Download Source: WB World Development Indicators database, 8 July 2016

CHAPTER 1
TURKISH ECONOMY IN THE FIRST TWO DECADES OF THE REPUBLIC
In this starting chapter we examine, first, the Ottoman heritage; the economic conditions in
the first years of the Republic. Then, we discuss the economic policies and performance of
the Turkish economy between 1923 and 1939.
1.1. STATRTING POINT: THE OTTOMAN HERITAGE
The Republic of Turkey was born as the inheritor of the Ottoman Empire, after long years of
wars. The destruction and death that accompanied wars had severe and long-lasting
consequences. Total casualties, military and civilian, of Muslims during 1912-1922 are
estimated at close to 2 million. In addition, more than 2 million Armenians and Orthodox
Greeks were migrated, deported or died during the same period. On the other hand, 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.
The dramatic decline in the population meant that many of the farmers of western
Anatolia and the eastern Black Sea coast, commercialized and producing export products, as
well as the artisans, leading merchants and money lenders who linked the rural areas to the
port cities and the European trading houses, had died or departed. The loss of urban
population was 35%, or more than one million people between 1912 and 1927. Economic
life of Turkey was affected adversely by the loss of human lives and by the deterioration
and destruction of equipment, draft animals and plants during the war years.
Turkey was an under-populated country, with a population density of only 18
people per square kilometer in 1927. Turkish economy was a typical backward one. The
ratio of the urban population was less than one quarter. The rate of literacy was
approximately 10% of the adult population.
The per capita income was about $50 in current prices. It was approximately 40
percent below its 1914 level in 1923. Per capita income levels prevailing before the First
World War could have not been reached again until the end of the 1920s. Turkish economy
was mainly based on agriculture, but both total agricultural production and yield per unit
1
area were very low. The share of agriculture, industry and services in total employment were
about 89%, 4% and 7%, respectively. The distribution of total income among agriculture,
industry and services was similar: 45%, 11% and 44%, respectively (see Table 1.1).
Agricultural production was heavily depended on natural conditions and fluctuated
year to year especially with changing air conditions. Because of the high share of agriculture
in total production national income also fluctuated extensively with the changing
agricultural production (see Table 1.2). As in the case of other sectors agricultural technology
was backward. About only one third of the cultivatable land was cultivated for the lack of
labor and equipment, let aside modern inputs such as improved seeds, fertilizers, irrigation
and pesticides.
TABLE 1.1: Some socio-economic indicators at the beginning of the Republican era
Population (1927)
The shares of agriculture, industry and
services in Gross National Product(GNP) (1)
Employment shares of agriculture, industry
and services (1)
Electric power generation
Rate of urbanization(2)
Adult literacy rate
Export structure: agricultural, mining and
industrial products (1923)
13,648,270
45%, 11%, 44%
89%, 4%, 7%
45 million kWh
24%
10%
86%, 5%, 9%
Source: TURKSTAT. Notes: (1) The average of three years: 1923, 1924 and 1925. (2) Ratio of
the population living in province and district centers.
The Industrial Census of 1927 gives an idea about the structure of the Turkish
industry at the beginning of the Republican era. In figures of that census, it is difficult to
distinguish between industrial enterprises and handicrafts. Among 65,245 establishments
qualified by the census as “industrial”, the overwhelming majority were small workshops.
The average number of workers per enterprise was only 2.5 people. The enterprises with an
average of more than 5 workers constituted only about 9 percent, and even among these
there were many workshops. Only 155 plants, or 0.23% of the total, employed more than
100 workers each, and only 2,822 of total enterprises (4.3%) employed motor power. The
structure of industry reflects the characteristic of an early stage of industrialization: 44.3% of
the enterprises were concentrated in food processing, and 23.8% in textiles.
2
The Government was unable, until 1929, to implement a protective foreign trade
policy which was necessary for an industrial drive, because of the Lausanne Treaty. The
outcome was loss of the Government’s income from customs, lagging the industrial
development owing to the restriction of protective measures, and an unfavorable trade
balance that persisted until 1929, the year when the related article of the agreement
expired.
National economy was not able to provide even the basic needs such as sugar, flour,
cement, and textiles. Although Turkey possessed the pre-requisites for cheap production of
agricultural products, the extreme exploitation of the peasant, the lack of Governmental
support, and the limitations of the local market impeded the utilization of the existing
resources effectively. There was an underdeveloped transportation system with almost no
good quality highways. The length of railways was only about 3,756 km. The inadequate
transport facilities severely handicapped the marketing of agricultural produce and the
supply of industrial goods and services to the villages.
The foreign trade pattern of the country reflected a typical backward economy,
exporting raw materials (agricultural and mining, see Table 1.1) and importing
manufactured goods. Total value of the capital controlled by 94 foreign companies
operating in Turkey was 63.5 million Sterling in 1924, equivalent to 516 million liras or more
than one half of the national income of the same year. Foreign investments were primarily
of French, British and German origin, and were mainly allocated in railroad construction,
banking and insurance, electricity, industry, tram, water supply, ports, trade and mining.
Issuing banknotes was carried out by the Ottoman Bank, a foreign bank owned by
French and British partners.
Total production of electric power per year was about 45 million kWh: approximately
4 kWh per capita (for comparison, they were 251,963 and 3,200, respectively, in 2015).
Turkey inherited a heavy debt burden from the Ottoman Empire. Turkish authorities
and creditors agreed upon the quantity of the share of the Turkish Republic in the Ottoman
debts in 1933 as approximately 80 million liras, about one half of the budget expenses of the
same year.
3
1.2. TURKISH ECONOMY IN THE 1923-1939 PERIOD
a. Policies
The first two decades of the Republic may be described as an era of foundation and
experiencing different economic policies. While relatively liberal economic policies were
implemented in the 1920s, in the 1930s statist policies gained priority.
Even in the relatively liberal 1920s, the Government started its own activities in some
fields, and endeavored to support private efforts by legal and financial regulations. Many
state monopolies of basic consumables like alcoholic beverages, sugar, kerosene, tobacco,
and matches were created and given to private businesses. Furthermore, some
nationalization was carried out in railroads, mining and ports. In 1924, Türkiye İş Bankası
was established as a semi-official commercial bank in order to develop private industry both
by credit financing and also by means of direct İşbank participations. In 1925 the Industry
and Mining Bank (Sanayi ve Maden Bankası) was founded to manage public industrial
establishments and support private industry. In 1927, the Government issued the Law for
the Encouragement of Industry to support the private sector.
The uşr, the agricultural tax of 10% of product, was abolished in 1925. Although the
usr was the most important part of the Government revenues this archaic feudal tax was
abolished to alleviate the burden of farmers. The total annual credits given by the
Agricultural Bank had been increased from about 5 million liras in 1923 to about 26 million
liras in 1929. Property rights were regulated by Civil Code that was accepted in 1927.
The relatively liberal policies of 1920s did not create the expected industrial drive.
The efforts made during the 1920s to spur the country’s agricultural and industrial
development met a limited degree of success only and no better prospects could yet be seen
towards the end of 1920s. The World Depression aggravated problems.
The principal mechanism for the transmission of the Great Depression1 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
1
Great Depression: A depression is a sustained, long-term downturn in economic activity in one or more
economies. The Great Depression is used for the worldwide depression in the 1930s. It was the longest,
deepest, and most widespread depression of the 20th century. The depression originated in the U.S. and
became worldwide.
4
cotton, averaged more than 50 percent from 1928–1929 to 1932–1933 season. The rate of
fall in the prices of agricultural products was remarkably higher than the decreases in the
prices of non-agricultural goods and services, changing the distribution of income against
agricultural producers.
The Government had begun to move towards protectionism and greater control
over external trade and foreign exchange earlier in 1929, with the expiration of the article
of the Lausanne Treaty on tariffs and before the onset of the Great Depression. As the
unfavorable world market conditions continued, the Government announced in 1930 a new
strategy of étatisme (statism), which promoted the state as a leading producer and investor
in the industry and services. 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. 2
That change in economic policies was a result of partly the Great Depression in the
world and partly the peculiar conditions of Turkey. The same years witnessed state
intervention in many economies in the world.
Although the Turkish statist view considered individual enterprise and effort as a
basic idea, it desired to have the Government take an active interest, especially in the
economic field. Turkish authorities adhered basically to the principle of private enterprise
and activity, but the urgent needs of the country, especially in the economic sphere, called
for the active intervention of the state.
The Turkish statist theory can be summarized as the following: the economic level of
the country must be raised to that of the developed countries; time was pressing and the
Great Depression only increased this pressure. The means for achieving this were: modern
methods of production, exploitation of domestic resources by local industry,
encouragement of agriculture in order to increase the purchasing power of the largest
class of the population, and improvement of the balance of payments.3
2
Clearing: Clearing or bilateral trade is trade exclusively between two states, particularly, barter trade based
on bilateral deals between Governments, and without using hard currency for payment. Bilateral trade
agreements often aim to keep trade deficits at minimum by keeping a clearing account where deficit would
accumulate.
3
Balance of payments: The balance of payments of a country is the record of all economic transactions
between the residents of a country and the rest of the world in a particular period.
5
Although the Government believed in the importance of the stimulus of profit
incentives for the private sector, it held that the private sector was too weak to stand up to
the great tasks involved. The Turkish view may be described as a principle which called upon
the state to take the initial action in stimulating the advance of the nation’s economy,
especially its industry, for the ultimate purpose of promoting private sector.
Additionally, Government driven industrialization in the 1930s was expected to ease
economic problems in other sectors also. Falling prices of agricultural products decreased
farmer revenues. The new industrialization drive was expected to process agricultural
products, increase their demand and support agricultural revenues also.
The Lausanne Treaty constrained the Government in deciding and implementing
foreign trade policies until 1929. Instabilities abroad were transmitted into domestic
markets, causing price and exchange rate fluctuations. The new economic policies, freed
from the limitations of the Lausanne Treaty, included Government intervention both in the
goods and financial markets. The Government tried to insulate domestic market from
international markets by protectionist foreign trade policies and exchange controls.
Exchange controls carried out by the Central Bank (CB). The CB was established in 1930 and
started to work in 1931. As a result of the increased tariff rates, the ratio of the total import
taxes to total import value rose from 29% in 1929 to 38% in 1930 and to 63% in 1936.
Industrialization gathered momentum in the 1930s. To accelerate industrialization,
led by the State Economic Enterprises (SEE), the First Five Year Industrial Plan (FFYIP) was
adopted in 1934. The new industrial capacities were to be built in conformity with the
domestic demand. Turkey was the first among backward countries to conduct an experiment
in planned development. However, the Turkish industrial planning experienced in the 1930s
was only a partial one, not comprehensive. The target of the Plan was to produce imported
manufactured goods domestically or to make import substitution.
The main targets of the first plan are:
1) To base industry mainly on local raw materials;
2) The dispersal of industrial centers, for strategic and economic reasons, by bringing
industry to agricultural sectors, locating processing plants in the vicinity of raw
materials;
6
3) Extensive development of the textile industry in order to meet local demand and
save foreign currency;
4) Particular emphasis on the production of consumer goods, without neglecting,
however, the necessary measures for the planned development of the sector of
producer and capital goods.
BOX 1.1: The FFYIP aimed at the establishment of the following industries:
1. Chemical industry: artificial silk (Gemlik), semicoke (Zonguldak), attar of roses
(Isparta), sulphuric acid (Izmit), superphosphates (Izmit), chlorine and caustic
soda (Izmit)
2. Earthenware industry: Ceramics (Kütahya), glass and bottles (Paşabahçe),
cement
3. Iron industry (Karabük)
4. Paper and cellulose (Izmit)
5. Sulphur industry (Keçiborlu)
6. Sponge industry (Bodrum)
7. Cotton textiles industry (Bakırköy, Kayseri, Ereğli, Nazilli, Malatya and Iğdır)
8. Worsted (woolen) industry (Bursa)
9. Hemp industry (Kastamonu)
Sumerbank and Etibank were two significant public enterprises established to
implement the Plan. Sumerbank was an umbrella organization of all public enterprises while
Etibank would be engaged in infrastructures, like mining and electricity.
Industrial establishments were designed to process the agricultural products and
natural resources, creating demand for these inputs. The planned industrialization would
increase the total production potential of the country, firstly, by increasing the demand for
and stimulating the production of domestic raw materials directly and, secondly, by
enlarging the domestic market, providing intermediate materials to the domestic industry
and thereby creating a base for further enlargement of the productive capacity.
The Statist policies can be described as the first stage of import substituting
industrialization (ISI)4 carried out by the public enterprises. Here, the first stage means
4
Import substituting industrialization (ISI) is a trade and economic policy that advocates replacing foreign
imports with domestic production. ISI is based on the premise that a country should attempt to reduce its
foreign dependency through the local production of industrialized products.
7
producing the basic consumer goods that had been imported before. These policies created
also the foundations of industries producing intermediate products such as iron and steel,
energy, and paper. The General Directorate of Mineral Research and Exploration (MTA) and
General
Directorate
of
Electrical
Power
Resources
Survey
and
Development
Administration were among the institutions established for these purposes.
In the same period Halkbank and Emlak Kredi Bankası were established; the first to
provide credits for small and medium non-agricultural enterprises, and the second to supply
credits to housing and construction.
Starting from 1934, the FFYIP was implemented successfully and, in 1936, the
preparation of the Second Five Year Industrialization Plan (SFYIP) was initiated. The priority
of SFYIP was the development of production of producer goods 5 : mining, electricity,
machinery and equipment, ports. However, because of the Second World War, the Plan
could not be implemented.
The nationalization movement of foreign enterprises which started in the 1920s had
been accelerated in 1930s; while the number of foreign enterprises nationalized in the 1920s
was 3 this number had increased to 21 between 1930 and 1945.
b. Assessment
In this subsection we will made an assessment of economic performance between 1923 and
1939, when the Second World War started. Since there had been a radical change in
economic policies in the early 1930s it is meaningful to evaluate the 1920s and 1930s
separately. Economic performance of the 1920s reflected both the recovery of the after-war
period and the implemented economic policies. The international economic conjuncture
was another determinant of economic performance. The 1920s was a period of international
disorder: prewar economic order collapsed but no new order took its place.
The main difference between the 1920s and 1930s regarding both economic policies
and performance is that the international disorder deteriorated further in the 1930s and the
Turkish Government adopted economic policies that limited the influences of the external
world on the Turkish economy.
5
Producer goods: In economics goods are classified as raw materials, producer goods and consumer goods.
Producer goods or intermediate goods are produced by one producer and used as inputs by other producers.
Consumer goods or final goods are goods ready to be consumed by consumers.
8
The annual average growth rate is 10.8% for the 1924-1929 period and 6.0%
between 1930 and 1939 (see Table 1.2). In the whole period (1924-1939) the rate of growth
was highly volatile mainly because of the volatility in agricultural production, and changing
international economic environment. Growth rates fluctuated between -12.7% and 21.5% in
the 1920s, and between -10.6% and 23.1% in the 1930s.
Table 1.2: Economic growth, 1924–1939
Year
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1924–29
1930–39
GDP
14.9
12.8
18.2
–12.8
11.0
21.6
2.2
8.7
–10.7
15.8
6.0
–3.0
23.2
1.5
9.5
6.9
10.8
6.0
Industry Agriculture
–7.1
27.2
17.9
5.6
14.8
31.8
19.4
–30.9
–0.6
19.2
3.8
42.6
12.7
–3.9
14.3
14.2
17.8
–28.8
19.0
22.1
13.8
2.7
–0.1
–6.1
–3.4
54.1
10.3
–3.5
15.7
5.4
16.7
3.8
8.0
15.9
11.7
6.0
Service
8.4
19.7
5.7
2.2
7.3
6.6
7.2
1.4
3.9
9.6
6.6
–1.3
6.0
5.1
12.1
6.9
10.8
5.7
Sources: TÜRKSTAT.
One important source of the output increases after 1929 was the protectionist
measures adopted by the Government, such as tariffs, quotas, and foreign-exchange
controls. These measures reduced sharply the import volume from 15.4 percent of GDP in
1928–1929 to 6.8 percent by 1938–1939. Import repression created attractive conditions for
the emerging domestic manufacturers.
Another factor of the overall performance of the economy during the 1930s is the
increase in agricultural production. It is remarkable that despite the adverse price trends,
agricultural output increased by about 50 percent during the 1930s. The most important
explanation of this outcome is the demographic recovery in the countryside. With the
9
population beginning to increase at annual rates around 2 percent after a decade of wars,
expansion of the area under cultivation soon followed. The ratio of cultivated area enlarged
by more than 100% from about 5% to about 12% between 1927 and 1940. The rate of
increase in production being lower than the increase in cultivated area implies that the
increase in production was generally a result of enlargement in employment and the
cultivated area not increases in yields (or productivity). This is understandable because
inputs other than land and labor, such as agricultural machinery, irrigation and fertilizers, did
not increase in this period. 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.
As a result of increase in the production of wheat, for example, Turkey, importing
wheat and flour at the beginning of the 1920s, became self sufficient in 1930.
The high rates of industrialization and growth could be possible by keeping the prices
of food and raw materials lower until the Second World War, lowering input cost of industry.
The share of the industrial production in GNP had increased from about 11 percent
to about 19 percent in 1930s (see Tables 1.1 and 1.4). In the same period the total value of
industrial production tripled approximately and the total industrial employment increased
by about 70%. It is notable that these growth rates were achieved with balanced budget,
stable prices and foreign trade surpluses. Investment projects were financed mainly by the
central Government budget. Additionally, a 10.5 million TL Soviet credit was used to finance
textiles investments and a 2.4 million TL İş Bankası credit was used to finance paper and
chemical investments.
Table 1.3: Import Substitution in 1930s: the share of domestic production in total
supply (%)
1929
1940
Iron and steel
0
32
Cement
49
97
Paper
0
39
Glass products
0
91
Cotton textiles
12
84
Woolen textiles
24
98
Sugar
10
90
Source: Tezel (1994).
10
As a result of the industrialization drive in the 1930s a notable import substitution
had been realized especially in the production of some basic industrial goods. Changes in the
share of domestic supply for some industrial products between 1929 and 1940 are given in
Table 1.3. Iron and steel, paper and glass production started in the second half of the 1930s.
