A Case Study on the NearEast
-Introduction
The development o f a market economy in Turkey has attracted increasing interest.
The reasons are manifold: undoubtedly there are certain specific features in the Turkish path to a market economy; the country has for a long time been seeking to jo in the European Community; the case o f Turkey is also part o f the international experience o f transforming backward economies into modern ones. The question has also arisen as to in what way Turkey can become a link between the economically advanced Western countries and the newly-established states in Central Asia and the Caucasus. A study o f Turkish economic history may help to give a clue to under- standing the specific features o f Turkey’s historical development, its economy, societal structure, and the organization o f political power. This w ill also shed light on Turkey’s achievements in comparison with a number o f nations and the causes o f its lagging behind the Asian success countries, bearing in mind the fact that Turkey had embarked on a path o f transformation long before the latter.
I. The Historical Background: State Intervention, M ixed and Planned Economy
The economic crisis o f 1929-1933 demonstrated Turkey’s deep-rooted economic backwardness, the low level o f agriculture (the mainstay o f the country’s economy), its lack o f a well-developed credit system and dependence on foreign investment.
In early 1930s President Kemal Ataturk and his aides were keen to speed up the establishment o f big industrial enterprises and state farms by using prim arily govern- mental sources and by giving priority to the provision funding and assistance to industry and agriculture. That period saw the appearance o f etatism, which became the main thrust o f the government’s economic policy. The state undertook the task o f eliminating (or at least alleviating) the degree to which the country trailed behind economically developed nations. The economic policy was aimed at strengthening the leading sectors o f industry and agriculture and the banking and insurance systems.
The principal method o f state intervention at that time was in the form o f priority allocations o f funds earmarked for the construction o f advanced (by the standards o f that period) industrial enterprises such as the Karabuk iron and steel complex, Kaiseri and N azilli textile factories, m ilitary production plants at Ankara, and for the creation o f state trading companies fo r agricultural produce, such as the Agricultural Produce Department, State Agricultural Enterprises Society, Imported Agricultural Equipment Society. Organizationally, etatism was propped up by big banks which fu lfilled , in
addition to credit, planning and controlling functions. The biggest such organizations were the Agricultural Bank, the Sumerbank (in manufacturing) and Etibank (extrac- tive industry). The ruling elite’s main funds were concentrated in the Business Bank, which moved into a dominant position among the country’s private banks shortly after its foundation in 1924. This was facilitated by the fact that Djelal Bayar, the bank’s founder, a prominent politician, joined the cabinet as a M inister o f Economy in the
1930s.
Before the Second World War, etatism contributed to reorganizing the Turkish economy in a number o f fields, accelerating and strengthening large-scale business.
Thus, from 1927 to 1938, the share o f agriculture in the country’s national income shrank from 67% to 47%, while that o f industry rose from 10% to 16%, and that o f the service sector expanded from 23% to 36%. Per capita income increased by nearly a third.1 Turkey was able to pay o ff a significant part o f the so-called Ottoman debt, overcome the foreign trade deficit, increase exports o f cereals, animal produce and mining products, expand road building, etc.
The state, however, failed to industrialize and modernize the country. In effect, state intervention created the basis for a dual economy, in which free competition was confined to narrow margins and traditional low-productivity economic forms were quantitatively the most numerous. In a backward economy an enclave o f a small number o f state enterprises was created, benefitting from government privileges and having a special system o f raw material supplies, credit, control and connections with foreign companies, etc.
The interaction and intertwining o f state and large private companies (mainly in banking) contributed to the use and consolidation o f a specific type o f monopoly state-private-bureaucratic institutions which had neither a basis in history nor a modern industrial base. In the conditions characterized by a lack o f mature market relations and the prevalence o f a state sector, in Turkey huge monopolies emerged, first and foremost in the credit, financial, and commercial spheres. The tendency toward monopolization was not hindered by the fact that some investments were not large in absolute terms, because they had become concentrated w ithin a narrow circle o f individuals who relied on government assistance and had access to state funds.
