TURKEY : FROM INWARD-

ORIENTED ETATISM TO

OUTWARD-LOOKING

LIBERAL STRATEGY

Prof.Dr.Coskun Can Aktan

Dokuz Eylul University

Faculty of Economics & Management

&

Social Sciences Research Society

http://www.sobiad.org

INTRODUCTION

From the beginning of the proclamation of republic in 1923 until the end of 1970' s, Turkey followed an inward-oriented mixed economic policy. At the beginning of 1980, Turkey adopted a comprehensive stabilization and structural adjustment program in order to achieve free market economy in the country. Since then,Turkey has been implementing some major economic policies for this end.

1923-1930 Period: The New Republic Years

Turkey gained its independence under the leadership of

Mustafa Kemal -popularly known as Ataturk - on 23 April 1920 and proclaimed the Republic on 29 October 1923. At the proclamation of republic,Turkish economy was not strong enough and infrastructure was destroyed during the national independence struggle.As a matter of fact,the Republic of Turkey was founded on the social and economic heritage of the Ottoman Empire. The economic problems of the Empire aggravated constantly during the 19th century and became worse in the first quarter of the 20 th century. When the Turkish Republic was proclaimed, it was completely devoid of the ecenomic means of the empire. Furthermore, it had inherited a heavy burden of debt and an economic structure that collapsed completely.

During the national independent struggle years, Ataturk, in his speech to the Turkish Grand National Assembly on March 1, 1922 focused on the importance of economic development and one year later, as a chairman of "Anadolu and Rumeli Mudafa-i Hukuk Cemiyeti" (Association for the Defence of Anatolia and Territories of the Europian Continent Particularly Thrace), he issued a statement proposing to take some measures in the field of importing agricultural machines, production of commodities with domestic raw materials, construction of railways, modernization of schools, improvement in health services, productive utilization of forests and mines etc.

Ataturk, after the proclamation of Republic called an economic congress to be convened in Izmir 1923. The new Republic's first and the most important decisions concerning economic system were taken at this Congress.

There were mainly two crucial policy issues, which were debated in length at this congress. The role of the government and the role of the foreign capital in the development of economy. Minister of Economy, Mahmut Esat Bozkurt outlined the main principles of the new government's economic policy at Izmir Economic Congress as follows:

" We are not attached to laissez-faire, socialist, communist, etatist or protectionist schools of thought.We have a new school of thought, which belongs to the new Turkey and corresponds to a new economic outlook. I call it the New Turkish Economic School. ... The new Turkish should follow a new mixed economic system. Economic enterprises should be undertaken partly by the state and partly by private individuals. For example, the state should direct large scale credit and industrial undertakings." (See: Hole, 1981; 39-40)

The major decisions taken at the Congress

were;

- Extending credit for private entrepreneurs,

- Selling land to individuals for the establishments of industrial facilities,

- Enacting laws concerning the encouragement of private sector activities,

- Protecting domestic industry against outside competition,

In sum, the main economic role was assigned to both private and public sectors at this congress. It was remarked that "the task of the state begins where the activity of private enterprise ends." (Hershlag, 1984; 174.)

The Izmir Economic Congress can be accepted as a first initiative to determine the Republic's economic policy. Even though, a Mixed Economy Model was accepted at Congress, the liberal economic model had been tried to implement until the end of the decade. However, some deficiencies hindered the private sector activities and compelled government to interfere to the economy.

Mainly the following factors affected

private sector activities negatively in the

first years of the New Republic:

- lack of capital accumulation of private

sector,

- risk and uncertainty in some sectors,

- lack of infrastructure,

- lack of entrepreneurial skill and experience.

For these reasons, it was necessary for the government to take an active part in economic activities.

1931 - 1949 Period: Etatism Era

The period from 1931 until the end of the following decade

constitute a new era in the Turkish economic history. In 1931, Republican People's Party officially announced at the Third Grand Congress that, economic growth would be succeeded in through active governmental interventionism. It was asserted that government intervention is necessary to " ensure the welfare of the nation and the prosperity of the state." (Hershlag, 1984; 174).This principle of the Republican People's Party was called "etatism". Etatism was accepted as a method or a strategy of economic development in this period. Etatism is understood "the emergence of the state as a pioneer and director of industrial activity, in the interests of national development and national defense in a country where private enterprise and capital are too weak to do anything effective." (Sayan,1968;1)

A similar definition was given by Bernard

Lewis. He described Etatism "as the

intervention of the state as a pioneer and

director of industrial activity, in the interests of

national development and security, in a

country, in which private enterprise is either

suspect or ineffective." (Lewis,1952;49)

On the other hand, Ataturk himself

described the Etatism as follows

Etatism "is a system peculiar to Turkey,

which has evolved from the principle of the

private activity of the individual, but places on

the state responsibility for the national

economy... to do quickly things, which have

not been done throughout centuries in the

Turkish Motherland by individual or private

activity. It is a system different from

liberalism. " (Hershlag,1984;176)

Etatism determined the tasks of the

government as folows:

the government had to take an active role in

economic activities in which, private sector

investments were inadequate. Government

was charged by the control of mines, forests,

canals, railroards etc. Government also

undertook the activities of public utilities.

(Karal, 1981;21)

1950-1959 Period: Liberalism

Movement

The years of 1950' s constitute an important period

in the economic history of Turkey. In this period,

etatism has been severely criticized and a liberal

economic policy had been tried to implement. In

1950, first multi-party elections were held in Turkey

and Democrat Party (DP) gained the victory on May

14, 1950. DP was formed under the leadership of

Celal Bayar and Adnan Menderes. This party

opposed government interference in the economic

field and embarked on a liberal economic policy.