In 1940 while Turkey produced approximately one third of the domestic demand for iron
and steel and paper, it became almost self sufficient in glass products cement, textiles and
sugar.
Considerable increases registered also in mining: The index of total mineral output
rose from 100 in 1930, to 157 in 1935, and to 232 in 1940.
TABLE 1.4: Some socio-economic indicators at the end of 1930s
Population (1940)
The shares of agriculture, industry and
services in Gross Domestic Product(GDP)(1)
Employment shares of agriculture,
industry and services (1)
Electric power generation-consumption
Rate of urbanization(1940)2
Adult literacy rate
Export structure: agricultural, mining and
industrial products (1939)
17,820,950
38%, 19%, 43%
86%, 6%, 8%
400(million kWh)
24%
20%
88%, 7%, 5%
Source: TURKSTST. Notes: (1) The average of 1939, 1940, and 1941. (2) Ratio of the population
living in province and district centers.
By the end of the 1930s, state economic enterprises had emerged as important and
leading producers in a number of key sectors, such as textiles, sugar, iron and steel,
glassworks, cement, utilities and mining. This happened despite the fact that close to half of
all fixed investments by the public sector during this decade went to railway construction
and other forms of transport. The Statist policies did not lead to large shifts in fiscal and
monetary policies.6 The Government budgets remained balanced. In fact, ‘balanced budget,
strong money’ was the Government’s motto for its macro-economic 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
6
Monetary policy is trying to influence the economic performance of a country by changing the quantity of
money. Monetary policy is determined and implemented by the Central Bank. Fiscal policy is trying to influence
the economic performance of a country by changing the total quantity of Government revenues and
expenditures and the composition of revenues and/or expenditures.
11
with budget deficits, large external debt and inflationary monetary policy during the First
World War.
In the 1930s the ratio of the foreign trade volume to national income was halved
approximately partly because of the import substitution policies and partly as a result of the
collapse of the international trade system. While the composition of exports did not change
considerably between the 1920s and 1940, the composition of imports changed radically:
the share of consumption goods in total imports fell from about 60% to about 20%, and the
share of the intermediate and investment goods increased from about 20% to about 60%.
Aside from a small deficit in 1938 Turkey had a trade surplus during the 1930s.
12
CHAPTER 2
TURKISH ECONOMY BETWEEN 1940 AND 1960
In this second chapter we are going to summarize the economic situation during the Second
World War years, first, and then examine the Turkish economy in the period between 1945
and 1960.
2.1. THE WAR YEARS (1940-1945)
War conditions dictated the economic policies and developments, during the Second World
War. The statist industrialization drive continued until the beginning of the War, but the
relatively rapid economic development of the 1930s was interrupted thereafter. Although
Turkey did not participate in War, full-scale mobilization was maintained during the war
years.
First of all, overall production and more specifically agricultural output decreased
since resources used for national defense had to be increased at the expense of productive
sectors. Both total and per capita GNP fell during the War: GNP in 1945 was about 35%
below the 1939 level. The values of agricultural and industrial products fell by about 41%
and 34%, respectively, in the same period.
Secondly, the price and cost of living indices quadrupled during the War. Falling
production, combined with the increased export demand and import difficulties and
restrictions, created shortages in basic necessities causing high inflation. Working conditions
of wage labor worsened, tax burden on the wages and salaries increased, raising inequality
in income distribution. Real wages fell by 65% between 1938-1939 and 1944-1945.
Thirdly, the balanced budget policy of Government could not be continued. Budget
expenditures increased fourfold during the War primarily because of the increasing national
defense expenses. Although 90 percent of this rise could be financed through tax revenues,
the internal debts doubled between 1939 and 1945. Money supply also increased rapidly;
more than tripled during the 1938-1946 period.
Finally, the high rate of inflation and black market distorted resource allocation,
promoting speculative activities, and created suitable conditions for a considerable
13
accumulation of capital in commercial sector. This capital accumulation would accelerate
the transformation of the merchant class into industrialists in the 1950s.
Foreign trade policies of the 1930s were implemented also during the War and
Turkey experienced an export surplus because of partly the high prices resulted from the
competition among the opposing belligerents for its goods, and partly by means of
restrictions on imports. Trade surplus helped the Central Bank to increase its total gold and
foreign exchange reserves.
2.2. TURKISH ECONOMY BETWEEN 1945 AND 1960
a. Changing World , Changing Policies
Both internal and external conditions of the country changed dramatically during and after
the Second World War. Domestic and foreign factors forced the country to change its
economic policies.
Domestically, many social groups had become discontent from 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.
The world was tripartite after the War; the capitalist developed countries
representing the First World, the socialist countries representing the Second World, and the
remaining underdeveloped countries representing the Third World. The first two were rivals
so they created their own camps. The Soviet Union and the USA were the leaders of the
socialist and capitalist camps, respectively. Turkey preferred to join the capitalist camp.
Turkey was among the founders of the International Monetary Fund (IMF) and
World Bank: two important institutions of international economic order since the Second
World War. Economic policies were changed accordingly: Export-oriented economic policies
giving priority to agriculture, infrastructures and construction were substituted for the
domestic oriented industrialization policies of the 1930s, at least for a while. A more
14
liberal approach, decreasing economic role of the state and giving priority to private sector,
was accepted.
As a result of liberal trade policies imports increased. To balance the increases in
imports the Government devaluated TL in relation to US dollar raising the lira value of dollar
about 119 percent from 1.3 to 2.8 in 1946. Devaluation was expected to improve the
competitiveness of Turkish export items in the international markets and check the rapidly
increasing import demand, making imports more expensive, while exports would become
cheaper for foreigners.
The share of the foreign resources in the finance of the development would increase
in that new period. The US Government included Turkey in its Marshal Plan which was
designed for the reconstruction of Europe. Furthermore, the US had an additional economic
aid package for Turkey and Greece (Truman Doctrine) which was aimed primarily at the
prevention of communism in these countries.
Aid projects also included, or were
conditioned by, fundamental economic policy proposals. Foreign economic aids and grants
were definitively tied to implementing specific economic policies, and also political and
institutional changes.
The economic reports prepared by Americans argued that Turkey should not
continue with industrialization, especially in establishing what was called then “heavy
industries” such as producing iron and steel, chemicals and fertilizers, and paper products.
Instead the country was supposed to specialize in agriculture which was needed for the
reconstruction of Europe, supplying food and raw materials. With the implementation of a
free international trading policy, they argued, Turkey would be able to grow faster
economically through specialization in agriculture.
The state should create competitive conditions in both domestic and foreign trade;
eliminate monopolies; improve economic conditions in rural areas; invest only in
infrastructures and energy, and support the private sector. State Economic Enterprises (SEE)
should be sold to private entrepreneurs, as strongly recommended by the World Bank. For
Turkey, that meant a shift of the policy away from the policies in the 1930s that aimed at
industrialization by the SEEs. The efforts to increase foreign resources via American
donations and credits increased the effects of the West in determination and
implementation of economic policies. In the Development Plan of Turkey prepared in 1947
15
emphasis was given to agriculture and infrastructure. One of the radical changes was
observed in transportation policy. While the Government gave priority to railway
construction before 1945, the priority had been shifted to roads in transportation. American
economic reports strongly recommended the construction of roads and highways instead of
railways.
Later events, especially those of the second half of the 1950s, would prove that the
shift in policy which interrupted the expansion in state manufacturing, and indeed in
manufacturing as a whole, was premature and unduly abrupt. The Government interrupted
an ongoing development on the part of the SEE and sought to replace their growth with that
of agriculture and private industry. The agricultural policy was rather narrowly conceived,
and the private industry as a whole was not overly expansionary during the post-War period,
with the inevitable result that the rates of economic growth during the time were low. The
Government, instead of permitting the private sector to evolve more gradually and in
response to an evolutionary development, expected private enterprises suddenly to bear the
burden of industrializing the economy. Instead of working out of its initial industrialization
strategy, which had called for the introduction of some capital goods, it abandoned the
successful policy of the recent past before it could yield the additional fruit.
After the War, the political structure was transformed to a limited multi-party
system and the newly founded opposition party, the Democrat Party, came to power in
1950. The Democrat Party Government (DPG) continued the implementation of the main
principles of economic policies adopted after 1945. But it had to change its relatively liberal
approach after 1953. Protectionism and fixed exchange rates below the equilibrium rates
were implemented to enable the industry to import investment and intermediate goods and
components cheaply. Import restrictions and prohibitions on consumer goods were intended
to raise the profitability of private sector and stave off competition from imports. The main
policy was the encouragement of private enterprise under intensive interventionism and
protectionism. It also involved a large share of public investments.
b. Policies versus Realities
1) Economic Growth
The growth performance of the Turkish economy through 1945-1960 was mixed. The period
between 1945 and 1949 may be described as the period of recovery from destructive effects
16
of the war. The 35% loss in GNP between 1939 and 1945 could be recovered in the following
three years and total GNP passed the 1939 level in 1948. But, the total value of the industrial
output in 1948 was still lower than what it was in 1938.
After a fall in GNP in 1949, the Turkish economy experienced a very high growth
between 1950 and 1953 mainly because of the exceptionally favorable weather conditions
increasing agricultural production and rising exports resulted from the expanding demand
in international markets due to the Korean War. GNP in 1953 was 46% higher than it was in
1948. However, national income fell in 1954 as a result of three factors: poor harvest
because of deteriorating weather, changing conditions in the international markets, and
the scarcity of intermediate inputs resulted from import limitations. 1954 may be seen as a
turning point for economic growth: While the average growth rate was 11.25% during 19491953, it more than halved during 1954-1959, only 4.1%. Volatility in total production and
national income continued in the 1945-1960 period also. Inconsistent economic policies of
the Government as well as weather conditions and international economic environment
played a role in the creation of this volatility.
2) Agriculture
Influential developments occurred in agriculture in the 1950s. Agricultural output more than
doubled from 1947 through 1953. Agricultural mechanization that accelerated at the
second half of the 1940s continued. Especially the rapid increase in the number of tractors
did make possible the enlargement of the cultivated areas by about 80% between 1945 and
1960. The number of tractors increased from 1,156 to 42,136 in the same period. It is
notable however that, the increase in the total percentage of area cultivated by tractors
expanded at a slower pace than the number of tractors; in 1960 only about 14% of the total
cultivated area was cultivated by tractors, indicating an inefficiency in the usage of tractors.
This inefficiency can be explained by the structure of ownership of both tractors and land,
usage of tractors for purposes other than farming such as transportation, problems of
maintenance stemming from the low level of training and difficulties of finding spare parts.
Agricultural credits increased about ten times in ten years after 1947. Although the
usage of artificial fertilizers and pesticides increased very rapidly in the 1950s, the usage of
both inputs per unit of land was still very low. Only a small fraction of the total arable land
was irrigated. Government distributed state-owned lands and open communal pastures to
17
peasants with little or no land. It used Marshall Plan aid to finance the importation of
agricultural machinery, especially tractors. Agricultural producers also benefited from
favorable weather conditions and strong world market demand, thanks to American
stockpiling programs during the Korean War. But the increases in agricultural production
during that period were mostly a result of increase in the cultivated area, not the increases
in yields.
The agriculture-led boom meant rising incomes for all sectors of the economy. It
seemed in 1953, however, that the promises of the liberal model would be quickly fulfilled:
these golden years did not last very long. When the Korean War ended international
demand slackened and prices of export commodities began to decline. With the
disappearance of favorable weather conditions, agricultural yields declined as well. The
Government initiated a large price support program for wheat, financed by increases in the
money supply, to keep the agricultural producers’ income.
3) Industry
Although, the priority shifted from industry to agriculture and infrastructure in the new
economic policies framework accepted after 1945, practical necessities make the DPG revise
its policies and accept the importance of the industry for other sectors and the whole
economy. Another revision, that practical considerations led the way, is about the role of the
SEE in industrialization and economic development.
The DPG declared at the beginning that it would privatize public enterprises, but it
was understood in a short time that privatization policy was impracticable from both an
economic and political point of view. The privatization policy of the Government remained
on paper: the Government was forced to enlarge the production capacity of the existing
SEE and to establish new ones. The demand for industrial products was increasing rapidly
and this rapidly increasing demand might be met by increasing imports and/or domestic
production. Since foreign exchange revenues were less than the total value of the potential
imports, the Government limited imports. Moreover, the private sector was not ready to
take over the role of the SEE in both actual production and increasing the production
capacity. In this position Government was forced to control prices, to contain inflation
arising from the shortage of industrial goods, on the one hand, and to try to increase
industrial production by means of the SEE, on the other.
18
In fact, it was understood that, the most effective way of supporting private
investments in the existing conditions was to expand public investments: public and private
investments were complement, not substitutes. New enterprises such as Makina ve Kimya
Endüstrisi Kurumu (MKEK), Türkiye Petrolleri Anonim Ortaklığı (TPAO), Devlet Malzeme
Ofisi (DMO), Türkiye Selüloz ve Kâğıt Fabrkaları A.Ş. (SEKA), Demir Çelik and Türkiye Kömür
İşletmeleri Kurumu (TKİ) were established by dividing Sumerbank and Etibank. The newly
created public enterprises were Çay İşletmeleri Genel Müdürlüğü (ÇAYKUR), Et ve Balık
Kurumu (EBK) and Azot Sanayi.
In the DPG era, public investments played a significant role in economic growth and
development, especially in the second part of the 1950s. Public investments concentrated
particularly in cement, energy, coal, sugar, transportation, energy and information
infrastructure. These fields required relatively large capital and high technology that was
not yet available by the private sector. The share of public sector in total fixed investments
during the “liberal” DP period rose from 39% in 1950 to 50% in 1960.
Private investments also increased rapidly in the 1950s. Public investments in
primary and intermediate inputs as well as those in infra-structure were complementary to
the private sector. Thus, public investments and SEE actually helped encourage private
industrial investments in manufacturing consumer goods. Other factors that enhanced
private investments were: more business-friendly economic policies after the War, the
transformation of commercial accumulation into industrial investments, industrial credits
provided by the Turkish Industrial Development Bank (established in 1950), enlarging
domestic market and improving infrastructures. Especially widening supply gap because of
the import restrictions after 1954 increased the profitability of producing consumption
goods. The policy of liberalization of foreign trade that had been started in 1946 could have
been implemented only until 1953. Facing the increasing trade deficits, the DPG returned to
protectionist trade and domestic market oriented growth policies. Because of the import
limitations the share of the consumption goods in total imports halved. Private enterprises
tended to produce consumption goods, especially textiles and food.
Industrial production increased four times during the 1950s. The first and easy stage
of the import substitution industrialization (ISI), that means production of basic consumer
goods, was completed. The share of the consumer goods in total value of imports fell below
19
10% in 1960. Additionally, some attempts were made for the domestic production of some
consumer durables, such as refrigerators.
Thus, an implicit division of labor in manufacturing was created; the SEE would
produce intermediate products and some basic inputs for private businesses while private
industry would produce basic consumer goods in general. It should be noted, however, that
some agro-industries like sugar and tea were established as public enterprises.
4) Foreign Economic Relations
Since the expectations of the Government were not fulfilled in the aftermath of the 1946
devaluation, import controls were increased again. The immediate effects of the
devaluation on exports and imports of Turkey are highly questionable. It seems that the
increase in agricultural exports of Turkey was a result of increasing import demand and rising
prices in international markets because of the bed harvest conditions in the World in 1946.
On the other hand, increasing prices of imported goods as a result of the devaluation did not
deter the demand for those goods. Thus, Turkey experienced a current account7 deficit for
the first time since 1929 in 1947, despite the remarkable increase in total export value.
Current account deficit of Turkey widened in 1948, with the increasing imports versus
decreasing exports. Turkey had foreign trade deficits also in 1949 and 1950, however less
than 1948.
The increasing foreign deficits were financed at the beginning with the foreign
exchange and gold reserves accumulated during the War. But, with the depletion of reserves
the need for foreign resources increased. The sum of the net foreign resources used by
Turkey in five years between 1946 and 1950 was more than the total foreign credits
accepted in 23 years between 1923 and 1945.
The US grants and credits, and loans from the newly established international
financial institutions, such as the World Bank, the IMF, the European Payment Union and the
OECD were used to finance foreign deficits.
7
Current account is one of the two components of the balance of payments of a country, the other being
the capital account. The current account consists of the balance of trade, net factor income (earnings on
foreign investments minus payments made to foreign investors) and net cash transfers.
20
TABLE 2.1: Some socio-economic indicators at the end of 1950s
Population (1960)
The shares of agriculture, industry and
services in GDP (1)
Employment shares of agriculture, industry
and services (1)
Electric power generation (1960)
Rate of urbanization(1960)2
Adult literacy rate
Export structure: agricultural, mining and
industrial products (1961)
27,754,820
37%, 18%, 45%
71%, 8%, 21%
2,815 million kWh
32%
38%
81.5%, 5.5%, 13%
Source: TURKSTAT. Notes: (1) The average of three years: 1959, 1960, and 1961. (2) Ratio of the
population living in province and district centers.
5) Urbanization and Services
The 1950s also witnessed the dramatic acceleration of migration from rural areas to cities.
Both push and pull factors were behind this movement. The development of the road
network also contributed to the new mobility.
Although the growth rate of the total agricultural production was quite impressive
labor had to leave this sector. The mechanization created surplus labor and forced it to
move into cities. Migration to the cities intensified and coincided with the rapid population
increase during the 1950s. However, while total population increased by about 32.5% the
rate of increase of the urban population was more than twice, 69%.
This high rate of urbanization created significant economic and social problems such
as employment, supplying basic necessities like food and more importantly housing and
transportation. Service sectors expanded in all sub areas; especially construction, land
transportation, banking and trade.
6) Imbalances and Crisis
The DPG offered the first example of a populist economic policy 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 adverse consequences.
21
Credits and money supply, and budget spending increased rapidly, especially during
the early 1950s. However, the trend produced economic difficulties during the second half of
the decade.
The import controls starting from 1953 could not be sufficient for balancing foreign
trade. Foreign trade deficit became chronic especially during the second half of the 1950s.
The exports to imports ratio fell to 63 percent in 1955. This process culminated in foreign
payment difficulties. The foreign debt of the country was rising rapidly and the DPG had
difficulties in supplying foreign currency. On the other hand, the rate of inflation was rising:
while it was around 10 percent per year during the early 1950s climbed to 25 percent in the
second half of the decade.