As a result, the political factor acquired special importance for investments since bureaucracy and corruption served as its breeding ground.
Although Turkey was not directly involved in the Second World War, the latter left a big impact on the country. The Turkish government strengthened state-monopolistic tendencies in the control and regulation o f the national economy by directing its main efforts towards edging out non-indigenous (mainly Armenian, Jewish, and Greek) entrepreneurs out o f the local market and replacing them with Turkish business. In January 1940, a special “ Law on National Defence” gave the government unlimited economic powers. The State obtained the right not only to control the output o f local factories but to determine the range o f products to be produced. It also received the right to introduce compulsory labor conscription in rural and urban areas, to deter- mine the price and volume o f purchased agricultural products and industrial goods, to
1 The First Five-Year Development Plan 1963-1967, Ankara: Central Bank of the Republic of Turkey, 1983, p. 8
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establish control o f raw material supply and sales o f manufactured products, to natio- nalize enterprises owned by private and non-indigenous entrepreneurs, to regulate ex- ports and imports, profit margins, to impose additional taxes on producers, to reduce consumption o f foodstuffs and industrial goods, etc.
Implementation o f this and other regulations expanded governmental influence in the national economy. As a consequence, in 1938 the state factories employed only 12.6% o f the labor force. In 1948 the percentage rose to 30%.2 The state sector in- creased production o f electricity, textiles, pig iron, steel, glass, paper, etc. The growth o f output was chiefly stimulated by m ilitary orders. Consumer goods were mainly sold in the “ black market” , where the price level exceeded the official one by more than 4-5.3 The state also received considerable earnings from the sale o f strategic raw materials, consumer goods, and agricultural products to the warring countries. In the period from 1940 to 1945 the cumulative balance o f Turkey’s trade with the countries o f the Axis and A llied blocs produced a surplus o f 332,000,000 lire (Turkey’s exports in 1945 were 219,000,000 lire).4 Turkey received weapons and loans on favorable conditions from Germany, Britain, and the United States.
The favorable Turkish economic situation during World War II and the govern- ment’s policies encouraged the growth and consolidation o f local private entrepre- neurship. As the magazine Turk Ekonomisi put it in 1951:
“ We can definitely say that the capital accumulation in today’s Turkey is sufficient to start industrialization in the private sector. But the accumulated capital is not in the hands o f enterprising persons, or rather not in the hands o f entrepreneurs who would wish to invest them in the industry.” 5
S till, supported by the state, namely by the Turkish Bank o f Industrial Development which was set up in June 1950, and foreign investors, industrial growth continued.
Prior to 1940, 344 large manufacturing enterprises (employing more than 10 wor- kers), existed in Turkey while another 368 such enterprises were established in 1940-49, 556 in 1950-54, and 784 in 1955-59.6 A number o f big private firms (N. Edjadjibasi, H. O. Sabanci, V. Кос, D. Yasar, etc) acquired a leading position in the Turkish business community during and immediately after World War II.
The growth o f the state and private economy was manifested in the way in which the problem o f changing the country’s model o f development was addressed after the War. The change in Turkey’s links with the world economy also had its impact. The Cold War brought Turkey closer to the West, w ith important m ilitary, political, and economic consequences. O f considerable importance was the aid to Turkey under the Truman Doctrine and the Marshal Plan. The total amount o f American m ilitary aid to Turkey between 1948/49 and 1951/52 came to $ 687 m illion.7 However, despite foreign aid and assistance, the Turkish economy progressed quite slowly. The Law on
2 Turkiye 'de ozeł sector ve kalkinma, Ankara: Turkiye Ticaret Odalari. Sanayi Odalari ve Ticaret Borsalari Birligi, 1966, p. 36.
