Turkey: 1946-1980

I will try to summarize Post-War period of Turkish economy until implementation of liberalization policies in 1980.

Postwar economic periods are generally classified as this by academicians

• After World War 2 Soviet Union's territorial demands pushed Turkey towards Western Block.
• After that, Marshall Plan for reconstruction of Europe after the war was extended also to Turkey.
• Before the transfer of funds US experts prepared reports on Turkish economy and Turkish politicians- a kind of - were guided on what should be done in the economy.
• The summary of demands by US from Turkey was to abandon the etatist/state controlled economic policy.
• Although this tendency to quit this policy had begun before Democrat Party won the 1950 (nineteen-fifty) elections, the move accelerated during the  Democrat Party rule. By the way, Turkey was under one-party rule from it's foundation in 1923 to 1946. That one-party was Republican People's Party, they lost at the first free elections in 1950 and they are still the main opposition party currently although there is no Democrat Party anymore.
• In this new period, agriculture was given more importance compared to etatist era. Some state-owned enterprises were also tried to be sold but that attemp was not succesful due to lack of private sector's interest.  
• Some of main developments in this period:

• Agricultural production doubled from 1947-1953 mainly by an increase in cultivated area.
•  Also Marshall aid was used by Democrat Party goverment to import agricultural machinery. For example, number of tractors rised from 10 thousands in 1946 to 42 thousands at the end of 1950s.
• Global demand, increased prices of agricultural products and good wheather conditions were all in favor of this sector at the beginning. And thus country experienced an agriculture-led boom in this period. The growth rate was on average 8.7 % during this period.
• The favorable conditions for agricultural production in the remaining part of 1950s was quite opposite of the previous period. The prices of agricultural products were falling resulting decrease in export revenues as well but the goverment decided to subsidize the producers in this period. This subsidizing was not done directly from the budget. It was by Central Bank's credits to the government institution which was responsible for buying  agricultural products-mainly cereals above the market prices. This indirect subsidizing created inflation in this period as well. The motivaiton behind this subsidizing seems as political populism because the majority of electorals were living in rural whose revenue was coming from agriculture.
• Results of this second period was overvaluation of currency and lower exports and reduction in foreign exchange reserves . 
• Then goverment decided to take action. Imports began to be restricted and this caused shortages of many consumption goods (a short ancdote about this restrictions: it is said that drinking  tea was not much popular in Turkey until that time and coffee/turkish coffee was heavily consumed by Turkish community but because of shortage of coffee during this period, black tea has begun to gain popularity over coffee and now Tukey is number one worldwide in terms of black tea consumption - al long term effect of economic policy :)).

• In the second half of the 1950s government started to abandon liberal economic policy and intervened more in economy. New state-owned enterprises were established and some imported products were tried to be produced in the country. Although the growth rates were still high in this period, the problems such as accumulated foreign debt (due to balance of payments deficit) , high inflation etc. resulted a deal with IMF in 1958. Foreign debts were restructured, ISI-like policy abandoned again. Finally, escalated political tension and bad economic conditions led a military coup in 1960 )  (That was the first military coup in Turkey and a bad habit of the Middle East, 8 years before that coup there was also a military coup in Egypt and Gamal Abdel Nasser came into power in Egypt.  After that, every 10 years in Turkey, there would be a coup or a coup-like intervention.
• To summarize, 10 years of Democrat Party rule was a period remembered positively by farmers and peasants. Moreover, road network was developed in this period. A signficant social change in this period was migration from rural to urban despite the support to the agriculture sector.
• After the military coup, there was a transition period of two years to return civilian authority. Elections were held in 1961 and military handed over the authority again to the civilians.
• ISI policy was institutionalized and started to bo adopted beginning from 1962 by the new government. ISI was applied as  5-year plans