Whenever developing countries faced a balance of payments crisis and applied for
aid, the IMF and the World Bank advised devaluation, bringing the artificially low exchange
rate to its market or equilibrium level. They also advised a “stabilization program” aimed at
preventing inflation and closing or reducing the budget deficit. The stabilization program
generally involved the rise of the prices of SEE produced goods, reducing subsidies, raising
the interest rates, and keeping agricultural support prices as well as wage rises in check.
This was the case for Turkey. The ensuing wave of inflation and the foreign-exchange
crisis, accompanied by shortages of consumer goods, created major economic and political
problems for the DPG, especially in the urban areas. To stabilize economy the Government
had to sign an agreement with the IMF and accepted an austerity program in 1958.
According to this stabilization package the value of the lira was devaluated from 2.81 to 9.02
liras per dollar. The package provided a debt restructuring of $422 million and a new credit
of $359 million. The Government agreed on the controlling money supply, implementing a
selective credit policy, increasing the selling prices of product produced by the SEE, carrying
out imports by three-month quotas, and balancing the budget by constraining expenses and
increasing revenues.
While the stabilization program was implementing, as a result of increasing political
tension in the country, the DPG was overthrown by a military coup in May 1960.
22
CHAPTER 3
PLANNED ECONOMY (1960-1980)
3.1. OVERVIEW
The era between 1960 and 1980 is known as the planned period. The 1961 Constitution
underlined economic and social rights. It was thought that there is a symbiotic relationship
between economic and social development. The only way of achieving a stable social and
political system and higher standards of living was to have a rapid economic growth with
social justice, and this could be possible by economic and social planning. It was expected
that the economic imbalances and social and political crises that the country had faced
during the 1950s could be avoided by planning.
One criticism frequently directed at the DPG was the absence of any coordination
and long-term perspective in the management of the economy. After the coup of 1960, the
military regime established the State Planning Organization (SPO). The idea of development
planning was then supported by a broad coalition: the Republican People’s Party, the
bureaucracy, large industrialists and the international agencies. Planning then was generally
seen as a magical touch that would bring well-being to whole society.
In the early 1960s when economic planning was started, despite some achievements
in the production of consumer goods and some intermediate goods, the Turkish economy
was still mainly an agricultural one. About 40% of national income was produced by the
agricultural sectors, about 70% of employment was also provided by the same sector, and
about 80% of export income obtained from the export of agricultural items (see Table 2.1).
In the planning period, industrialization was thought as the driving force of
economic development. The implicit division of labor in the industry between private and
public enterprises continued in that period also: while private enterprises were specialized
mainly in the production of consumer goods, durables, automobile, office and construction
materials; public investments intensified mainly in infrastructures and intermediate
products such as energy, iron and steel, copper, aluminum, chemicals and petrochemicals.
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
23
used a restrictive trade regime, investments by the SEE and subsidized credit as key tools
for achieving ISI objectives.
Although total cultivated areas in agriculture remained almost constant, considerable
rises in yields and production were recorded, thanks to increases in agricultural inputs and
technological development in the sector. Between 1960 and 1980 the number of tractors
increased by tenfold and the quantity of artificial fertilizers increased by twentyfold.
Reasonable rates of growth were realized in relatively stable conditions with mild
rate of inflation during the 1960s. But since the rate of inflation was higher than the
developed world Turkey traded with, the fixed exchange rates started making the lira overvalued in terms of other currencies. The over-valued lira enhanced imports and
discouraged exports, enlarging foreign trade deficits. Moreover, the expansion of importsubstitute industries, also, contributed to foreign deficits. While expanding import
substituting industries increased the imports of raw materials and intermediate goods,
thereby foreign exchange demand, they did not earn foreign exchange, contributing to the
balance of payments crisis.
The Government tried to overcome the foreign exchange bottleneck by devaluating
lira against dollar by 66.7% in August 1970. Although the devaluation was not enough to
eliminate foreign trade deficits, foreign deficit problem was alleviated temporarily, thanks to
increasing worker remittances. Turkey had even a current account surplus in 1973.
The inflow of hard currency encouraged the Government to embark on an ambitious
five-year development plan (1973-1977) with import substituting industrialization in capitalintensive sectors. This plan was important for Turkey's target of integration with the
European Economic Community (EEC). However, the demand-led growth did not last long
with rising inflation and increasing pressure on the balance of payments. Moreover, the
fourfold rise in oil prices in 1973-1974 increased the import bill.
Rapidly increasing import values, slow increases in exports, and falling worker
remittances, combined, did bring back the balance of payments problem in 1974.
As a result of financing foreign deficits by short-term credits, total short-term debts
had risen rapidly and, in 1977, Turkey could not find new credits to rotate old loans and
finance current deficits. The Turkish economy entered into a crisis; the other symptoms of
24
which were high inflation, budget deficit and unemployment. Growth rate fell drastically
after 1976 and the economy experienced a recession in 1979 and 1980.
It is possible to explain this crisis by some internal and external developments in
economic and political fronts.
External factors can be summarized as follows:
1) A ten-fold increase in the petroleum prices in 1973-1974 and 1979 oil crises;
2) Increasing military expenses because of the Cyprus War and the US arms
embargo;
3) Stagnation in the developed countries, especially in Europe. European
stagnation had critical results on exports and unemployment in Turkey. About
half of the Turkish exports were directed to Europe and an important part of the
Turkish labor surplus was demanded by European countries in the second half of
the 1960s and early 1970s. The European stagnation affected adversely the
demand both for Turkish exports and labor, slowing down the increases in
exports and aggravating unemployment.
4) The collapse of the international monetary system and the passage to the
flexible exchange system, putting the exchange value of TL into question.
In April 1978 and July 1979, Turkey launched two austerity programs undertaken in
conjunction with two separate stand-by arrangements with the IMF. These included
measures such as devaluation of the Lira, promoting exports by increasing exports
incentives, increasing bureaucratic measures on imports (licensing), and raising interest
rates to attract savings. These measures had only a minor effect on the economic situation
due to political instability and violence at home and adverse conditions in the world
economy, such as the rise in oil prices and the increase in world interest rates in 1979.
Turkey entered the 1980s in difficult economic circumstances. Inflation was
accelerating, unemployment was rising, shortages were common, and social unrest
reached high proportions. Foreign trade deficit was increasing; total exports were about 3
billion dollars while imports were reaching 8 billion dollars in 1980.
The development model based on import substitution and domestic demand, but
unsuccessful in the promotion of exports, had become unsustainable. While the demand
25
for the foreign exchange of the import substitution model was increasing continuously, the
foreign exchange earning capacity of the model was very limited and the needed foreign
exchange could not be provided. The system based on import substitution, high protection
walls, negative real interest for bank loans, an overvalued lira and low selling prices of
products produced by the SEE, was in an impasse. Total foreign debts which was just over
one billion dollars in 1960, was more than 14 billion dollars at the end of 1979. Moreover,
this happened despite unpredicted worker remittances of more than 10 billion dollars
between 1965 and 1980.
Turkey, trying to overcome the crisis, could not get the expected support from the
Western economic organizations and Governments, which wanted radical structural
changes in the Turkish economy. Finally, the 24 January 1980 Decisions packet including
fundamental changes in the economy and demanded by Western institutions was put into
force and the planned development experience, started in 1963, was ended de facto, if not
legally.
At the end of the 1970s, agriculture still had an important weight in the economy and
about one quarter of the national income was produced in this sector (see Table 3.3). About
two thirds of exports items were food and raw materials. Despite undeniable achievements
in the way of industrialization, the established industrial capacities had important problems
of technology and scale. Services inflated unhealthily. Industry was heavily dependent on
imports and could not earn the needed foreign exchange.
One of the notable issues of the period under consideration was the relations
between Turkey and European Economic Community (EEC). A Partnership Agreement
(Ankara Treaty) was signed between the EEC and Turkey in 1963. According to this
agreement, Turkey would join the EEC after the preparation, transition and final stages. The
preparation period had expired in 1968 and the Annexed Protocol regulating the transition
period of 22 years was signed between Turkey and EEC in 1970 and put into force in1973.
3.2. PLANNING
Economic planning started in the early 1960s and lasted in its proper sense until 1980. The
planning practice continued after 1980, but the resource allocation was left to the market
forces so, planning became a good-wishing without targets and instruments.
26
Although the planning was in fact implemented as an alternative of the market
mechanism by socialist countries, especially in the Soviet Union, this economic policy
instrument was also used in some market economies after the Second World War.
Economic planning as implemented in market economies is not a substitute of but a
complement to the price mechanism. Economic planning that was implemented in Turkey
was of this second kind. The implementation of the First Five Year Development Plan
(FFYDP) was started in 1963. Unlike the previous planning experiences in the 1930s, the
plans of the 1960s and 1970s were much more comprehensive: all aspects of economic and
social developments were covered. Macroeconomic variables such as national output,
savings and investments, public finance, incentives, employment and foreign trade balances
as well as public services like infrastructures, education, health, science and technology were
included in the planning model.
The plans were compulsory for the public sector and indicative for the private
businesses: While the public economic sector would operate with the direction of the
Government, the private sector would be induced to operate in conformity with the plan
targets by subsidies and incentives. The agricultural sector, however, was mostly left outside
the planning process.
The planning model implemented in Turkey was a three-stage planning model: longterm perspective (strategic) plans, five-year development plans and annual programs.
The first long term perspective plan was put into effect in 1963 and covered 15 years
(1963-1977). The targets of the fist strategic plan were:
1) an annual average rate of growth of seven percent
2) to increase the qualified human resources, scientists, engineers and
technicians that were needed for development;
3) to solve the unemployment problem;
4) to achieve the foreign payment balance and
5) to accomplish all these following the principle of social justice.
It was estimated that the investment rate had to be 18.3 percent of the national
income to realize a seven percent growth rate. In the early 1960s, it was estimated again
that only 14.8 percent could be provided by domestic savings. The remaining 3.5 percent
was expected to come from the foreign sources.
27
After ten years of implementation and before the expiration of the first one, a new
long-term perspective was prepared in 1973 for 22 years (1973-1995). The main purpose of
the new long-term perspective was to prepare Turkey for the full membership of the
European Economic Community (EEC) at the end of 1995.
The new perspective aimed at a radical transformation in the production structure of
the economy. By this perspective Turkey would converge to and finally catch up the EEC
countries. This would be possible by a much faster industrialization, completing the third
stage of ISI: producing investment goods, intermediate goods and equipments
domestically. The public sector would play a dominant role in the ISI process while
incentives for the private sector would be increased. To reach the targeted growth rate of
7.9 percent an impressive increase in investment was necessary.
As it is explained in section (a) of this chapter, developments both in Turkey and in
the world, starting just after the acceptance of the Second Perspective Plan, did not allow
the implementation of the plan. The Turkish economy could not be adapted to new
conditions abroad.
The result of implementation of the Third Five Year Plan (1973-1977) was not more
than a failure. After a year of transition in 1978, the Government prepared the Fourth Five
Year Development Plan (1979-1983). The main purpose of the Plan was the establishment
of high-technology or investment goods industries, developing the mining and energy
sectors, and increasing exports. That plan was dead-born, however: it could not be
implemented because of many economic and political difficulties, which can be summarized
as follows:
First, the World Bank and IMF opposed the implementation of the plan. These two
institutions were, in fact, strongly objected to the continuation of the import substituting
industrialization. They argued that, the Turkish economy would not be able to continue the
ISI policy; it should follow market-friendly economic policies. For Turkey this was a dilemma:
it was aiming at faster industrialization, but there were economic and political crises at
home and the main foreign exchange suppliers; the USA, the IMF and the World Bank,
which had the upper hand, were insisting on quite the contrary.
28
Secondly, the central Government budget resources were not sufficient to finance
investment projects. In fact, the deficits of the existing SEEs were one of the main causes of
the budget deficits. Thus, the new industrial establishments were not feasible financially.
Finally, the Turkish business community also opposed the new industrialization
attempt of the state with structural and ideological arguments.
After some initial efforts for the establishment of heavy industry, economic policy
took a very sharp turn on January 24, 1980. That was the end of the experience of planned
development in Turkey.
3.3. ASSESSMENT
The experience of planned development in Turkey could not create the expected results
from planning. The targets and results of the first four Five Year Development Plans are
given in Table 3.1. The Table shows that the gap between targets and results had widened in
time.
TABLE 3.1: Growth Targets and Realization (increase in GNP, %)
Target
Result
I. Plan
II.Plan
III.Plan
1963-1967
1968-1972
1973-1977
7.0
6.6
7.0
6.3
7.9
5.2
IV.Plan
1978
6.1
1.2
1979-1983
8,0
1.7
Source: State Planning Organization (SPO).
In the planned period not only the growth targets were missed but all of the
macroeconomic variables such as balance of payments, unemployment and inflation,
deteriorated especially in the second part of 1970s. This failure was, naturally, a result of
many different factors, some of which are explained above. Other factors related to planning
can be summarized as follows.
First of all, as stated above, planning in market economies was developed as an
integral part of the market mechanism, not an alternative for it. Therefore, there is a
common problem for all countries implementing economic planning in a market economy:
to reconcile the roles of market and planning. To be clear about the role of each is not easy.
Naturally, when there is ambiguity, implementation is often in favor of market; making
planning dysfunctional and ineffective.
29
Secondly, despite official discourse the planned development policy was not
commonly accepted. A part of business community faced planning suspiciously. For the
targets to be achieved, not only the public sector but also the private businesses must
decide their strategies in conformity with plan targets. However, business, while supporting
planning in the appearance did not accept measures of implementation. On the other hand,
there was not a well-functioning communication and coordination between planning
authorities and business. In fact, as many private firms were not interested in plans they did
not care about planning.
The most effective instruments of directing private investments to the sectors of
priority are incentives and subsidies. Using these instruments Governments may lower the
cost of production and increase profitability of the aimed sectors. Additionally, if the
products are sold in protected markets at higher prices, protection will be a second support
for investment. The shortest way of lowering production cost is to make inputs cheaper.
Government provided long-term and low-interest credits, tax exemptions, cheaper foreign
exchange, and supplied the intermediate products produced by the SEE at concessionary
prices to private business operating in certain sectors. Similar support instruments were
used for exporters of selected products.
For incentives and subsidies to be effective they must be implemented selectively:
sectors must be ranked according to their importance or the degree of priority. The Turkish
Governments could not be selective enough regarding sectors, location, size, and the
production technology, and the incentive system was not implemented effectively.
Since the main purpose of industrialization was to meet domestic demand, export
and foreign competition policies were of secondary importance. Thus, the costs, qualities
and prices of industrial products were not considered properly.
Thirdly, there was a consistency problem between targets and instruments or
policies. The mentality of planners was based on a vision of radical changes in the social
structure of Turkey. A land reform, a tax reform, the reorganization of the SEE and human
power planning were the main pillars of the reform packet. Agriculture would be
modernized and imbalances would be eliminated by a land reform. Science and technology
policies would enhance and expand scientific research capacity and technological progress.
Tax reform would facilitate the finance of development and would narrow inequalities
30
among social groups. This vision in the background of planning, however, could not be put
into implementation because of lacking of political will. Although Governments confirmed
plan targets, they did neither support related policies nor develop alternatives.
Table 3.2: Savings and Investment: Plans and Realization
I
Investment/GNP (%)
Domestic Savings/GNP (%)
Foreign resources/GNP (%)
Investment realization rate
P
R
P
R
P
R
II
18.3
16.0
14.8
14.2
3.5
1.8
90.6
III
21.3
16.1
19.4
15.5
1.9
0.6
91.4
21.9
20.2
21.1
16.0
0.8
4.2
90.5
Source: SPO. I, II, III: First, second and third five year development plans. P: planned, R: realization.
The first obstacle for the accomplishment of the plan targets was financing. Domestic
savings were not enough for the realization of investments necessary for the targeted
growth rates: there was a saving-investment gap. This gap may be filled by increasing
domestic savings compulsorily, that is by taxing more, and/or using foreign resources.
Planning experience had shown clearly that these two sources combined were not enough
for the targeted rate of growth. The result was that, total investment that was necessary for
the realization of the growth targets could not be reached (see Table 3.2).
Neither the voluntary increase in the rate of saving nor the political consensus
necessary to increase taxes could be realized. The gap between the planned and realized
saving rates enlarged in the second and third plan periods. Inflationist financing was the
way mostly used to raise resources. That resulted in an accelerated inflation pressure
especially in the third plan period and thereafter.
Expected foreign resources could not be provided in the first and second plan
periods. In the third plan period foreign savings were more than planned but there was a
quality problem: As mentioned before, foreign resources used after 1974 were generally
short term, high-interest credits. Turkey tried to finance long term projects with costly shortterm credits. While the share of short-term external debt in total was less than 10 percent in
1973, in 1977 more than 50% of total external debt was of short term. The situation was
unsustainable.
31
The foreign direct investment (FDI) flows during the planned period was less than
expected. Foreign enterprises were operating mainly in manufacturing. They were generally
assembly line-style production units; importing most of inputs, and more importantly, they
were smaller than optimum size, and inefficient economically and technologically.
Fourthly, there was not a consensus on planning among political circles. While some
saw planning a way of coordination without disturbing the market mechanism, some other
considered it as the mechanism of rapid industrialization, growth and development. The lack
of consensus about the nature and scope of planning made the coordination among state
institutions difficult. Bureaucrats of the SPO and of other public bodies could not often agree
on the targets and instruments of planning.
Fifthly, political instability and frequently changing Governments was another factor
creating unfavorable conditions both for the preparation and implementation of plans.
TABLE 3.3: Some socio-economic indicators at the end of 1970s
Population (1980)
The shares of agriculture, industry
and services in GDP (1)
Employment shares of agriculture,
industry and services (1)
Electric power generation (1980,)
Rate of urbanization(1980)2
Adult literacy rate
Export structure: agricultural, mining
and industrial products (1980)
44,736,957
25%, 20%, 55%
51%, 14%, 35%
23,275 million kWh
44%
66%
56%, 7%, 37%
Source: TURKSTST. Notes: (1) The average of three years: 1979, 1980, and 1981. (2) Ratio of the population
living in province and district centers.
As a result of the factors summarized above the planning in Turkey could not be a
success story. The structure and working of the economy was not changed by planning.