3 K. Boratov, Turkiye iktisat tarihi 1908-1985, Istanbul: Gercek yayinevi, 1989, p. 68.
4 Yeni Turkiye, Istanbul: Ant, 1959, p. 267.
5 Turk Ekonomisi, Ankara, No. 105, 1951, p. 89.
6 D. Avcioglu, Turkiye'nin duzeni (dun-bubun-yarin), Istanbul: Tekin yayinevi, Ikinci kitap. 1976, p. 729.
7 M. Singer, Economic Development in the Context o f Short-Term Public Policies: The Economic Advance o f Turkey 1938-1960, Ankara: Ayyildez Matbaasi, 1977, p. 56.
G iving Land to the Peasants adopted in 1945 produced rather modest results and did not alter significantly the traditional system in the Turkish countryside. Based on this law, in the period from 1947 to 1950, 20,200 peasants purchased from the state only 90,900 hectares (nearly 230,000 acres) o f uncultivated land. This should be compared to the fact that in 1963 over 413,000 o f Turkey’s 3,500,000 peasant households were landless. Additionally 2,000,000 peasants owned small plots o f land whose output was not sufficient to support a fam ily o f four to five persons. Archaic economic rela- tions survived in the countryside such as metayage, a barter economy, and artisan pro- duction. The yields o f the main field crops were extremely low.8
The bulk o f industrial output was produced by small scale artisan and low mecha- nized shops. Only about 2% o f enterprises covered by the census could be classified as big industrial establishments. These employed some 37% o f the industrial work force. Labor productivity remained at a level far below international standards. The value added index at state enterprises was growing by a mere 0.7% per annum, while the growth rate in the private sector reached 4%.9
A new political force representing the advocates o f modernisation came to power in 1950 after a long spell o f one-party dictatorship. The ten years during which the Democratic Party was in office saw many government attempts to adopt the Western system o f free enterprise, to turn Turkey into “ little America” , to obtain aid and support from abroad on favorable conditions and, to modernize industry and agri- culture. The fact that the Turkish economy had a mixed character was not taken into account.10
The state sector, however, remained strong. Investments in the state-owned economy grew seven fold and represented 48% o f all investments. The state sector controlled as much as 35% o f manufacturing capacity, 32% o f the total volume o f in- dustrial output and 10% o f the national income. More than two thirds o f the country’s bank assets was concentrated in state banks."
Turkey also received a significant amount o f foreign investment mainly from the United States. Several jo in t Turkish-foreign ventures came into being based on the altered Foreign Investments Law. In July 1958 the country took the first step to gain entry to the Common Market, by making a formal application. Foreign aid contri- buted to improved labor productivity. The value o f agriculture, chiefly in Turkey’s western regions rose by 69% in 10 years.12 As a consequence, the characteristics o f the dual economy and the gap between traditional and modem sectors increased.
The private sector continued to grow chiefly through increased business activities o f corrupt bureaucrats, as well as large intermediary companies and firms whose ma- nagement had close links w ith the government. During the decade-long rule o f the Democratic Party, the number o f registered companies exceeded those set up during
8 Turkiye istatistik yilligi 1968. (Statistical Yearbook o f Turkey), Ankara: Devlet istatistik enstitusu maat- basi, 1969, pp. 166-67.; R. Aktan, “Turkiye ziraatinda produktivite,” In: Turkiye ekonomisinde produk- tivite meselert. Ankara: Iktisadin arastirmalar enstitusu, 1958, pp. 31-35.