Democrat Party, immediately after the election, announced

that government's functions should be reduced whereas the

private sector activities should be encouraged. DP Party

Program, which was read in the Turkish Grand National

Assembly on the 29th of May 1950 declared: "Hereafter, government will not operate in

the fields, which have not public service

characteristics and the public economic

enterprises established for different purposes

- except those that have been doing a public

service and those operates in the field of

main industries will be gradually sold to the

private sector in a program." (Yasa, 1966;49)

The Article 43 of the DP Government

Program determined the tasks of the

government as follows. "To undertake the activities, where private capital is

inadequate or the activities, where private enterprises are not interested in order that they do not anticipate profit in the short-run; to deal with the activities related to the defense of the country and the activities, which will be beneficial for the other economic activities; to build especially heavy industry and grant power plants; to construct railroads, ports and water supply facilities; to develop the car industry;... to operate the mining and forestry businesses, which will be beneficial for the future generation." (Yasa, 1966; 47)

On the other hand, the President Celal Bayar, in his

speech to the Grand National Assembly Inauguration in

November 1950 mentioned that:

" A democratic economic policy can be defined as a system based on private property, protecting individual freedom and emphasizing on the importance of private enterprise. Current government should be responsible for only some special tasks related to commercial businesses and the main duties of the government should be specially to encourage, regulate and control the economic activities, at the same time, to provide a wide and secured field of work for the private enterprises by preparing the legal and economic structure." (Kuruc, 1963;144)

1960-1980 Period: Planned Years and

Mixed Economy

From the beginning of 1960 until the end of 1970' s,

Turkey followed a mixed economic policy. The First

Five Year Development Plan, drawn up in

conformance with the stipulation contained in the

1961 Constitution covered the period of 1963-1967.

This Development Plan outlined the strategy as

follows:

" The activities of the government will be planned to

achieve a high economic growth and a balanced

economic deveopment." (Aktan, 1987; 39)

Post- 1980 Period: Towards Free

Market Economy

Turkey moved from an inward-oriented etatist strategy, which is called "Mixed Economy" to an outward- oriented "free market economy" during the 1980' s. On January 24, 1980, the government introduced a comprehensive set of economic stabilization and structural adjustment measures. Economic stabilization program primarily aimed to curb inflation, to overcome the scarcities that hindered production and bootlenecks in inputs, to reduce the foreign trade deficit through export promotion and trade liberalization etc. Structural adjustment program, on the other hand, aimed both to stabilize the economy and to achieve restructuring the economy through the principles of a free market strategy in the long- term. In the following, we will summarize January 24, 1980 measures and after that, continue to explore other structural adjustment policies.

Major Free Policies

Implemented in the Post

1980 Era

2.1. Privatization and Deregulation

Privatization, in broad meanning refers to the

transfer of the role and the functions of government to the private sector. In this concext, several policies have been implemented in Turkey, since the beginning of 1980. Deregulation, imposing user charges for public goods and services, contracting-out, joint venture are some examples. On the other hand, the sale of public economic enterprises assets or shares to the private individuals and firms constitute the other aspect of privatization. This has been one of the major economic policy in Turkey in the 1980' s.

2. 2. Deregulation in Banking

Until July 1980, deposit rates and, to a large extent lending rates of the banking system were determined by the Central Bank. During the 1970' s, only modest increases were granted and with the acceleration of inflation rates, interest rates became increasingly negative in real terms. In Turkey, banking and other financial services has been deregulated a great deal, during the 1980' s. In July 1980, interests rates paid for time deposit and bank loans were freed. Although, initially a " gentlemen' s agreement" enforced by the cartel of commercial banks limited the extend of the increases, interests rates subsequently rose to a considerable extent on both deposits and loans as the pressure of competition rendered the agreement largely ineffective. The Decree 8/909 which was effective as of July 1, 1980 became a first step for full deregulation in financel services. Following these measures, in October 30, 1986, interest rates paid for demand deposits were also freed to some extend.

2. 3. Foreign Exchange Policy

Following January 24 Measures, new

measures to foster and initiate free market

economy have been put into effect in the

following years. One of the most important

reform was the termination of Decree 17,

Concerning Protection of the Value of Turkish

Currency.

Foreign Trade Policy

In the post- 1980 period, trade liberalization has

been one of the fundemantal objectives of market

economy, which has been tried to implement in

Turkey, As known, import substitution was adopted

to assure Turkey' s " economic independence" and

to protect domestic " infant industries" against

outside competition since the proclamation of

Turkish Republic. Until 1980, all foreign trade policy

instruments such as quantitative restrictions, tariffs

etc. were used to support import substitution.

Turkey' s structural adjustment program emphasized on the liberalization of foreign trade regime in the post- 1980 era. Both import and export regimes have undergone a substiantial transformation during the 1980' s. The import regime of 29 December 1983 constitutes a major step towards liberalizing foreign trade and eliminating red tape in imports. Prior to 1983, the import regime was determined by a decree drafted each year, and the regime was generally valid for only one year. Under the new, more liberal arrangement, however, this annual decree has been eliminated and the import regime set forth at the end of 1983 has been given permanent validity.

Foreign Investment Policy

One of the major policy decisions in 1980 was the adoptation of open and flexible foreign investment policies. On March 13, 1986, a new decree (Foreign Capital Framework Decree) was put into effect concerning foreign capital as a supplement to the present Law Concerning the Encouragement of Foreign Capital. (Law No:6224), which was enacted on January 18, 1954.

Since the beginning of 1980’s, governments have taken measures and implemented policies to encourage the inflow of foreign capital.