Planning could not change traditional trends especially in the industry. It would not be an
exaggeration to say that the economy fashioned planning: planning could not be effective.
Let aside private investments, planning could not either commanded public investments.
32
CHAPTER 4
TURKISH ECONOMY IN THE LAST TWO DECADES OF THE 20TH CENTURY
4.1.
THE JANUARY 24, 1980 PACKAGE
Turkey entered the last two decades of the 20th century with radical changes in its economic
policies. On January 24, 1980 the Government launched a structural adjustment program,
under the auspices of the IMF. That package aimed at the stabilization and liberalization of
the Turkish economy. The short-term objectives of the program were to reduce the
inflation, improve the balance of payment deficit, and stimulate export growth. The
achievement of these objectives was expected to regain the international creditworthiness
of Turkey. In the long-run, the program aimed at adopting outward-oriented trade and
more market-oriented economic policies. Thus, the economic direction of Turkey was
transformed from import-substitution to export-oriented growth.
The basic elements of adjustment program included: the adoption of a flexible
exchange rate with an immediate devaluation of the lira, export promotion to reduce the
trade deficit and promote export led growth, the liberalization of trade by dismantling the
restrictions on imports, tight monetary controls to reduce consumption and inflation, the
deregulation of interest rates to stimulate savings, privatization of the SEEs to encourage a
greater role for the private sector, rationalization of the cost structure in the SEEs, and the
liberalization of prices to improve efficiency and reduce the budget deficit.
The primary aspect of the measures was the priority of the free markets in
determination of prices and allocation of resources. The Government, however, was unable
to gain the political support necessary for the successful implementation of the package, but
the military regime that came to power in September that year endorsed the new program.
The new policy package and the Military Coup of September 12 are two integral parts of
the new economic orientation.
An export oriented growth policy was substituted for the model based on domestic
market. In order to create a surplus for exports, the following policies aiming at containing
domestic demand were implemented: real wages and salaries were lowered, agricultural
33
supports were decreased and internal terms of trade8 were changed in favor of the nonagricultural sectors; price controls and subsidies in basic goods were finished, it was tried
to decrease public spending.
4.2. POLICIES AND PERFORMANCE IN THE 1980s
Macroeconomic developments between 1980 and 2000 can be divided into two phases:
1981-1989 and 1990-2000. The main characteristics of the first phase were export
promotion with strong subsidy components and gradually phased import liberalization,
together with the managed floating of the exchange rate9 and regulated capital movements.
Gradual, but significant depreciation of the lira was one of the pillars of the policy
orientation.
Severe depression of wage incomes and declining agricultural supports
continued during the years following the military regime. There was also a decisive move
towards containing public spending.
BOX 4.1: EXCHANGE RATE SYSTEMS
Exchange rate is the unit value of a national currency in terms of another national currency. There
are three different exchange rate determination systems: fixed rate, floating (or flexible) rate, and
managed rates.
In the fixed rate system, the exchange rate is determined by the central bank and the central bank
intervenes the foreign exchange market to keep this rate. Major fluctuations from the fixed rate
are not allowed.
In the floating (flexible) exchange rate system, the exchange rate is determined in the market by
the supply of and the demand for the currencies.
In the managed exchange rate system, the central bank can influence the exchange rate by
intervening in the foreign exchange market. Both t he fixed and the floating rate can be managed
by the central bank.
On January 24, 1980, the lira per US dollar devaluated by 48.62 percent; from 47.80
to 71.40 liras. Starting from the first of July, 1981, the exchange rate of TL was decided
daily, as a step toward a flexible exchange rate system. In addition to a steady policy of
8
Internal terms of trade refer to the relative price of agricultural products in terms of industrial goods and are
defined as the ratio of agricultural prices to industrial prices. It can be interpreted as the amount of industrial
goods that can be purchased per unit of agricultural goods.
9
For the exchange rate systems see BOX 4.1.
34
exchange-rate depreciation, the exporters were supported by generous credits at
preferential interest rates, tax rebates and foreign-exchange allocation schemes.
Domestic financial system had been liberalized in the 1980s. The early phase of
financial liberalization turned out to be a painful process. The speedy lifting of controls on
deposit interest rates and on the allocation of credits in mid-1980 had led to the financial
scandal of 1982 when the numerous money brokers (called "bankers") which had flourished
by offering very high real interest rates to savers collapsed together with a number of
smaller banks. Thereafter, the policy pendulum moved between re-regulation and deregulation up till the late 1980s; but the trend, although gradual, was definitely towards the
establishment of a liberalized domestic financial system.
In 1984, in an effort to increase the inflow of foreign currency, the Government
partially liberalized the foreign capital movements. Banks were allowed to accept foreign
currency deposits from residents and to engage in specified external transactions.
Nonresidents were allowed to hold financial assets in domestic markets, and restrictions on
residents holding foreign currency and opening foreign-exchange deposit accounts in
domestic banks were removed. Restrictions on borrowing from foreign-exchange markets
and holding financial assets abroad were also lifted for authorized financial intermediaries,
corporations holding investment incentive certificates, and foreign trade companies. The
Central Bank's control over commercial banks was simplified with a revision of the liquidity
and reserve requirement system. An interbank money market for short term borrowing
facilities became operational in 1986. In 1987, the Central Bank diversified its monetary
instruments by starting open market operations.10 A supervisory and regulatory agency over
the capital market, Capital Market Board, was established which initiated the re-opening of
the Istanbul Stock Exchange.
Turkey’s merchandise exports sharply rose from 2.6 percent of GDP in 1979 to 8.6
percent of the GDP in 1990 and manufactures accounted for approximately 80 percent of
this increase.
There were, however, adverse changes with respect to the composition of total fixed
investments against tradable sectors. While gross fixed investments of the private sector
10
An open market operation (OMO) is the activity of the Central Bank of buying and selling financial assets on
the open market. OMO is one of the instruments of monetary policy.
35
increased by 14.1% annually during 1983-87, the fixed investments in manufacturing
increased by only 7.7%, and private fixed investments in manufacturing could not reach its
pre-1980 levels in real terms until the end of 1989. Much of the expansion in private
investments was in housing. This result was not in conformity with the official stance
towards industrialization: in a period where outward orientation was supposedly directed to
increase manufacturing exports through significant price and subsidy incentives, distribution
of investments revealed a declining trend for the sector. This non-conformity between the
objective of increasing manufacturing exports and the decline in the share of
manufacturing investments constituted one of the main structural deficiencies of the
growth pattern of the period. The impressive export boom of the 1980s was, thereby,
essentially based on the productive capacities established during the 1970s.
The agricultural sector was ignored by the Governments in the 1980s. The virtual
elimination of subsidies and price-support programs after 1980, combined with trends in the
international markets, created a sharp deterioration in the internal terms of trade. The
internal terms of trade turned against agriculture by more than 40 percent until 1987. As a
result, the agricultural sector showed the lowest rates of output increase during the postwar era, averaging only 1 percent per year from 1980.
Table 4.1: Selected Macroeconomic Indicators, 1980–1990
Year
1980
1981
1982
1983
1984
1885
1986
1987
1988
1989
1990
GDP
growth
rate
–2.4
4.9
3.6
5.0
6.7
4.2
7.0
9.5
2.1
0.3
9.3
Inflation
rate(CPI)
101.4
34.0
28.4
31.4
48.4
45.0
34.6
38.9
73.7
63.3
60.3
Budget
deficit
(% of
GDP)
-2.4
-1.2
-1.1
-1.7
-3.3
-1.7
-2.1
-2.6
-2.3
-2.5
-2.3
Exports
(million
dollars)
2,910
4,703
5,746
5,728
7,134
7,958
7,457
10,190
11,662
11,625
12,959
Imports
(million
dollars)
7,909
8,933
8,843
9,235
10,757
11,343
11,105
14,158
14,335
15,792
22,302
Trade
balance
(% of
GDP)
–5.1
-3.7
-3.7
-3.3
-3.0
-2.8
-1.5
-2.9
-4.7
Current
account
(% of
GDP)
–3.8
-2.4
-1.8
-1.1
-1.5
-0.7
1.3
0.7
-1.3
Sources: TÜRKSTAT, Central Bank of the Republic of Turkey (CBRT), Undersecretariat of Treasury, State
Planning Organization (SPO).
36
The new policies had significant negative effects on income distribution. The
suppression of wages was instrumental both in lowering production costs and also in
squeezing domestic demand. Real wages declined by as much as 34 percent. The share of
wages in manufacturing value added declined from an average of 35.6% in 1977-80, to
20.6% in 1988 and average gross profit margins as a ratio of current costs in private
manufacturing increased from 31% to 38%.
Table 4.2: International reserves, external and domestic debts, and PSBR, 1980–1990
International reserves
Year
1980
1981
1982
1983
1984
1885
1986
1987
1988
1989
1990
(billion
dollars)
1.2
1.6
2.0
2.1
3.5
3.3
4.3
5.2
6.4
9.3
11.4
Reserves/
Imports
(%)
15.3
22.6
32.4
28.9
39.1
36.8
44.8
58.8
51.1
External debt
Total
(billion
(% of
dollars)
GNP)
15.7
19.3
16.6
20.2
17.9
25.1
18.8
29.6
20.8
34.0
25.7
37.4
32.2
42.0
40.3
46.1
40.7
44.8
41.7
38.4
49.0
32.2
Domestic
debt
Short term
(% of
(% of GNP)
GNP)
3.1
2.6
2.5
3.8
5.4
7.1
8.4
8.9
7.1
5.3
6.3
13.6
12.4
12.6
22.8
20.9
19.7
20.5
23.0
22.0
18.2
14.4
PSBR11
(% of
GDP)
6.6
3.0
2.7
3.7
4.0
2.7
2.7
4.5
3.6
4.0
5.5
Sources: TÜRKSTAT, CBRT, Undersecretariat of Treasury.
The export-led growth path, which was dependent on wage suppression,
depreciation of the domestic currency, and generous export subsidies, however, reached its
economic and political limits by 1988. Distributional policies against workers and
agricultural producers were crucial with respect to the internal logic of the model; but it was
becoming more and more difficult to sustain them within the political and social map. The
falling growth rates in 1988 and 1989 (see Table 4.1) and a new wave of populist pressures
changing distributional policies in 1989 may be interpreted as evidence that the policy model
of 1980-1988 had exhausted itself and had to be changed. The way out of the impasse
turned out to be the liberalization of the capital account in August 1989.
11
Public sector borrowing requirement (PSBR) is the amount of money the Government has to borrow when
taxes and its other sources of income are not enough for its payments.
37
Tables 4.1 and 4.2 demonstrate how economic indicators changed in the 1980s. We
can summarize the general trend of improvement in the first years and a deceleration
afterward as follows. Figures depicting budget deficit, trade deficit, inflation, and PSBR in
1980 almost reemerged at the end of decade. Total external debt, especially short-term
external debt, and total internal debt as a percentage of the GDP increased remarkably.
International reserves had increased during the 1980s both absolutely and as a ratio to
imports, but that increase could be realized by borrowing from abroad, and as we will
explain below, this was a necessity in the face of increasing uncertainty in the financial
markets after the financial liberalization. Volatility in the GDP growth rate continued in the
1980s: growth rate fluctuated between -2.4% and 9.5% during the decade.
4.3. LIBERALIZATION OF THE CAPITAL MOVEMENTS AND ITS CONSEQUENCES
a. Liberalization of the capital movements
As we explained above, towards the end of the 1980s, the policies aiming at constraining
domestic demand became impracticable because of the changes in political environment.
Increasing redistributional pressures resulted in larger fiscal deficits and higher rates of
inflation. Rising real wages and salaries, and agricultural supports that have been held under
control until 1988 had enlarged Government deficits. On the other hand, since the idle
capacities created before 1980 and used to increase exports had been exhausted, the rate of
increase in exports had fallen. Additional resources were needed both to finance expanding
public deficits and to create new production capacities to enhance exports. New resources
were tried to be found abroad. For this purpose capital movements were fully liberalized in
1989. Liberalization of capital movements allowed free inflow and outflow of capital.
Exchange rules were liberalized and controls on foreign currencies ended. Full convertibility
of the Turkish lira was adopted at the beginning of 1990; a new stage of the model
accepted in 1980 was reached. There were no longer restrictions on residents including
foreign securities in their portfolios, and nonresidents were allowed to freely trade Turkish
financial instruments.
The post-1988 period witnessed a drastic deterioration of the fiscal balances. Behind
the recurrent financial crises in Turkey there was a very high ratio of public sector borrowing
requirement (PSBR) to GDP. This is not a novel issue in Turkey as the problem also existed in
the 1970s. However, financial liberalization largely altered the process whereby public
38
deficits have traditionally been financed. Before 1980 public deficits were financed through
Central Bank advances to the Treasury. During the 1980’s the Government financed its
deficits from domestic borrowing through issues of the Government debt instruments. The
establishment of domestic capital markets presented the Government with the opportunity
to borrow domestically. As a result, domestic debts increased. High real rates of interest
emerged as a striking feature of the Turkish economy during the 1990s. The size of the
Government’s financial requirement compared to the size of the domestic financial system
was at the heart of these high real interest rates. The growth in the Government’s financial
requirements outstripped the increase in the size of the financial system. This increased the
burden on the financial markets, and—in turn—the domestic financial system responded by
raising interest rates. Therefore, Turkey’s high and downwardly rigid interest rates are a
direct outcome of the increasing public deficits. Not surprisingly, the increase in real interest
rates has caused an increase in interest payments and hence an increase in budget deficits.
PSBR/GDP ratios, which averaged 3.4 percent during 1981-1988 rose to 7.7 percent
in 1993 (see Table 4.4). Government financed financial deficit by issuing Government debt
instruments and more than 90% of these instruments was purchased by the banking sector.
High real interest rates paid by the Treasury made attractive for commercial banks
borrowing from abroad and lending to the Treasury. In this system, speculative short-term
foreign funds flowed to the Treasury through the operations of the banking system.
The underlying characteristic of the domestic debt management was its extreme
short-termism. Net new domestic borrowings, as a ratio of the stock of the existing debt,
rose to 58% in 1992, indicating that each year the state had to resort to net new borrowing
reaching to half of the debt stock. Thus, the public sector is trapped in a short term rolling of
debt. This unsustainable process contributed to the so-called confidence crisis of the
1990’s. For this scheme of financing public deficits to work, however, domestic financial
markets required the continued inflow of short-term foreign capital.
The liberalization of the capital movements increased economic risks and fragility.
The major brunt of the costs of this fragile environment, however, falls on the productive
sphere of the economy, especially the exporting sectors. The hot money coming to exploit
high rates of interest created a pressure on the exchange rate causing the overvaluation of
lira. The overvalued lira, while discouraging exports, increased the demand for the
39
imported goods; thereby, expanded the current account deficits. This was a vicious cycle:
while external funds were needed to fill the twin gaps (public deficit and trade deficit) the
inflow of external funds increased trade deficit, by appreciating lira.
Economy became increasingly vulnerable to external shocks and sudden outflows of
capital in the 1990s. Public-sector deficits continued to widen. Domestic and external
borrowing was the most important mechanism for financing the growing deficits. High
interest-rates and appreciation of the lira attracted large amounts of short-term capital
inflows. Banks rushed to borrow from abroad in order to lend to the Government.
b. 1994 Financial Crisis
Widening public deficits accumulated a high stock of internal debt. Increasing stock of
internal debt, combining with high rates of interest, raised the interest burden of the
Government. This was another vicious cycle: the way of financing public deficit enlarged
this deficit by raising interest rates and then debt stock of the Government. In the face of
rising inflation and deteriorating imbalances, the Government chose a strategy aimed at
reducing inflation by keeping interest rates low, maintaining an overvalued Turkish lira,
and keeping the prices of goods and services produced by public sector low.
Deficit financing through the Central Bank’s credits gained momentum in the last
months of 1993. Several auctions of short term maturity Treasury bills were canceled one
after another and the Treasury started to rely on cash advances from the Central Bank. The
share of domestic borrowing in the financing of budget deficit declined between 1991 and
1993, but the share of both external borrowing and short-term credits from the Central Bank
increased. This deficit financing policy of the Government made the financial crisis almost
inevitable, in the existing financial system.
While the Government was trying to lower interest rates and public debt stock, trade
balance and therefore current account was deteriorating in 1993. The current account deficit
reached a record of $6.4 billion (2.7 percent of GDP). On the financial side of the economy,
the situation was even more dismal. PSBR reached 7.7 percent of GDP in the same year, and
the debt stock, both domestic and foreign, reached record levels (see table 4.4). As a
percentage of GDP, domestic debt rose from 11.5% in 1991 to 13.4% at the end of 1993, and
40
during the same period external debt rose from 26,7% to 29.6%. Total external debt at the
end of 1993 stood at a level of $67.4 billion.
The only way of financing foreign deficit, in the existing conditions, was short-term
capital inflows. The continuity of capital inflows, however, was dependent on their expected
profitability. For the capital inflows to be profitable, the expected rate of return on deposits
denominated in TL must exceed the expected return on foreign currency. Domestic real
interest rates have to be kept high enough to attract foreign capital and there should be low
risk of currency depreciation. If interest rates begin to decline and/or the domestic
currency shows signs of weakness, the flow of capital quickly reverses itself. Signs of
weakness of the domestic currency or speculation of devaluation will likely lead to a massive
sell-off of the domestic currency.
Increasing doubts about the continuity of external funds inflows raised the demand
for foreign exchange and therefore created a pressure on the exchange rate. The assets
structure of the Turkish commercial banks also aggravated the exchange rate risk:
borrowing from the external world in terms of foreign currencies and lending to the
Government in terms of TL. Indeed, the ratio of the foreign currency denominated
liabilities in total liabilities of the banking system was higher than the ratio of foreign
currency denominated assets to total assets. That is, commercial banks were holding large
short-term positions in foreign currency. After the financial liberalization, they had raised
the Government security investment portion of their assets, increased the volume of foreign
currency denominated deposits, and taken large short-term positions in foreign currency.