4 M. Singer, Op.cit. pp. 71-72, 74.
10 Y. Rosaiiev, Ekonomicheskaya istoria Turetskoy Respublika Moscow Nauka, 1980, pp. 179-184.
11 Ibid: p. 191.
12 Turkiye'de ekonomik yapi degismeleri 1913-1988, Ankara: TUSIAD, 1989, pp. 22-24.
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the twenty-seven years o f People’s Republican Party domination by five times. W hile in 1950 the country had only 802 companies, in 1960 their number rose to 3,996.13
Although Turkey still lagged behind developed countries, large-scale companies gained ground. The share o f the top 10% o f plants and factories in industrial output reached nearly 75%. A few companies came to dominate Turkish business. In 1952, 4% o f all companies took 70% o f total company profits. In the early 1960s, 5% o f all taxable firm s enjoyed 86% o f total company income. The rest o f the companies (95%) had to be content with the remaining 14% o f all profits.14
High revenues were accruing to the Business Bank which was headed by the Presi- dent o f the Republic and served as a center o f gravity for top businessmen and politi- cians. According to our estimates, this bank had accumulated assets equalling nearly 50% o f private banks’ assets, 70% o f the shares in joint-stock companies, and about 50% o f deposits, and 40% o f profits by the 1960s.15 Thus, the degree o f moderniza- tion was quite extreme. The dual character o f Turkey’s economy, however, survived.
The drive to get rid o f the traditional economy failed to create a modern market mechanism o f economic growth in a country which had retained remnants o f semi- natural economic forms and effects o f a long-practiced policy o f etatism. Private firms found it more profitable to invest not in the industrial sector but in banking and commerce. A developing modem economic sector remained an island in the sea o f a self-sufficient traditional sector. Underdeveloped market relations had disrupted the sequence o f development and interaction o f various economic forms, thus creating a real threat to the living standards o f a wide stratum o f people generating their means o f existence in the traditional economy. This, in turn, exacerbated social tensions.
The high rates o f growth registered in the first years o f the Bayar-Menderes government were followed by an economic decline. By 1956, production started to contract and commodity circulation to fall. Imports declined by 18%, and in 1958 they were dropped another 20%. By 1958 exports had plunged by 28%. The average annual growth o f real per capita income had slowed from 8.8% in 1952 to 0.7% in 1956 and to 1.1% in 1959.16 National and foreign debt soared. From 1950 to 1960, prices increased approximately three times. Inflation raised its head. Under-utilization o f industrial capacities reached significant levels. The spread o f unemployment was unprecedented. The state budget deficit widened and the foreign trade balance worsened.
The difficulties experienced by the entire economy aggravated the internal political situation. An anti-govemmental movement gathered momentum. It was in this context that top generals carried out a coup d’ etat on May 27, 1960. The country’s government was placed under arrest and later brought to trial.
The coup produced significant changes. The thrust o f the policies pursued by the m ilitary authorities (The Committee o f National U nity) was directed at an attempt to embark on transformations in the interests o f numerous small enterprises in towns and
13 Turkiye istatistik yellegi 1964-65. Ankara: Devlet istatistik enstitusu, 1965, p. 362.
14 Y. Rosaliev, Osobennosti razvitiya kapitalizma v Turtsii, Moscow: Nauka. 1962, pp. 199-200.
15 Turkiye’de ekonomik yapi degismereli 1913-1988, Ankara TUSIAD, 1989, pp. 24-25.
16 Y. Rosaliev, Klassy i klassovaya borba v Turtsii, Moscow: Nauka, 1966. pp. 9-31. V. Danilov, Politi- cheskaya borba v Turtsii, Moscow: Nauka, 1985. pp. 45-55.
villages, to reduce the huge gap between top layers o f corrupt bureaucratic finance and the bulk o f entrepreneurs, to eliminate, or at least, to place under the control o f public opinion, red tape, corruption and bribery and to stop the country’s slide towards economic collapse. In sensing the necessity o f correcting the process o f development o f a market economy so that it would not do harm to the bulk o f the po- pulation, the Committee o f National Unity adopted a number o f stabilizing measures.