The age of import substituting industrialization: 1963-1979

• One important criticism to Democrats was the absence of long-term and coordinated economic policy.
• After the coup, State Planning Organization (SPO) was established in 1961. After that in 60s and 70s the economic policy was going to aim the protection of domestic market and industrialization through import substitution.
•  In this period, a large part of technology was obtained from abroad through patent and licensing agreements.
• The planning techniques made heavy use of a restrictive trade regime, investments by state economic enterprises, and subsidized credit as key tools in achieving ISI objectives.
• SPO was also directing private sector's investment decisions.
• Holdings which were actually emerged before ISI era, played a much larger role in this period.
• Private sector, especially holdings were focusing on consumer goods sector while state enterprises were directed to invest in large-scale intermediate goods idustry 
• A problem after 10 years of ISI: This was sharp increase of real wages. Since the domestic market was heavily protected from import threads, this increase of real wages was not seen as a problem in first 10 years. Because manufacturers were not under pressure to compete in the export markets.
• That's why share of  industrial exports in GDP  was less than 2% during the planned economy period (contribution to GDP). (will discuss at the end a little bit more)
• As mentioned before Public Sector was at the heart of ISI policy. As we see, in manufacturing industry share of public sector is higher than private sector.
• Similarly, investment share of public sector was also quite high in the planned economy.
• Sector of consumer durables improved significantly during this period and this sectors are currently doing still well in Turkey and making substantial exports.
• As we will discuss at the end, exports of manufactures were not considered enough. 
• Oil shock in 1973
• First oil shock did not affect Turkish economy too much unexepectedly mainly with the support of  remittances (Funds sent by Turkish migrants in Western Europe).
• While industrialized economies were taking painful steps to adjust their economies to new high oil prices, Turkey was following expansionist policies at that time.
• This expansion then funded by costly external borrowing.
• And private sector was also encouraged to use external debt (exchange rate risk of private sector was undertaken by the government)
• As a result government debt increased very rapidly.
• In 1978 and 1979, Turkey experienced its most severe balance of payments crisis of the postwar period. The borrowing and expansionist trend after first oil crisis combined with the second oil crisis caused shortages and long queues in such as gasoline, meat, margarine and in many other consumer products.
• The crisis was tried to be overcome with the IMF. IMF conditions were not accepted immediately in 1978, steps were taken gradually and finaly in January 1980 ISI policy was decided to be abandoned.

Why ISI policy failed?

• The period started with a military coup and ended with a military coup. (Liberalization decision was made before the coup by civilians but the execution of the decisions was going to be done after the coup)
• First of all, as you said in last week for the reforms in Ottoman Empire, all these efforts should not be considered as totally unsuccesful. For example, GDP per capita in Middle East in general grew during this period compared to last era (Interwar Era).
• annual growth rate was 6.8% and real wages almost doubled during the period btw 1963-1977 in Turkey.
• Then what was the problems?
• Not well planned subsidies to industries by social planner, and fixed exchange rate despite inflation caused misalloction of resources in both agriculture and industry.
• For Turkey, political instability, fragile coalitions with short term horizons in 1970s and lack of consensus on structural reforms  were other issues
• Export orientation of manufacturing industry remained weak
• ISI program couldn't be carried into the technologically more difficult stage (like prducing capital goods)
• Labor unions were powerful due to new constitutional rights and they were in favor of the continuation of the protected domestic market since they feared that export orientation would put downward pressure on wages.
• After first oil crisis Turkey was basically consuming more than it produces and this situation only lasted for 3 to 4 years. Budget deficits were monetized during this period.
• Finally, by 1979 inflation had reached triple-digit levels because of this monetization, unemployment had risen to about 15 percent, industry was using only half its capacity, and the government was unable to pay even the interest on foreign loans. Therefore they had to make an agreement with IMF and declare a liberalization policy.

I have some graphs that summarizing Positive and Negative results of ISI Period.

What could be done to avoid this "relative" failure?

• Şevket Pamuk says that a shift towards exports/forcing the producers to compete in global markets would have helped Turkish industry. It would have increased its efficiency and competitiveness, acquired the foreign exchange necessary for an expanding economy, and even supported the import subtitution process  itself in establishing the backward linkages towards the technologically more complicated and more expensive intermediate and capital goods industries. Pamuk believes that there existed an opportunity for export promotion in early 1970s, especially in the aftermath of the relatively successful devaluation of 1970. He states that by that time, Turkish industry had acquired sufficient experience to be able to compete, or at least to learn to compete, in international markets.
• For that major shift to occur, he says, a new orientation in government policy and the institutional environment was necessary.
• But unfortunately this didn't happen.

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