As a result of the Treasury’s drive to lower domestic interest rates, maintaining an
overvalued lira was no longer possible. The demand for foreign currency of commercial
banks increased rapidly to close their open foreign currency positions12. As a result of the
increasing levels of anxiety in the financial sector, Turkey’s credit rating was downgraded by
some major international agencies. There was some capital flight.13 Although the lira was
overvalued the Central Bank heavily intervened in the interbank market and raised the
overnight rate to record levels to defend the currency and to contain the loss of foreign
currency reserves. Yet, the Central Bank still went on losing reserves- selling foreign currency
12
Open foreign currency position refers a situation, when the total value of foreign exchange assets is less
than the total value of the foreign exchange liabilities.
13
Capital flight means rapid flow of capital out of a country, leading mostly to financial crisis.
41
to the commercial banks. The commercial banks which were able to buy foreign currency
from the Central Bank at relatively lower rates also were losing their own reserves as
residents started to withdraw their foreign exchange deposits.
Table 4.3 Selected macroeconomic indicators, 1990–1999
Year
GDP growth
rate
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
9.3
0.9
6.0
8.0
–5.5
7.2
7.0
7.5
3.1
-4.7
Inflation
rate
(CPI)
60.3
65.9
70.1
66.1
106.3
88.0
80.4
85.7
84.7
64.9
Budget
deficit% of
GDP
–2.3
–4.0
–3.2
–5.0
–2.9
–3.0
–6.2
-5.8
-5.5
-8.9
Trade
balance(%
of GDP)
-4.7
-3.6
-3.8
-5.9
-2.4
-5.8
-4.2
-5.9
-5.2
-3.9
Current
account (%
of GDP)
-1.3
0.1
-0.5
-2.7
1.5
-1.0
-1.0
-1.0
0.7
-0.4
Sources: TÜRKSTAT, CBRT, SPO.
Turkey’s risky interest rate and exchange-rate strategy eventually came to an end. As
the margin between the official and the market exchange-rate increases, so does the
expectation of devaluation. Clearly, maintaining an overvalued domestic currency in a
managed floating exchange-rate system, and at the same time administering the nominal
interest rate, was not a sustainable strategy. The liquidity build-up through excessive
creation of domestic credit to the public sector in the form of cash advances to the Treasury
by the Central Bank, and the decline in total foreign exchange reserves in the first quarter of
1994 finally had its impact on the parity: the parity more than doubled from about 15,000
TL/$ in January, to 35,000 TL/$ by the first days of April.
The primary source of the 1994 crisis was its financial origin, in particular, the effort
to administer the interest rate and the adverse effects of the exchange-rate policy used.
For policy makers, the increase in future interest expense and debt-servicing was indeed a
major concern. High interest rates were not only adversely affecting public finances but may
have also contributed to lower investment and an increased cost of working capital, thus
adversely affecting inflation and output. Low interest rates may have been appealing given
the burden of high interest costs on the budget, but clearly the low-interest rate policy was
42
not compatible with the external financing policy of the Government. Turkey had
consistently maintained an overvalued Turkish lira since 1991. The inflow of external capital
depended on the expected value of the domestic currency and real interest rates, and
attempts to lower interest rates triggered the speculative attack on the domestic currency
and contributed to the unfavorable financial environment that led to the crisis of 1994.
Table 4.4: International reserves, external and domestic debt, and public-sector14
borrowing requirement, 1990–1999
International reserves
Year
In billion $
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
11.4
12.3
15.3
17.8
16.3
23.0
25.1
27.1
29.5
33.8
External debt
Total
Short term
Reserves/
Imports In billion $ % of GDP
(%)
51.1
49.0
26.1
58.2
50.5
26.7
66.7
55.6
27.8
60.4
67.4
29.6
71.0
65.6
38.8
65.3
73.3
33.6
57.2
79.3
32.6
55.9
84.4
33.3
64.2
96.4
35.6
83.0
103.1
41.7
% of GDP
4.7
4.5
6.0
7.8
6.3
6.9
7.0
7.0
7.7
9.3
Domestic
debt
% of GDP
10.8
11.5
13.2
13.4
15.4
13.0
15.9
16.2
16.5
21.9
PSBR
% of
GDP
5.5
7.5
7.9
7.7
4.6
3.7
6.5
5.8
7.1
11.6
Sources: TÜRKSTAT, CBRT, SPO.
Government policy intended to lower the interest payment component of the
budget and to reduce inflation, but instead it led to higher interest rates, higher inflation,
and larger deficits.
c. The Stabilization Program of April 5, 1994
A stabilization program, later supported by an IMF Stand-By15 was launched on April 5th,
1994. Profiling a classic austerity plan that combines monetary, fiscal, and incomes policies,
the package attempted to contract the economy to improve the imbalances in the product
14
Public sector includes, in addition to the central Government, local Governments, non-financial state
enterprises, social security funds and the unemployment insurance fund.
15
IMF Stand-By Arrangement is an economic program of the International Monetary Fund (IMF) involving
financial aid to a member state in need of financial assistance, normally arising from a financial crisis. In return
for aid, the economic program stipulates reforms in the recipient country, which are seen necessary by the IMF
to bring it back on a path of financial stability and economic sustainability.
43
and financial markets. Domestic demand was reduced to slow price increases, and through
supply-side adjustments, it was expected to lower real production costs and bring about an
economic recovery led by export expansion. Some of the measures included in the package
were:
(1) devaluing the Turkish lira by 38.8 percent with further adjustments based on the
average of rates declared by ten leading banks,
(2) gradually reducing short-term credits from the Central Bank,
(3) raising taxes by about 9 percent, reducing spending by 12 percent, and lowering
the budget deficit by 80 percent for the next three months,
(4) removing agricultural subsidies, and
(5) raising prices of fuels and tobacco by about 100 percent
After the announcement of these measures, the financial crisis deepened.
Deterioration of the Turkish lira continued, despite frequent interventions from the Central
Bank to stabilize it. By the end of April, overnight rates soared to about 400 percent and the
U.S. dollar appreciated significantly against the Turkish lira. One serious problem during the
next two months was the Treasury’s inability to borrow. The Central Bank’s advances to the
Treasury were shut off because of the austerity measures, external borrowing was no longer
possible, and a lack of confidence halted domestic borrowing. The Treasury was unable to
borrow. So, as a last resort, on May 26, it auctioned 3-month “super bonds”, and the realized
rate of interest was 461.3 percent, compounded annually. With this super bonds operation
and a Stand-By agreement with the IMF, macroeconomic indicators began to improve
somewhat during the following months. The Central Bank supported the decline in the
interest rates by lowering overnight lending rates. Interest rates gradually fell, nearly
returning to levels comparable to those that existed before the crisis. Inflation began to slow
down, and the budget, excluding interest payments, showed a surplus during the second
quarter of 1994. A budget deficit of 51.3 trillion liras in the first quarter turned into a surplus
of 9.2 trillion liras during the second quarter. Also, by the end of July the Central Bank’s gross
foreign-exchange reserves reached their pre-crisis level of about $5.8 billion.
Despite these slight improvements, particularly in the financial sector, the growth
rate of real GDP turned negative with a substantial drop of 5.5 percent in 1994, and the
inflation rate surged to 106.3 percent (see table 4.3). Although the growth rate improved in
44
1995, reaching an impressive 7.2 percent, inflation remained the top priority, it was 88
percent. Exports continued to grow, but that did not prevent the trade deficit rising from 2.4
percent of GDP to 5.8 percent in 1995. The budget deficit grew as well. Despite notable
increases in revenue, expenditures increased at a higher rate, and that led to a budget deficit
of 2.9 and 3.0 percent of GDP in 1994 and 1995, respectively. External debt rose from $65.6
billion in 1994 to $73.3 billion in 1995, although as a percentage of GDP it declined from 38.8
to 33.6 percent (see table 4.4). As a proportion of GDP, domestic debt first declined from
15.4 percent in 1994 to 13.0 percent in 1995 but then rose to 15.9 percent in 1996. Clearly,
these statistics did not reflect the performance of an economy implementing an austerity
plan.
d. Years of Instability
Indeed it soon became clear that the Government was not strongly behind the April 5
program and the stand-by agreement came to an end in 1995. During the following two
years, there was no serious attempt to stabilize the economy and to reduce inflation.
Governments tried to finance the twin gaps by short-term capital inflows, since they could
not increase domestic saving rates and/or foreign direct investments. 16 The close
relationship between capital inflows and economic growth continued in the 1990s within a
broad context: starting from the liberalization of capital movements in 1989, capital inflows
were demanded not only to finance current account deficits but also for building up a
foreign exchange stock that would limit the fragility of the economy in the face of the
possibility of capital flights. While the sum of the current account deficits was 170 billion
dollars between 1989 and 2008, the increase in the foreign debt stock was 236 billion
dollars, in the same period.
The movements in budget deficits in the post-1994 period were almost completely
dominated by interest payments on domestic debt. The impact of financial liberalization in
the presence of a large budget deficit was a systematic increase in the domestic debt and
short-term domestic borrowing requirements, which caused a move towards higher interest
rates. As a result, Turkey has been caught in a vicious circle of increasing deficits and rising
16
Foreign direct investment (FDI) is a direct investment into production or business in a country by an
individual or company of another country, either by buying a company in the target country or by expanding
operations of an existing business in that country. FDI is a long-term investment and does not create foreign
debt in contrast to speculative portfolio or financial investment.
45
interest rates. Keeping interest rates higher to promote the entry of the foreign capital has
increased the interest burden of the economy. The share of the interest payments in total
spending of the central Government had increased from 3.8% in 1971-1980 to 14.5% in
1981-1990 and to 24.3% in 1991-2000. By 2000 interest costs on domestic debt reached to
80% of overall tax income of the public sector.
The financing policy of the Government being based on short-term borrowing led the
commercial banks to change their asset management policies. They shifted from direct loan
extensions to firms to purchasing Government securities. In this way, commercial banks
who increasingly borrowed from abroad started to finance public deficits. The public sector
direct borrowing from international capital markets was replaced by this indirect form of
borrowing by commercial banks. The deficit-financing policies led the commercial banks to
open short positions in foreign currencies. In order to finance their massive investment in
Government bonds, many Turkish banks made short-term borrowings from international
markets against which the Government bonds were pledged as collateral. Banks were
borrowing short-term money to hold long-term Turkish Government bonds. The banking
sector’ operation in short positions in foreign currency-denominated assets made the sector
progressively more vulnerable to foreign exchange and interest rate risks. The process of
financing public deficits by commercial banks mostly meant building up of domestic assets in
the hands of the domestic banking sector, with injections of liquidity from the rest of the
world via short-term capital inflows. Under these conditions banks’ assets mostly consisted
of domestic debt instruments of the Government, while their liabilities were mostly short
term foreign borrowings. This operation deepened much of the fragility already existing in
the system due to the mismatch between the maturity and currency compositions of the
domestic assets and the foreign currency denominated liabilities.
The short-positions of the banking system reached to almost 15 billion $ by the end
of the 1990s, and increased the vulnerability of the banking system with a high devaluation
risk. With the rise of the gap of the open positions of the banking system, the ongoing risk
premium of new borrowing increased secularly until when capital inflows turned into
outflows as in late 1998, and again November 2000. The necessary adjustments to bring the
system back to secure capital inflows were indeed onerous and painstaking.
46
An important consequence of these profitable short-term positions has been the
increasing trend of dollarization in the banking system. The share of foreign currencydenominated assets and liabilities started to increase, especially after 1987.
To summarize, the liberalization of the capital account in Turkey in 1989 has pushed
the economy into an unstable and risky path in four directions: (1) the fragility of the
domestic financial system has increased substantially. (2) The growth path of the economy
has become more volatile, subject to a newly emerging financial cycle, and the period
between its boom and bust phases shortened considerably. (3) Drains or "leakages" out of
inflows rose in relative terms, and the external debt has grown at a pace totally unrelated
with the external financing needs of economic growth. (4) And, finally, arbitrage-seeking
and short-term capital ("hot money") flows constituted a rising share of total capital
movements and this phenomenon had started to transmit a serious factor of instability to
the economy.
TABLE 1.6: Some socio-economic indicators at the end of 1990s
Population (2000)
The shares of agriculture, industry and
services in GDP (1)
Employment shares of agriculture,
industry and services (1)
Electric power generation(2000)
Rate of urbanization
Adult literacy rate
Export structure: agricultural, mining
and industrial products (2000)
67,803,927
10%, 23%, 57%
43%, 17%, 40%
124,922 million kWh
65%
86.5%
6%, 2%, 92%
Source: TURKSTAT. Notes: (1) The average of three years: 1999, 2000, and 2001. (2) Ratio of the population
living in province and district centers.
Turkey made an attempt to deal with the structural causes of the budget deficits and
the chronic inflation process. In July 1998, a new program was agreed with the IMF. The
program achieved some improvements concerning the inflation rate and fiscal imbalances
but it could not relieve the pressures on the interest rates. The Russian crisis in August 1998,
the general elections in April 1999 and two devastating earthquakes in August and October
1999 led to a deterioration of the fiscal balance of the public sector.
47
By the end of 1999 it was clear that the macro-economic balances were not
sustainable. Negotiations with the IMF led to a new stabilization program. We will discuss
the implementation and results of the 1999 stabilization program in the next chapter.
48
CHAPTER 5
2000-2001 CRISIS
5.1. 1999 DISINFLATION AND STABILIZATION PROGRAM
An exchange rate-based disinflation and stabilization program designed, engineered, and
monitored by the IMF was put into implementation in 2000. This program was based on a
tight fiscal policy, an incomes policy17 in line with targeted inflation, and monetary and
exchange rate policies formulated in line with decreasing inflation. The program also tried to
make fundamental structural changes in the key areas of taxation, privatization, banking
regulation, and the agricultural price support schemes. Reduction of agricultural support
prices and their replacement by direct income supports were crucial components of the
program.
The program targeted to bring consumer price inflation down to 25 percent by the
end of 2000, 12 percent by the end of 2001, and to seven percent by the end of 2002. A 20
percent increase in the nominal TL price of a basket of (1US$+0.77Euro) was programmed
for 2000. The program limited the monetary expansion to changes in the net foreign asset
position of the Central Bank, and fixed the Bank’s stock of net domestic assets at its
December 1999 level.
Therefore, money supply was to be totally dependent on the
purchases of foreign exchange by the Central Bank. Additionally, lower limits for the net
international reserves and upper limits for public sector deficits were set as performance
criteria and sterilization18 was excluded as a policy option.
a. Implementation of the Program
The program appeared to be successful in the first 10 months of its implementation:
Monetary, fiscal and exchange rate targets were attained. However, although slowed down,
the decline in inflation was behind the targeted rates. From the end of 1999 to end of 2000,
the exchange rate basket increased by 20.3%; but rate of change in consumer price index
was 39.0 percent. Disregarding price movements in trade partners, these figures correspond
17
Incomes policies are economy-wide wage and price controls, most commonly instituted as a response to
inflation, and usually seeking to establish wages and prices below free market level.
18
Sterilization refers to the actions taken by the Central Bank to counter the effects on the money
supply caused by an increase or decrease in foreign Exchange reserves.
49
to a real appreciation for the TL by more than 15%. Behind this appreciation there was a net
capital entry of 15.5 billion dollars during the first ten months of 2000. Real interest rates on
Government’s debt instruments collapsed from an average of 33% in 1999 to practically zero
during 2000. This, together with the steady real exchange rate appreciation, fuelled a boom
in domestic demand and led to a widening of the current account deficit.
Turkey was exhibiting serious deterioration in terms of fragility indicators throughout
2000. The ratio of short-term debt to international reserves of the Central Bank, which had
stood at 101% at the inception of the program, jumped to 152% in December 2000. Thus,
the program, in addition to significant currency appreciation, increased the fragility of the
banking system and the external vulnerability of the Turkish economy.
Six banks in November 1999 and an additional two banks in September 2000 were
taken over by the authorities and criminal investigations were initiated against owners and
executives of five of these banks on suspicion of fraud and stashing away the financial
resources of the banks through offshore operations. This strengthened the impression that
the private banking industry had significant problems, and that large costs were imminent
which would endanger the sustainability of public debt. In addition, the financing of the
budget deficits by the banking sector led to the accumulation of currency and maturity
mismatches on the balance sheets of commercial banks. On the other hand, state-owned
banks had accumulated significant "duty" losses and were also engaged in unsound lending
practices. As a result, the prudential indicators of the banking system had deteriorated to
the point where the sector could no longer ensure a smooth financing of the public debt and
was actually undermining its sustainability.
In October 2000, Demirbank, a major primary dealer and investor in Government
debt instruments heavily dependent on overnight funds, reached the point where it could no
longer refinance itself on the market. Restrained by its ceilings on net domestic assets, the
Central Bank refused to lend to Demirbank, forcing it to sell part of its Government
securities portfolio and triggering a significant increase in interest rates and further sale
waves. This sudden outflow due to non-residents liquidating their Treasury bill and equity
assets started a run against the TL in November. Additional foreign exchange demand
resulted in the erosion of the Central Bank reserves by nearly 7 billion dollars in two weeks
after mid-November. Faced with a negative impact on other problematic banks and the
50
Treasury's borrowing capacity, the Central Bank eventually injected liquidity in the system
in November 2000. This maneuver, however, did not prevent the money supply to contract
during the rest of the month as most of the additional liquidity came back as foreign
exchange demand to the Central Bank.
Short-term policies during the three months between the November and February
crises were essentially aimed to preserve the exchange rate anchor at all costs. After
making some allowance for the November turbulence, the previous rules of the game were
reestablished, changes in the money supply was still dependent on changes in Central Bank
reserves. The low level of reserves continued up till the end of the year and contributed to a
severe liquidity squeeze for the banking sector, high interest rates and contractionary
pressures. An agreement with the IMF late in December included a financial package of
$10.5 billion. This kept funding the essential elements of the preceding program intact and
replenished reserves early in January 2001. However, IMF funding precluded its incidence
on the money supply. Hence the liquidity squeeze continued; yet, foreign exchange markets
were temporarily stabilized, albeit at interest rates significantly above the pre-crisis levels.
Interest rate on Treasury auctions for Government debt papers rose from less than 40% in
November to 66.6% in January 2001. On the other hand, demand contraction and the
ongoing impact of the exchange rate anchor were instrumental in pulling inflation down to
around 27 percent per annum in January and February.