The state sector, however, continued to serve as the basis for the adopted policies, receiving additional privileges and funds, under the conditions o f intensified political contradictions, debates, and attempts made by representatives o f rival parties to bring pressure on the government.17
However, the end o f the “ transitional period” and the adoption in 1961 o f a new Constitution o f the Turkish Republic (the previous one had been adopted in 1924), which gave more rights and liberties to the population and political parties, failed to bring peace and accord to the country’s politics. On the contrary, the internal struggle intensified, often drawing in large masses o f people. Successive coalition governments, attempted coups, referendums and elections, and mutual accusations o f “ poor leadership” , patronage o f extremists and links with imperialism and commu- nism, etc. did nothing to clear the way fo r a new economic model and produced a negative impact on the development o f a market economy. The country’s politics did not focus attention on the cardinal problems o f long-term modernization o f Turkey, but highlighted short-term problems such as inflation, wage levels, government debt, budget and foreign trade deficits, etc. Successive governments did not set for them- selves the task o f switching to a market economy. In fact, past history seemed to repeat itself, with the governments attempting, by the use o f old methods, to improve economic performance. Plans drafted by governments o f various orientations on the whole envisaged state sector-based development, while also luring private Turkish and foreign investment, although the desired level o f foreign participation was lim i- ted. The plans did not pay much attention to market relations (apart from the capital market), to inter-links and interactions o f the various economic sectors. Problems o f everyday life and the survival o f the m ajority o f the population employed in the tradi- tional economy were not taken into account by planning officials. It was believed that the growing large-scale production would by itself raise labor productivity in all fields o f industry and agriculture, level growth rates in different regions and economic zones, and improve the living standards o f the entire population.8
Concentrating the planned efforts o f state and large-scale firms in selected di- rections produced positive results at first. In the first five-year plan the annual growth o f GDP averaged 6.7%, in the second - 7.2%, and in the third - 8.5%, in spite o f the devastating oil crisis. However, at the same time Turkey was running into serious eco- nomie difficulties caused by disproportions in the shares o f existing economic sectors in the national economy, the flood o f impoverished peasants into towns, and the decreased consumption. Shortcomings in the planning process had an extremely
17 Second Five-Year Development Plan 1968-1972, Ankara: Central Bank of the Republic of Turkey, 1969, pp. 4-5.
18 O. Ozbek, “ 1982’den 1983’e gecerken tarim ekonomisin sorunkari ve cozum yollari,” In: 1982’den 1983’e Turkiye ekonomisi semineri, Ankara, 1983, pp. 209-216.
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adverse effect on agriculture: none o f the planned targets in the fourth plan in this sphere was reached. Moreover, output declined. Small-scale agriculture was faced with higher prices o f machinery and agricultural tools, marketing difficulties, and the lack o f cheap credits, fertilizers, fuel, etc.19 The dual rural economy, the co-existence o f modem and traditional forms, dynamism and stagnation, cash crop production and natural economy - the latter constituting over half o f all agricultural households - continued to exist. The urban areas and industry also continued to find the going very hard. By the end o f 1979 internal public debt had reached 240 billion lire, with accu- mulated interest equalling as much as 236.8 billion lire.20 The country’s foreign debt totalled $ 8.8 billion. To service the foreign debt during the period between 1960 and 1979, Turkey had to allocate 18% to 39% o f its export earnings. The annual deficit o f foreign trade balance increased from $ 359 m illion in 1970 to $ 2.8 billion in 1979.
The imports exceeded the exports by 30% to 40% annually.
Turkish analysts reported that technology used in the Turkish industry continued to be inferior to modem standards by 30 to 40 years.21 A large proportion o f city dwellers (21.8%) still inhabited gedjekondu, i.e. buildings built during one night. In 1975-1979 the annual average inflation rate increased between 33% and 60%. The index o f peasants' income in 1978 fell to 74.2%, that o f employees to 65,7% and that o f industrial workers to 57% compared to 1970.22 The economic difficulties ex- perienced by the country and the aggravation o f the social climate were important
Turkish analysts reported that technology used in the Turkish industry continued to be inferior to modem standards by 30 to 40 years.21 A large proportion o f city dwellers (21.8%) still inhabited gedjekondu, i.e. buildings built during one night. In 1975-1979 the annual average inflation rate increased between 33% and 60%. The index o f peasants' income in 1978 fell to 74.2%, that o f employees to 65,7% and that o f industrial workers to 57% compared to 1970.22 The economic difficulties ex- perienced by the country and the aggravation o f the social climate were important