and generating additional external re-sources. The systematic delay in signing an IMF program was projected as a sign of strength of the Turkish economy and a sign of growing national autonomy. Turkey was no longer in need of an IMF program to help it out of a major crisis. In addition, the government’s progressive and reformist image was bolstered by the revitalization of democratization initiatives in the aftermath of March 2009 as well as the proactive foreign policy stance to improve economic and political relations with neighboring countries in the Muslim Middle East and the post-Soviet world.

Effective political management of the crisis does not imply, however, that the gov-ernment managed to address the longer-term, structural problems of the Turkish economy effectively during the crisis period. The recent “crisis” is predominantly a crisis of the real sector. Although there are signs of a pronounced recovery during 2010, Turkey may still find it difficult to escape a slow growth-high unemployment equilibrium with potentially destabilizing consequences in the medium-run, par-ticularly given the demographic structure of a large proportion of young people. Growth rates in the order of three to four percent per annum will not be sufficient to catch up with the living standards of advanced economies within a reasonable time span. The AKP government has so far managed to evade the storm and is likely to maintain its broad-based electoral coalition in the run-up to the 2011 general elections. The post-2011 phase, however, may prove to be more difficult.

Turkey’s encounter with the global financial crisis helped to expose some of the structural weaknesses of its growth performance in the post-2001 era, disguised by unusually favorable global liquidity conditions. These included excessive de-pendence for growth on external financial resources in the face of weak domestic savings and the inability to channel sufficient resources to research and techno-logical development to improve the long-term competitiveness of the real sec-tor. Turkey has made progress in strengthening its regulatory institutions in the aftermath of the 2001 crisis. The developmental arm of the state, however, has

ZİYA ÖNİŞ

TURKISH POLICY QUARTERLY

www.turkishpolicy.com61

remained relatively weak. To reactivate a process of high growth, in the order of six to seven percent per annum, Turkish governments clearly need to implement structural reforms such as a major tax reform and an educational reform to mo-bilize public resources for investment and raise the quality of labor force drasti-cally. Similarly, the reestablishment of the EU anchor is also important in economic terms by consolidating stability, attracting long-term capital on a sustained basis and providing a framework for mutually reinforcing economic and political reforms.

Conclusion

Turkey’s post-war development tra-jectory illuminates the difficulties of accomplishing large-scale economic transformation in an emerging demo-cratic polity. Significant transformation has occurred in the nature of Turkish capitalism over the past few decades; but this was a costly and crisis-ridden project. One of the key lessons is that Turkey’s democratic deficits have pre-vented the achievement of high eco-nomic growth. Turkey has the charac-teristics of an emerging tiger in terms of its young population, geo-political position, level of entrepreneurship, and the quality of human capital. However, so far it has displayed the characteristics of a “temporary star” with rapid growth taking place in terms of brief spurts followed by periods of deep instability and crises.12 The consolidation and deepening of liberal democracy in Turkey is likely to contribute to better economic performance by helping to prevent the costly stop and go cycles, an endemic feature of Turkey’s political economy in the post-war period.

“Significant transformation has occurred in the nature

of Turkish capitalism over the past few decades; but this

was a costly and crisis-ridden project.”

12 Ziya Öniş and İsmail Emre Bayram, “Temporary Star versus Emerging Tiger? Turkey’s Recent Economic Performance in a Global Setting”, New Perspectives on Turkey, No. 39, Fall 2008, pp. 47-84.

TURKEY’S POLITICAL ECONOMY