Suppressing the foreign exchange demand via exorbitant interest rates was, clearly,
an unstable situation. A political skirmish between the President and the Prime Minister
resulted in a second attack on the TL late in February 2001. As interest rates rose to threedigit figures, the Central Bank had to sell $5.2 billion within two days. The 2000 program
officially came to an end as free floating of the currency was announced on 22 February.
The lira depreciated about 40% against the dollar immediately after the announcement. A
new program that was entitled as Strengthening the Turkish Economy was announced on
April 21, 2001. And by mid-May, a more conventional Stand-By agreement with the IMF
was finalized. The new program was structured around a long list of so-called “structural
reforms” and demand management via fiscal and monetary stringency, but with no targets
for the exchange rate.
51
b. Impacts of the Crisis
In this section we will summarize the effects of the crisis on production, employment,
foreign trade, foreign debt, inflation, exchange rate, interest rate, public finance and private
finance.
1) Production
The 2000/2001 crisis resulted in a substantial output loss: real GDP dropped by 5.7% in
2001 after growing by 6.8 percent in 2000, representing one of the most severe contractions
in Turkish history (see Table 5.1). Investments collapsed in volume terms by 30%, while
industrial output dropped by 8.7% annually. Activity in the manufacturing sector was hit
harder and declined by 9.4%.
TABLE 5.1: Growth and Unemployment (1999-2002, %)
Years
1999
2000
2001
2002
GDP growth Unemployment
rate
rate
-3.4
7.7
6.8
6.5
-5.7
8.4
6.2
10,3
Source: TURKSTAT.
Capacity utilization rates in manufacturing declined from 75.9 percent in 2000 to
71.4 percent in 2001. There was considerable variation in the pattern of adjustment of
different sectors to the crisis. The decline in manufacturing, for example, was much more
severe in the private sector, which, unlike the public sector, felt the initial impact. While
capacity utilization in the public sector during this period increased from 79.9 percent to
82.0 percent, there was a sharp fall in capacity utilization in the private manufacturing sector
—from 74.2 percent to 66.9 percent.
2) The Labor Market
The adverse production trends had the most significant impact on the labor market. The
unemployment rate surged to 8.4% in 2001 and 10.4% in 2002 from 6.5% in 2000. A
distinctive feature of the 2001 crisis was the mass redundancy of labor on a scale hitherto
unprecedented in Turkey. A large number of workers lost their jobs, especially during the
first few months of the crisis. This was the combined result of firms under financial strain
either reducing their workforce or going out of business altogether. Estimated number of
52
workers fired was around 30,000 in the banking sector, around 5,000 in mass media, and
nearly 50,000 in engineers and architects. Construction was most severely affected, with
employment declining by a massive 18.3 percent during 2001. Employment in the
manufacturing sector fell by 8.4%, and the total number of unemployed persons increased
by 437,000 in the same year. The rise in unemployment was accompanied by a change in the
profile of the unemployed, with the share of young and educated persons increasing
sharply.
As in previous crises, a major effect of the 2001 crisis on the labor market was a
sharp drop in real wages. The real minimum wage declined by 14.0% in 2000 and by 13.7%
in 2001, thereby the cumulative decline from 2009 to 2001 reached 25.8%.
3) Foreign trade, current account, and foreign debt
Table 5.2 summarizes how the 2000-2001 crises influenced foreign trade and current
account balances. Although exports increased by 4.5% in 2000, foreign trade deficit almost
doubled from $14,084 million in 1999 to $26,728 million, as a result of an imports boom.
Imports increased by 34.0% in 2000. The current account deficit increased from $925 million
in 1999 to $9,920 million in 2000, mainly because of the increase in foreign trade deficit.
The high rates of increase in trade and current account deficits may be explained by
the appreciation of TL and increase in domestic demand, suppressing exports while
enhancing imports.
Table 5.2: Foreign Trade, Current Account Deficit, Foreign Debt (1999-20002, million $, %)
Years
Exports
Imports
1999
2000
2001
2002
26,587
27,775
31,334
36,059
40,671
54,503
41,399
51,554
Trade
Deficit
(TD)
-14,084
-26,728
-10,065
-15,495
Current
Foreign
Account
TD/GDP CAD/GDP
debt
FD/GDP
Deficit
(FD)
(CAD)
-925
-3.9
-0.4 103,123
41.7
-9,920
-8.3
-3.7 118,602
44.7
3.760
-1.7
1.9 113,592
57.5
-626
-2.8
-0.3 129,592
56.2
Source: TURKSTAT, CBRT.
The increase in the current account deficit raised foreign debt of Turkey in 2000.
Total foreign debt increased by $15,479 or 15%, and it also rose as a ratio to GDP from
41.7% in 1999 to 44.7% in that year. Although foreign debt decreased absolutely in 2001, it
53
increased as a ratio to GDP because of the decline in GDP. In 2002, total foreign debt rose
again absolutely by $16 billion, or by 12.3%.
4) Inflation, Interest Rates and Exchange Rate
One of the targets of the disinflation program was to lower consumer inflation to 25% at the
end of 2000. Although the target was missed, consumer inflation was lowered from 68.8% in
1999 to 39.9% in December 2001. But this was a temporary decline. With the increase in
exchange rates and interest rates especially starting from February 2001, inflation climbed
again to the previous year’s level. At the end of 2001 consumer inflation was 68.5%.
Interest rates had declined in the first half of 2000. Interbank overnight average
interest rates fell from about 70% in December 1999 to about 27% in July 2000.
Compounded average Treasury borrowing rates had a similar trend; they fell from 96.4% in
November 1999 to 32.5% in July 2000. In the second part of 2000 interest rates turned
upward and the speed of increase accelerated after the third quarter. This trend continued
until the end of the first quarter of 2001, with some temporary drawbacks. Interbank
overnight average rates climbed to 199% in December 2000 and 400% in February 2001.
Treasury average borrowing rate reached the highest point in March 2001, 194%. Beginning
the second quarter of 2001, interest rates went down. The average Treasury borrowing rate
had been 59.0% in December 2001. Consequently, the annual average borrowing rate of the
Treasury more than doubled during 2001, rising from 36.60% in 2000 to 75.90%. That was a
heavy cost of the 2000-2001 crises.
TABLE 5.3: Inflation, Interest Rates (1999-2002, %)
Years
1999
2000
2001
2002
Inflation
rate(CPI)
68.8
39.9
68.5
29.7
Interbank overnight
average interest
rates (December)
69.9
199.0
59.0
44.0
Treasury
Average
borrowing rate
94.00
36.60
75.90
56.00
Source: Ministry of Development
Another target of the disinflation program was a 20% depreciation of the TL against
the (dollar-euro) basket by the end of 2000. This target was achieved, thanks to intensive
interventions of the Central Bank during the November crisis; the rate of depreciation in the
54
TL had been 20.3% in 2000. The depreciation of TL against the basket accelerated with the
February 2001 crisis; TL depreciated 33.3%, 14.8% and 10.4% in February, March and April,
respectively. And, total depreciation in these three month reached 41% (see Table 5.4). After
April 2001 the value of the TL against the basket fluctuated but the general trend was
downward. At the end of 2001 total annual loss in the value of TL in terms of (dollar-euro)
basket had been 110%.
TABLE 5.4: Exchange Rates and Interest (1999-2001)
Date
Change in the
(1US$+0.77E) basket (%)
1999/12
2000/1-10 average1
2000/11
2000/12
2001/1
2001/2
2001/3
2001/4
2001/5-12 average1
1,64
1.00
0.87
1.03
33.26
14.81
10.88
2.82
Interbank overnight
average interest rates
69.97
40.21
95.43
183.2
42.7
400.27
81.19
80.99
62.29
Source: CBRT. (1) Simple average.
5) Public and Private Finance
The increase in public debt following the depreciation of the lira and the recapitalization of
banks was staggering. The public debt stock as a ratio to GDP was 39.8% in 1999 and it
climbed to 51.5% in 2000 and 78.8% in 2001. The debt stock/GDP ratio was still remarkably
higher in 2002 than it was in 1999 (see Table 5.5). The banking crisis had affected about one
quarter of Turkey's 81 banks, causing a loss to the budget of about 30% of GDP. The bulk of
tax revenue is used to service Government debt. The interest payments on public sector
debt as a proportion of tax revenue, which stood at 30.7 percent in 1991, increased sharply
throughout the decade and reached 77.1 percent in 2000 and 103.3 percent in 2001.
Consolidated budget deficit rose to 12.4% of GDP in 2001 from 8.2% in 2000, after a fall
from 8.9% in 1999. A similar trend had been observed in the PSBR, with a higher rate of
fluctuation. Public foreign debt also increased considerably during the crisis, from about 55
billion dollars in 1999 to about 71.5 billion dollars in 2001 and to about 86.5 billion dollars in
2002.
55
TABLE 5.5: Indicators of Public Finance (1999-2002, million $, %)
Years
Public debt Consolidated budget PSBR
stock/GDP
deficit/GDP ratio (%)
Public foreign
debt stock
1999
39.8
8.9
11.64
55,113
2000
51.5
8.2
8.88
64,171
2001
78.8
12.4
12.06
71,480
2002
73.4
11.9
9.98
86,536
Source: Ministry of Development.
Interest and exchange rate shocks of such severity not only increased the
Government’s debt-service obligations remarkably but also imposed a big burden on the
banking sector and firms. The crisis started in the financial sector, placing many firms in
financial distress, and came full circle, increasing the fragility of the banking sector. The
sharp rise in interest rates and the severe depreciation of the domestic currency led many
small- and medium-sized enterprises to close down. As expected, the firms who had taken
foreign currency loans were hardest hit. As a result of the difficulties faced by the banking
sector, these firms faced a credit squeeze and were unable to meet their needs for working
capital. Furthermore, those in a position to borrow were confronted with exorbitant interest
costs in addition to the high costs of imported intermediate goods, most notably petroleum
and petroleum-related inputs such as electricity.
c.
The Assessment of the Crisis
The occurrence of the crisis can be summarized as follows: a demand-based economic
expansion accompanied by rising and unsustainable trade and current deficits followed by
a phase of contraction with a liquidity squeeze, skyrocketing interest rates, and negative
growth.
The main weakness of the 2000 disinflation program was its exclusive reliance on
speculative short-term capital inflows as the source of the liquidity generation mechanism.
The program limited the monetary expansion to changes in the net foreign asset position of
the Central Bank, and fixed the Bank’s stock of net domestic assets at its December 1999
level. Overlooking the existing structural indicators of financial fragility and resting the
liquidity generation mechanism on speculative in-and out-flows of short-term foreign
capital, the program left the economy defenseless against speculative runs and a sudden
56
stop. Within this mechanism, the monetary policy is restricted to the direction of the foreign
exchange flows, and the liquidity generation of the economy was made dependent upon the
proper continuation of the foreign credit flow into the system.
The expansion of the money supply was linked to the foreign exchange inflows, and
the Central Bank was committed to the strict rule of no-sterilization throughout the
program. Therefore, it was expected that the available liquidity in the domestic economy
would be managed by the interest signals inherent in smoothly operating financial
markets; rising domestic interest rates would invite foreign inflows, allowing for monetary
expansion. Excess liquidity (as a result of increasing foreign exchange reserves) would, in
turn, be signaled through lower rates of interest, allowing foreign capital outflows to
balance the equilibrium level of liquidity in the domestic financial markets.
However, with the eruption of the first crisis in November 2000, and then again in
February 2001, it was clear that the basic foundations of the liquidity creation mechanism
were at fault. In fact, given the shallowness and fragility of the Turkish financial system, the
mechanism was always incapable of bringing about such smooth adjustments towards
equilibrium as those envisaged by the program designers. The strategy of public sector
deficit financing based on short-term foreign borrowing led the banking system to be more
vulnerable to foreign exchange and interest risks. Increasingly risk-taking behavior, coupled
with a remarkable build-up of the short positions in foreign currency in the banking sector,
raised serious doubts about the sustainability of the short-term capital inflow-based public
debt management policies. The sheer volume of short term foreign capital flows
intermediated through the banking sector is clearly indicative of their gross volatility and
erratic movements. The volume of inflows of banking credits reached $122.7 billion in 1999
and $209.4 billion in 2000. Consequently, the short-term debt rose from $22,921 million in
1999 to $28,301 million in 2000. Yet, the program had envisaged that possible increases in
Central Bank reserves would be able to match the increase in outstanding short-term foreign
debt, and that Turkey would be able to remain sound externally. However, the lure of the
uncontrolled flows of speculative gains clearly grew unchecked throughout 2000. Debtfinanced public deficit and rapid acceleration of private expenditure escalated inflows of
short-term foreign capital and severely increased the vulnerability of the banking system.
As a result, the ratio of the short-term foreign debt to the Central Bank’s international
57
reserves rose steadily throughout the program. This ratio is regarded as one of the crucial
indicators of external fragility. The value of 60 percent for this ratio is considered a critical
threshold. In the Turkish case this ratio had never fallen below the 100 percent since the
liberalization of the capital account in 1989. Thus, the Turkish financial system had been
operating constantly in the “danger zone,” as far as this indicator is concerned. During the
implementation of the disinflation program this ratio rose to 112 percent in June 2000 and
to 147 percent by early December 2000.
The implementation of the program itself increased the financial fragility in the asset
market. The combined effect of an easy deficit financing policy and a liquidity-creating
mechanism not allowing for sterilization induced many commercial banks to shift their asset
management policies toward bond-financing activities. The share of Government debt
instruments in total bank assets rose from 10.3 percent in 1989 to 21.3 percent in 1999, and
was 19.8 percent in 2000. The growing willingness of banks to increase their bond-financing
activities under these conditions increased the fragility of the financial sector against
uncovered interest risk.
Additionally, dollarization in the banking system further increased the riskiness
creating short position in foreign currency. The liability dollarization ratio increased to 48
percent by the end of 1999, while the asset dollarization ratio was 38 percent at that time.
The short-term foreign capital inflow-based deficit financing policy of the Government,
accompanied by high real rates of interest, incited the commercial banks to extend their
short positions in foreign currency, overlooking prudential asset-liability management.
During the implementation of the program, the net short position of the banking system
nearly doubled, deepening the vulnerability of the banking system against foreign currency
risk. In sum, the program and its liquidity creation mechanism deepened further the
vulnerability of the banking system to market risks, which have been inflicted since the
liberalization of capital movements.
On the other hand, the steady increase in the size of the current account deficit
originated from the fact that the interest rates dropped too rapidly in the initial stages of the
program. This, in turn, helped to sustain a consumption boom and made it difficult for the
authorities to control the overall demand, resulting in a major surge in imports with negative
repercussions on the current account.
58
The failure of the program, therefore, cannot be tied to the inability of the
Government to undertake accurate actions. The Central Bank played its role quite
successfully until November. Turkish monetary authorities have successfully implemented
the monetary program within the given targets, conditioning the Central Bank operations to
net foreign inflows. Therefore, the outbreak of the November crisis and the ultimate
collapse of the program in February 2001 cannot be attributed to any divergence from the
monetary targets.
Similarly, the fiscal operations were in line with both the revenue and the
expenditure targets, and the non-interest primary balance19 on the consolidated budget
succeeded in attaining the end-of-year target by as early as September. Consolidated budget
data reveal that budget revenue realizations were actually higher than the targeted values
by 3.6 percent in 2000 and by 5.1 percent in 2001. On the other hand, expenditure remained
0.2 percent lower than the 2000 target, and the 2001 targets were exceeded by only 1.7
percent. Consequently, during the years in question public management expenditure and
revenue targets were achieved.
Clearly, the fiscal austerity objectives reached were far below the program’s target.
Crisis conditions emerged in due course, mainly as a result of the increasing fragility in the
financial system. The IMF itself should share a significant part of the blame for the
outbreak of the two successive crises. The fact that the crises occurred in the midst of an
IMF program clearly demonstrates that even in the presence of IMF support, the program
failed to inspire sufficient confidence on the part of market participants. The IMF had a
standard model and tried to apply it in a number of countries, irrespective of its lack of
information concerning the political and institutional environment prevailing in those
countries. Furthermore, it has been argued that the IMF could have prevented the initial
November crisis, which was essentially a liquidity crisis. One of the main tenets of the
stabilization program was the “no sterilization rule” as a safeguard against possible
monetary indiscipline in order to add credibility to the disinflation program. The conditions
engendered by this approach restricted the monetary autonomy of the Central Bank by
forcing it to allow the interest rate to be freely determined by the market while leaving the
control of monetary policy in the hands of foreign capital flows. Given the inflexibility of the
19
Primary budget balance is the balance excluding interest payments.
59
IMF in this respect, the Central Bank appears to have adhered too rigidly to the program. As
a result, Demirbank effectively lost all of its capital in two days. Arguably, through a more
flexible approach, the Central Bank could have injected liquidity into the system at the right
moment to prevent the collapse of Demirbank and, hence, block the outbreak of the crisis
itself.
The IMF could have also paid explicit attention to the sequencing of reforms. Rather
than placing the primary emphasis on the elimination of the budget deficit in the first
instance, the restructuring of the banking sector could have received immediate attention.
There exists a certain consensus that the 2000 and 2001 crises in Turkey were essentially
banking crises, though these were clearly related to underlying fiscal imbalances. Thus, a
perennial failure to properly regulate the banking sector was at the heart of both crises.
Although that failure was mainly a result of the deficiencies of the domestic political order,
the IMF was also partly responsible for the under-regulation of the banking system.
Admittedly, the formation of the key regulatory agency—the Bank Regulation and
Supervision Authority (BRSA)—constituted a key component of the IMF program in 1999.
Indeed, the organization became operative prior to the November crisis. The IMF was,
however, rather over-optimistic concerning the ability of such a new institution to play an
effective role over a short period of time in a highly problematic banking sector. Whilst the
IMF was justified in its emphasis on the need to create strong regulatory institutions in
Turkey, it clearly underestimated the political and institutional problems of constructing
autonomous and effective regulatory institutions in the Turkish context.
Finally, it is necessary to underline the role of the systemic origins of the crisis in the
global financial markets. The IMF has been impervious to systemic criticisms and has failed
to pay adequate attention to proposals involving internationally coordinated capital controls
over short-term capital flows. In the Turkish case, considering the risks of program failure,
given the depth of disequilibrium and the magnitude of adjustment, temporary controls over
outflows of short-term capital could have been an effective instrument. The fact that the
IMF did not pay any attention to such instruments as part of its overall program design in
Turkey, or elsewhere for that matter, is clearly an issue that deserves serious criticism.
60
CHAPTER 6
TURKISH ECONOMY BETWEEN TWO CRISES (2002-2007)
In this chapter we will summarize the evolution of the Turkish economy between 2002 and
2007. We will study firstly the new economic program adopted after the 2000-2001 crises;
then, we will discuss the implementation results.
6.1. NEW ECONOMIC PROGRAM AND IMPLEMENTATION
Despite the undeniable role of the IMF in the occurrence of the 2000 and 2001 crises, the
program developed by the Turkish Government after the 2001 crisis was based on the
recommendations of the IMF. The IMF had been involved with the macro management of
the Turkish economy both prior and after the crisis, and provided financial assistance of
$20.4 billion between 1999 and 2003.
The IMF program relied mainly on two pillars: (1) fiscal austerity that targets a 6.5
percent surplus for the public sector in its primary budget as a ratio to the GNP; and (2) a
contractionary monetary policy through an independent Central Bank that exclusively aims
at price stability via inflation targeting. Thus, the Turkish Government aimed dual targets: a
primary surplus in fiscal balances of 6.5% to the GNP; and an inflation-targeting Central
Bank whose sole mandate is to maintain price stability.
According to the logic of the program, successful achievement of the fiscal and
monetary targets would enhance “credibility” of the Turkish Government ensuring
reduction in the country risk perception. This would enable reductions in the rate of
interest that would then stimulate private consumption and fixed investments, paving the
way to sustained growth.
The Central Bank was made independent in May 2001 and mandated to focus on
price stability. As of November 2001, direct financing by the Central Bank of the public
debt issuance was prohibited. The program adopted a floating exchange-rate regime: the
foreign exchange rate would be determined by market conditions. However, the Central
Bank also announced that it could intervene in the foreign exchange market to prevent
excessive volatility.
61
A new banking regulatory and supervisory framework was adopted. After the 2001
crisis, the Banking Regulation and Supervisory Agency (BRSA) implemented a "Restructuring
and Rehabilitation Program" which strengthened the private banks, restructured and
privatized some of the state banks, resolved the bankrupt banks taken over by the Saving
and Deposit Insurance Fund (SDIF) and increased the quality of bank supervision. The
restructuring of the banking sector resulted in 22 banks being taken over by the SDIF and
came with a high price tag.
Following the crisis, Turkey had implemented an orthodox strategy of raising interest
rates and maintaining an overvalued exchange rate. The Government followed a
contractionary fiscal policy, and promised to satisfy the customary IMF demands: reduce
subsidies to agriculture, privatize public enterprises, and reduce public sector in economic
activity.
The underlying characteristics of the post-crisis adjustments ultimately relied on
maintaining high real rates of interest in anticipation of increased foreign capital inflow into
the domestic economy. The high interest rates attracted short term finance capital; and the
relative abundance of foreign exchange led to overvaluation of the Lira. Cheapened foreign
exchange costs led to an import boom both in consumption and investment goods.
Contrary to the traditional stabilization packages that aimed at increasing interest
rates to constrain the domestic demand, the new orthodoxy aimed at maintaining high
interest rates for the purpose of attracting speculative foreign capital from the
international financial markets.
The program found the main source of expansion in speculative inflows of foreign
finance. High rates of interest against falling inflation and fiscal primary surplus targets were
the main attributes of the IMF program
The Turkish Government signed a new Stand-By agreement with the IMF on
February 4, 2002, for 2002–2004. With this agreement, in addition to the base money
target, Net International Reserves became a performance criterion and Net Domestic Assets
an indicative criterion. The outstanding liabilities of the state banks were converted to longterm public debt.
62
The program 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. That time, sterilization of excess liquidity
as a policy instrument was allowed.
The objectives of the 2002–2004 program were to restore confidence in financial
markets through greater interest-rate and exchange-rate stability, improve the resiliency of
the economy against future crises, and move forward with inflation targeting and
sustainable economic growth. The program was based on three main pillars: strict fiscal
consolidation, significant structural reforms in the banking sector and in particular in
banking supervision and Central Bank independence, with monetary policy anchored in
the short run by monetary targets, but aiming towards full-fledged inflation targeting.
In the fiscal area, the primary surplus target of 6.5% of GNP was seen as a key in
restoring confidence and allowing the expansion of private sector activities through the
reduction of public debt and the contraction of the public sector.
After expiration of the 2002 Stand-By agreement a new 3-year stand-by agreement
with the IMF was made and became effective in May 2005. The 2005 Stand-By agreement
maintained the primary surplus target of 6.5% of GNP.
All went well until the end of 2005. The Banking Regulation and Supervisory Agency
(BRSA) tried to minimize financial risks during the bull market20 of 2003 to 2007 by raising
the minimum capital adequacy ratios of Turkish banks to 12%, while international
regulations required only 8%. At the same time, lending in foreign currency was only
allowed for companies and individuals with revenues in foreign currency, thus minimizing
the foreign exchange mismatch on the bank balance sheets. The Central Bank had reduced
the short-term interest rates gradually; from 67% in June 2001, to 59 % at end-2001, to 44%
at end-2002, and to 18% at end-2004. The overnight (O/N) policy interest rates were
generally lowered until mid-2006 with low volatility.
By 2005, the authorities were confident that fiscal discipline was established, there
were no worries on the sustainability of public debt, inflation was reduced to single digits,
20
Bull market is a financial market where the prices of securities are rising or are expected to rise. The term
bull market describes upward trends, just the opposite of bear markets.
63
and financial sector fragility was eliminated. Accordingly, at the beginning of 2005, six zeros
were removed from the TL. The borrowing rates of the Treasury closely followed the shortterm rates of the Central Bank. Implicit inflation targeting was successful; realized inflation
turned below targeted rates in 2002, 2003 and 2004. In 2005, the Central Bank decided to
establish explicit inflation targeting starting from January 2006. The Bank’s current mandate
is to set a “point” target of 5 percent inflation of the consumer prices.
The optimistic perception, however, did not last long. 2006 and 2007 were difficult
years for monetary policies and for the Central Bank. In May-June 2006 there was a global
turmoil that hit developing countries. In Turkey, this turmoil resulted in major reversals of
capital flows and a jump in exchange rates to which the Central Bank responded by hikes in
the O/N interest rates. From end-May to end-June 2006, the Central Bank raised the O/N
interest rate by 4 percentage points.
In spite of this hike, actual inflation was almost the double of targeted inflation at
end-2006. Inflation far exceeded the targeted rate also in the first half of 2007. Thus, the
Central Bank kept the O/N interest rates high. After some easing at the beginning of 2008,
the rates were raised from 15.25% to 16.75% between May 2008 and July 2008. The latter
rate was kept unchanged until November 2008.
After this summary of the main principles and implementation of the economic
program since the 2001 crisis, now we will make an assessment of the achievement of the
program.
6.2. IMPLEMENTATION RESULTS
a. Growth and Employment
The real GDP started to grow again vigorously from the second quarter of 2002. The
strongest growth performance took place in 2004/2005, followed by a certain slowdown as
of 2007 (see Table 6.1). Growth was driven by increasing private consumption, and in
particular by a boom in investment which grew on average by 15% in real terms during
2002- 2007.
The high growth after 2001 had very unique characteristics. Firstly, it was mainly
driven by a massive inflow of foreign finance capital which in turn was lured by significantly
64
high rates of return offered domestically; hence, it was speculative-led in nature. Capital
flows to Turkey reached unexpectedly high levels during 2002-2007 (for net capital inflows,
see Table 6.2, third column) and these were crucial in the attainment of high growth rates
during this period. Actually, realized growth rates surpassed the growth rates foreseen in
programs. On the other hand, stoppages and reversals of capital flows during 2007-09 led to
record declines in GDP growth. Growth started to fall in 2007, before the recent crisis
affected Turkey, due to sluggish domestic demand. The private consumption and particularly
private investment had been making negative contributions to GDP growth since the
beginning of 2008.
TABLE 6.1: Growth, Unemployment and Inflation (2002-2007)
GDP growth Unemployment Inflation
PSBR
Consolidated budget
rate (%)
(%)
(CPI, %) % of GDP
deficit/GDP
2002
6.2
10.3
45.0
9.98
-11.9
2003
5.3
10.5
25.3
7.32
-8.8
2004
9.4
10.8
8.6
3.63
-5.4
2005
8.4
10.6
8.2
-0.7
-1.3
2006
6.9
10.2
9.6
-1.83
-0.6
2007
4.7
10.3
8.8
0.08
-1.6
Source: TURKSTAT, Undersecreatariat of Treasury.
Years
Secondly, a higher and a more stable growth during 2002-2007 had been recorded
not only in Turkey; this was a general tendency in the world, particularly in developing
countries. Average growth increased and growth volatility decreased generally in the
developing countries during 2002-2007.
Thirdly, it was accompanied by high rates of unemployment; hence, was of the
jobless-growth type. The high rates of interest prevailing in the Turkish asset markets
attracted short term finance capital, and in return, the relative abundance of foreign
exchange led to overvaluation of the Lira. Cheapened foreign exchange costs led to an
import boom both in consumption and investment goods.
The rate of open unemployment was 6.5% in 2000; increased to 10.3% in 2002, and
remained at that plateau despite the rapid surges in GDP and exports. Open unemployment
was a severe problem, in particular, among the young urban labor force. On the other hand,
the labor force participation rate fluctuated around 48% to 50%. Even though lower than
65
the comparable countries, labor force participation rates were nevertheless above 50%
during most of the 1990s. It declined to less than the 50% threshold first during the
implementation of the 2000 exchange rate-based disinflation program. This low rate was
principally due to the size of the discouraged workers who had lost their hopes for finding
jobs. If we add the TURKSTAT data on the underemployed people, the excess labor supply
(unemployed + underemployed) was observed to reach 15.9% of the labor force as of the
first quarter of 2006.
The rate of employment, on the other hand, did not rise; in fact it declined, albeit at a
marginal pace, throughout the high growth period of 2002-2007.
b. Prices, Exchange Rates, and Interests
The annual inflation rate declined from 54.2% in 2001 to 8.8% in 2007. By the end of 2005,
annual inflation had declined to below 8 percent, a level not seen since the 1960s. But the
formal adoption of the inflation-targeting regime in 2006 was less successful in bringing
inflation down; the official year-end targets of 5% in 2006, and 4% in 2007 and 2008 were
missed. Disinflation was particularly adversely affected by the cost-push inflation imported
via soaring international commodity and oil prices in the latter part of the period.
Inflation rate, both in consumer and producer prices, has, in fact, been brought
under control by 2004. Producer price inflation receded to less than 3% in late 2005. After
the brief turbulence in the asset markets in May-July 2006, inflation again accelerated to
above 10%. Actual inflation was almost the double of targeted inflation at end-2006.
Despite the positive achievements on the disinflation front, rates of interest
remained slow to adjust. Although there was a decline in the general plateau of the real
interest rates, the Turkish interest charges are observed to remain significantly higher than
those prevailing in most emerging market economies. The real rate of interest on the
Government debt instruments for instance remained above 10% over most of the post-crisis
period.
The credit interest rate, in particular, had been stagnant at the rate 16% despite the
deceleration of price inflation until the May-July turbulence in 2006. Then it accelerated to
23.5%.
66
High rates of interest generated a high inflow of hot money finance to the Turkish
financial markets. The most direct effect of the surge in foreign finance capital over this
period was felt in the foreign exchange market. The over-abundance of foreign exchange led
significant pressures for the Turkish Lira to appreciate. As the Turkish Central Bank had
restricted its monetary policies only to the control of inflation, and left the value of the
domestic currency to the speculative decisions of the market forces, the Lira appreciated by
as much as 40% in real terms against the US$ and by 25% against Euro between 2002 and
2007. The TL appreciated even in nominal terms in 2004, 2005 and 2007.
Sharp
appreciation of the TL resulted from relatively large capital inflows to Turkey that started
after 2002. But then, stops and reversals of capital flows brought about uncertainties to
the economy.
With an appreciating TL, exporting firms found it difficult to compete in the
international markets and costs had to be reduced. Cost reduction was generally achieved
by reducing or limiting employment. With an appreciating TL, especially intermediate and
labor intensive goods producing industries were unable to adjust and were forced to stop
producing. With limited employment in non-agricultural activities and continuing migration
from the agricultural sector, wage increases were kept under the inflation, despite a very
robust advance in labor productivity at an average rate of around 7% during the period
between 2002 and 2007.
Thus, appreciating TL and non-increasing real wages, in spite of productivity rises,
contributed to the attainment of lower inflation rates between 2002 and 2007.
c. Public Finance
Turkey managed to reduce its public sector borrowing requirement from around 12% of
GDP in 2001 to almost zero in 2007. On average, Turkey achieved a central budget primary
surplus of close to 3% of GDP during the period 2002-2007, which allowed it to roughly
balance the central budget starting from 2006. The consolidated budget deficit as a ratio to
GDP declined from 11.9% in 2002 to 1.6% in 2007.
The fiscal adjustment took place primarily on the expenditure side, as revenues of the
central budget varied only marginally from 2002 to 2007. The share of revenues in GDP did
not change significantly, and their composition remained more or less the same. On the
67
other hand, savings were achieved on interest payments, as public debt declined
dramatically as a share of GDP and the cost of servicing the stock of public debt fell. Interest
expenditure as a percentage of GDP declined from almost 15% in 2002 to less than 6% in
2007, while primary spending recorded only small fluctuations as a share of GDP over the
period. On the other hand, the deficits in the social security system were and have been a
potential deficit source for the budget.
The impressive decline in public debt from around 79% of GDP in 2001 to less than
40% of GDP in 2007 was the result not only of the strong primary surplus, but also of other
favorable developments. High real GDP growth rates made a substantial contribution during
2002-2007, outpacing all other factors. The appreciation of the Turkish lira in real terms
caused an immediate reduction of the debt-to-GDP ratio, as a significant part of the debt
was either denominated in or indexed to foreign currency. As the privatization process
picked up speed, a large share of the privatization revenues was used to pre-pay debt, in
particular until 2006, which alleviated the public debt burden by around a further 4
percentage points of GDP. The positive contribution of real interest rates was evident only in
2002 and less so in the other years, as real interest rates remained relatively high over the
period.
2007 was an election year, growth was on the decline and non-interest expenditures
increased in spite of stagnant revenues; the result was that the 5% primary surplus could not
be attained. The overall budget deficit increased in that year.
d. Trade, Current Account, and External Finance
Total annual value of the Turkish exports had increased by 197 percent between 2002 and
2007, from about $36 billion to about $107 billion (see Table 6.2). Despite this rapid increase
in exports, since imports had increased faster than exports, trade deficit enlarged by 524
percent, from $15.5 billion in 2002 to $62.8 billion in 2007. The percentage increase in
imports had been 230. During the same period current account deficit had widened about
60 times, increasing from $626 million in 2002 to $37,781 million. The current account
deficit as a ratio to the GDP rose from 0.3% to 5.9%. Although other items also had a role in
the increase in the current account deficit, the main factor was the trade deficit.
68
The factors behind the rapid increase in imports and, therefore, current account
deficit were the real appreciation of the Turkish lira, the high rate of growth in industrial
output, the increase in the import dependence of manufacturing production, growing
domestic demand, and the increase in crude oil prices.
TABLE 6.2: Trade Balance and Current Account (2001-2007, Million Dollars)
Years
2002
2003
2004
2005
2006
2007
2002-2007
Total, %
increase
Current
Account
Deficit (CAD)
-626
-7,554
-14,198
-21,449
-31,836
-37,781
59,353
CAD/GDP
(%)
Exports
Imports
Trade
Balance
-0.3
-2.5
-3.7
-4.6
-6.1
-5.9
36,059
47,253
63,167
73,476
85,535
107,272
51,554
69,340
97,540
116,774
139,576
170,063
-15,495
-22,087
-34,373
-43,298
-54,041
-62,791
-
197
230
524
Source: TURKSTAT, CBTR, NOTES: (1) Foreign direct investment+portfolio investment+others
For a long-time perspective the most important among these factors is the
increasing import dependence of manufacturing production. As traditional Turkish exports
lose their competitiveness, new export lines have emerged. Yet, these are mostly importdependent, assembly-line industries, such as automotive parts and consumer durables. They
use the advantage of cheap import materials, get assembled in Turkey at low value added
and then are exported. Thus, being mostly import-dependent, they have a low capacity to
generate value added and employment. As traditional exports dwindle, the newly emerging
export industries are not vigorous enough to close the trade gap.
Table 6.3 shows how the current account deficits had been financed by foreign
capital inflows in the period between 2002 and 2007. Foreign capital inflows had three
main components: credit financing of the banking and non-banks enterprises, speculative
portfolio investments, and foreign direct investments.
Since the total capital inflows had been higher than the current account deficits for
the period under consideration, the Central Bank’s foreign exchange reserves had increased
by about $54 billion. In Table 6.3, total increase in reserves ($54,067) is higher than the
difference between the total current account deficits and total capital inflows ($113,44469
$160,697). This is because of a total net omissions and errors of about $7 billion in that
period.
TABLE 6.3: Finance of Current Account Deficits (2001-2007, Million Dollars)
Years
2002
2003
2004
2005
2006
2007
TOTAL
2002-07
-626
-7,554
-14,198
-21,449
-31,836
-37,781
Total Net
capital
inflows
1,172
7,162
17,702
42,685
42,689
49,287
Net foreign
direct
investment
939
1,222
2,005
8,967
19,261
19,941
Net
portfolio
investment
-593
2,465
8,023
13,437
7,415
833
113,444
160,697
52,335
32,766
CA deficit
826
3,475
7,674
20,281
16,013
28,513
Changes
in
reserves
212
-4,097
-4,342
-23,200
-10,625
-12,015
19,569
-54,067
Net foreign
credits
Source: CBRT. Note: Omissions and errors (2002-2007): $6,821 or $6,814 million.
Data given in the Table 6.3 indicate that while the shares of net foreign direct
investment and net foreign credits had gradually increased during the period, the share of
the speculative capital flows had increased until 2005 and then decreased. Portfolio
investments have two components: equity investments which do not affect foreign debts,
and bond credits which are included in foreign debts. In our example, out of total net
portfolio investment of $32,766 million $28,555 million was debt creating bond credits and
$4,211 million was equity investment. Thus, total debts creating capital inflows is the sum of
net foreign credits ($19,569) and debt creating component of portfolio investment
($28,555), and equals $48,114 million. Indeed, total net foreign debts of Turkey had
increased by $45,650 million (52 percent) from $88,445 to $134,090 between 2002 and
2007.
Despite the sharp increase in the current account deficit, expectations on the Turkish
economy were generally optimistic between 2002 and 2005. 2006 showed, however, that
the Turkish economy was still vulnerable to boom and bust. Despite the solid disinflation
process since 2002, nominal and real interest rates remained high and were thus conducive
to attracting inflows of "hot" money. This led to the appreciation of the lira in real terms
against the USD and the EUR. Turkey was trapped in a policy of overvalued exchange rates
and high real interest rates which hurt its external competitiveness and expanded its
70
external deficits and imbalances. It may also be a reason for the economy's sluggish capacity
to generate employment. Turkey remained a fragile economy with respect to a change in the
risk appetite of investors, and its vulnerability mainly stemmed from an overvalued local
currency and relatively high external indebtedness ratios. Indeed, the events of 2006, when
the domestic currency came under intense pressure, revealed the growth cycle to still be
subject to speculative influences.
The strength of domestic demand caused a significant widening of the current
account deficit to 6.1% of GDP in 2006. Concerns had been raised about the sustainability of
the external imbalances, in particular as easier access to credit had led to a rapid increase in
private consumption and household debt. And indeed these fears were realized as the
tightening of international capital market conditions in spring 2006 coincided with the
emergence of domestic political tensions and resulted in outflows of short-term capital and
a sharp depreciation of the lira in May and June 2006.
Nonetheless, the currency crisis was short-lived and it did not lead to a full-blown
crisis. Capital flows were restored by the swift intervention of the Central Bank with
successive increases of its policy interest rate. The Turkish lira recovered about 70% of the
ground lost against a EUR-USD basket by the end of the year and portfolio inflows exceeded
USD 8 billion in the second half of 2006, after an outflow of about USD 4.5 billion in AprilJune.
6.3. CONCLUSION
The average annual rate of growth in the Turkish economy had been 6.8% between 2002
and 2007. This is a higher rate than the long-term average in Turkey, which is about 5%. The
growth between two crises, however, has two important characteristics: Firstly, the post2001 expansion is observed to be concomitant with a deteriorating external disequilibrium,
resulted from the excessive inflows of speculative finance capital. Thus, it is a “speculativeled” growth. Secondly, despite the high rate of growth there had been no changes in the
rate of unemployment, 10.3% in both 2002 and 2007. So, it is a “jobless growth”.
Inflation rate fell from 45% in 2002 to 8.8% in 2007. The decline in the rate of
inflation was a result of the non-increasing real wage rates despite the high increase in labor
productivity and GDP, and the import boom.
71
The current account deficit increased from only 626 million dollars (or 0.3 percent of
GDP) in 2002 to 37,781 million dollars (or 5.9 percent of GDP). The appreciation of TL of 40%
against dollar and 25% against euro contributed to decline in inflation by making possible
the import boom, but also enlarged the current account deficit.
In the period under consideration, imbalances in the public finance decreased
considerably: consolidated budget deficit as a ratio of GDP fell from 11.9 percent in 2002 to
1.6 percent in 2007. Three important factors leading this improvement were the high rate of
increase in GDP, which increased the amount of taxes; the decline in rate of interest, which
decreased the cost of public borrowing, and privatization income, used to reduce the public
debt stock.
Despite the considerable decline in the nominal interest rates Turkey had continued
to pay a real interest rate of about 10% during the period, since the decline in the nominal
interest rate was lower than the decline in inflation.
Developments after 2007 showed clearly how sensitive the economic performance
and balances are to foreign capital inflows. We will discuss this matter in the next chapter.
Here, we should underline another side of the picture. With the implementation of the
policies dictated by the IMF and World Bank, developing country governments that are
dependent upon foreign capital have been conditioned to adopt or maintain
contractionary policies in order to secure “investor confidence” and “international
creditworthiness”. Such efforts are restricted to a balanced budget, entrenched fiscal
expenditures, and a relatively contractionary monetary policy with an ex ante commitment
to high real interest rates. All of this signifies reduced political autonomy in the developing
world in exchange for market access to industrialized North.
In this environment, portfolio investors become the ultimate arbiters of national
macroeconomic policy. Public policy became synonymous to populism and waste.
Democratic institutions are put under siege through endless lists of conditionalities set forth
by the IMF and the World Bank, and in the meantime, the transnational companies and the
international finance institutions have become the real governors with an implicit veto
power over any economic and/or political decision that is likely to act against the interests
of global capital.
72
CHAPTER 7
GLOBAL ECONOMIC CRISIS AND TURKEY
7.1.
THE 2008-2009 GLOBAL ECONOMIC CRISIS
The 2008-2009 global economic crisis originated from the United States and was rapidly
transmitted to Europe and the rest of the world. Turkey had been one of the most affected
countries, with a sharp contraction in economic activity and a parallel increase in
unemployment in 2009. In fact, the global crisis made the twin gaps in Turkey
unsustainable: saving gap and foreign exchange gap. Turkey could not eliminate the twin
gaps but tried to finance them with foreign capital inflows since the liberalization of capital
movements in 1989. When capital inflows interrupted because of internal and/or external
factors, the Turkish economy plunged into crises. This was the common grounds of all the
crises that Turkey experienced since 1989. The main differences between the 2008-2009
crisis and past crises may be summarized as follows:
Firstly, the last crisis started abroad and transmitted to Turkey, while the previous
crises were typically domestically generated crises.
Secondly, while each previous crisis necessitated external financial assistance for
the subsequent recovery process making the encounter with the IMF and the World Bank
inevitable, in the latter case the capital inflows restarted as a result of the increasing
international liquidity stemming from the stimulating policies of the USA and EU. The
Turkish economy recovered faster than in the past with the restarted capital inflows,
without immediate IMF assistance. The robustness of the public finance and banking sector
and low inflation also played a role in that episode.
Thirdly, the rate of depreciation of TL was modest in the last crisis compared to the
previous crises both because of the restarted capital inflows and lower rate of inflation.
Fourthly, in the last crisis Turkey suffered from a dramatic loss in export revenues,
mainly resulted from a demand shock from the European Union.
Finally, at the end of the last crisis the rate of unemployment was notably higher
than past crises.
73
7.2. THE IMPACT OF THE GLOBAL CRISIS ON THE TURKISH ECONOMY
Turkey was hit harder by the global financial crisis of 2008-2009 than by any of the previous
instances of a sudden stop in capital inflows. Falling exports resulting from the collapsed
external demand combined with the decreasing domestic demand had led to a severe
contraction in the Turkish economy.
Now, we will overview the effects of the global crisis on the Turkish economy in
more details.
a. Output and Employment
The Turkish economy contracted by 4.8 percent in 2009, after a growth rate of 0.7 percent
in 2008. Although the global economic crisis accelerated the slowdown and contraction, the
deceleration in growth of the Turkish economy started in mid-2007, basically due to falling
growth in private investment and consumption. The main reason for the fall in private
domestic demand was the volatility in capital flows first in mid-2006, when there was a
global volatility, and second in mid-2007, when there were political uncertainties.
The economy slid into negative annual real GDP growth in the last quarter of 2008
when it shrunk by 6.5% (see Table 7.1). Cumulative growth in 2008 amounted to only 0.7%,
sharply down from the average 6.8% real GDP growth recorded during 2002-2007. The
economy contracted in the first quarter of 2009 at an accelerated pace and real GDP fell by
14.6% compared with the first quarter of the previous year, worse than in any single quarter
of the 2001 crisis. This is also confirmed by the evolution of the capacity utilization rate in
the manufacturing sector. In the 2001 crisis, the lowest level attained by the drop in the
capacity utilization rate was 68.5% in April 2001, whereas in the recent crisis, the capacity
utilization rate sank to 63.8% in both January and February 2009.
The real sector had been impacted through two main channels: external demand
had shrunk significantly since October 2008, and domestic demand has contracted in
tandem with deteriorating business prospects and lending conditions. Private consumption
fell by more than 10% while private investment contracted by 35.8%. The positive
contribution of public consumption and investment could not offset the large decline in
private sector activities. In a similar vein, the decline in exports had been significant in the
74
recent crisis whereas in the previous one they were barely affected. This is not surprising,
given that in 2001 only Turkey was in recession, not the whole world.
TABLE 7.1: How did the crisis affect economic growth?
2008
I
II
2009
III
IV
Y
I
2010
II
III
IV
Y
I
II
6.2
4.4
2.0
3.5
0.4
1.1
Agriculture
5.4
-0.3
5.4
2.4
3.5
-1.2
Industry
9.0
5.0
0.7
-9.6
1.1
-20.9
-11.2 -4.2
11.6
-6.7
19.2
14.9
Services
6.5
2.3
0.1
-6.5
0.4
-12.8
-7.6 -3.8
4.4
-5.0
9.7
9.6
GDP
7.2
2.8
1.0
-6.5
0.9
-14.6
-7.6 -2.7
6.0
-4.7
11.7
10.3
Source: SPO, TURKSTAT
The output decline slowed down in the second quarter of 2009. Private consumption
moderated its annual decline to 1.2% and domestic demand recovered in the second
quarter, mainly due to tax incentives on sales of durables.
The contraction of the annual rate of industrial production slowed in the second
quarter of 2009 to 11.2% from 20.9% in the first quarter and that the capacity utilization rate
improved to above 72% in July from a record low of 64% in February. Also, the consumer
and
business
confidence
indicators
have
been
rising
since
their
trough
in
November/December 2008. In July, business confidence reached the critical 100-point
threshold which separates optimism from pessimism. Consumer confidence, on the other
hand, remains below the 100 mark and actually dropped by around 3 percentage points in
July when some of the consumption tax breaks expired.
TABLE 7.2: The Effects of 2008-2009 Crisis
Years
2008
2009
2010
GDP
Unemploy- Exports
Imports
Current
growth
Ment (%)
(million $) (million $) deficit
rate (%)
million $)
0.7
11.0
132,027
201,964
-4.7
14.0
102,143
140,928
9.2
11.9
113,883
185,544
account CAD
(CAD, % of GDP
-40,372
-12,124
-45,420
5.7
2.3
6.6
Source: TURKSTAT, CBTR.
The 2008-2009 crises caused a large increase in the unemployment rate. In February
2009, the Turkish economy recorded highest unemployment rate with 16.1 percent.
The
non-agricultural unemployment rate climbed to 19.8%, and youth unemployment reached
75
28.6 percent in the same month. The job loss was the highest in the manufacturing sector,
more than 400,000 in a year.
b. Foreign Trade, Current Account and Capital Flows
Foreign trade flows have been an important channel through which the recent global crisis
affected the Turkish economy since mid-2008. Falling exports contributed substantially to
the negative growth. There was a sharp fall in the value of Turkish exports starting in
October 2008. The fall in the value of imports was even sharper, leading to smaller current
account deficits from the fourth quarter of 2008 onwards. Imports started to pick up from
March 2009 onwards while exports continued to stagnate with the result that current
account deficits started rising again after March 2009.
The sharp decline in the value of Turkish exports resulted from falling volumes as
well as falling prices. This result was in line with developments in global trade. The volume
of Turkish exports had closely followed the falling volume of world imports, but export
prices of Turkey had fallen more than the global import prices.
The main factor behind the contraction in Turkish exports was the sharp fall in the
EU demand. The share of EU-28 in total exports fell from about 56.6% in 2007 to about
46.2% in 2009. The share of Turkish exports to areas such as Africa and the Middle East
increased significantly during the crisis.
One of the dissimilarities between the 2008-2009 crisis and its predecessors relates
to export performance, as we mentioned above. In the past, a key driver of recovery had
been a rapid run-up in exports, largely given impetus by a competitive currency. Exports
took a very different path during the 2008-2009 crisis. Export volume fell until early 2009
and has recovered very slowly, much more sluggishly than in the other post-crisis periods.
This fairly weak export response has been due, in the first instance, to the fall in global
demand, which resulted in a worldwide collapse in trade. This prevented external demand
from operating as an adjustment mechanism. Another causative factor was the short-lived
real depreciation of the Turkish lira. As the lira began to appreciate again in 2009, it
undercut companies’ incentives to export. For both sets of reasons, exports have not
contributed much momentum to economic activity in the aftermath of the latest crisis.
76
The (current account deficit/GDP) ratio exceeded 5% between 2006 and 2008 and
this ratio fell steeply after the crisis of 2008-09 hit Turkey. Exports of gold from Turkey had
significantly reduced the current account deficit during last quarter of 2008 and first quarter
of 2009 and eased the pressure on the exchange rate. The current account deficit fell from a
record - $15.51 billion in the last quarter of 2008 to - $1.71 in the first quarter of 2009. This
result, in spite of sharp declines in exports, is due not only to falling import volumes related
to falling growth, but also to steep falls in import prices in general, petroleum and gas prices
in particular.
After March 2009, imports and current account deficits started to turn up due to
the following factors: (a) Effective from mid-March 2009, the Government reduced the value
added tax and special consumption tax rates on motor vehicles and consumer durables to
encourage demand. Demand was also helped by interest rate reductions of the Central
Bank. The increase in total demand resulted from the increase in demand for import goods
as well as the increase in the demand for domestic products. (b) The TL started to appreciate
once again in April 2009. (c) Energy prices started to rise. (d) Net portfolio investments
started to turn positive, supporting financing of imports.
Volatility in capital flows had significant effects on interest rates, credits, exchange
rates and created uncertainty. Volatility in capital flows increased first in mid-2006, when
there was a global volatility, and second in mid-2007, when there were political
uncertainties in Turkey. The lira became more volatile and depreciated strongly in OctoberNovember 2008. From October 2008 until March 2009, the lira lost around 25% of its value
against the euro, but had appreciated thereafter. Volatility had created and fed uncertainty.
In spite of large current account deficits, the Central Bank accumulated substantial
reserves until the first quarter of 2008, because of large capital inflows mostly thanks to high
real interest rates. However, foreign exchange reserves had declined by $ 10 billion
between June 2008 and June 2009.
An interesting development in the balance of payments is a jump in the errors and
omissions; in the 9 months from October 2008 to June 2009, the sum of this item reached $
14.8 billion. This constitutes nearly 20% of exports of goods and services in the same period.
This amount appears to comprise asset repatriation by Turkey residents (due to reduced
investment opportunities abroad plus the squeeze on domestic credit) and the use of under77
the-mattress savings. Without the inflow of foreign exchange of this size, the source of
which is not known, foreign deficits and foreign exchange rates would have been much
higher and the Turkish economy would have felt the global crisis much harder.
c. Banking and Finance
The biggest concern for Turkey at the start of the global financial crisis had been whether it
would be able to finance its large current account deficit and service its external debt. At
the end of 2008, it needed large amounts of foreign currency from domestic or foreign
sources, as a result of non-negligible risks stemming from the balance sheets of the nonfinancial private sector. The current account deficit amounted to 5.7% of GDP.
The risk of Turkey having difficulties in meeting its external payment obligations had
not materialized. Several factors have played in its favor. The current account deficit had
shrunk significantly as a result of depressed domestic demand and lower volumes and
cheaper imports of energy. The moderate decline in foreign reserves of about 15% since
September 2008 has been reversed in from mid-2009.
Banks continued to borrow from abroad, but they also repaid some of their external
debt. The costs of the syndicated loans have gone up, but in general, do not appear
excessive. Private companies had also drawn down their holdings of foreign assets. They
used their own resources in financing activities because of the increasing borrowing costs
and uncertainty of holding reserves abroad. The amount of deposits held abroad by Turkish
banks and companies was around USD 74 billion or 10% of GDP at the end of 2008.Their use
of own resources abroad helped cushion the impact of the global credit crunch.
The amount of cumulative foreign borrowing of the Treasury between January and
July was 3.75 billion US dollars, more than the total amount of external issuances planned
for 2009. It can be inferred that although Turkey's access to foreign capital has been
constrained by the impact of the global credit crunch, it continued to service its debt
obligations and pay for its imports with the help of large holdings of recorded and
unrecorded foreign assets. The declining roll-over ratios seem to reflect primarily the
reduced domestic activity and production, the drawdown of holdings of foreign assets and
the collapsing external demand for Turkey's exports. In the third quarter of 2009, capital
inflows started to pick-up again. Unlike in the 2000/2001 economic crisis, the pressure on
78
the domestic currency had not triggered a widespread sale of Turkish financial assets.
Overall, the stock of external loans declined by around 6% in the first quarter of 2009 from
the end of 2008, but subsequently stabilized in the second quarter of 2009.
Turkey's banking sector took a cautious stance during the credit boom in the 2000s,
by striking a better balance between financial deepening and excessive risk-taking. The
capital adequacy and profitability improved and liquidity remained high in the first half of
2009. The rate of non-performing loans had increased moderately to 4.9% from 3.4% at the
end of 2008.
The effect of the downturn in capital inflows on credits was rather mild, at least
compared to their effect in 2001-02. In the recent crisis of 2008-2009, the fall in real total
credits was relatively smaller. Therefore, we can say that the sharp downturn in growth and
upturn in unemployment in late 2008 and early 2009 cannot solely be explained by the
decline in credits, although it is surely one of the factors. The demand for loans had also
shrunk in tandem with the depressed economic activity and private investments. High level
of liquidity in the banking sector had been increasingly channeled into holdings of
Government securities, thus permitting very high roll-over rates for the Treasury's issuance
of debt.
7.3. GOVERNMENT POLICY RESPONSES TO THE GLOBAL CRISIS
The anti-crisis measures adopted by the authorities initially focused on the monetary side
and subsequently became more pronounced in the fiscal policy area.
a. Monetary Policy Measures
Turkey adopted a floating exchange rate regime after the 2001 crisis. The exchange rate
and interest rates would be determined in the market: changing liquidity will assure the
determination of these variables in market equilibrium. This regime worked well between
2002 and 2006 when there was abundance of foreign capital inflows. But 2006 and 2007 had
been difficult years for monetary policies and for the Central Bank. In May-June 2006 there
was a global turmoil that hit developing countries. In Turkey, this turmoil resulted in major
reversals of capital flows and a jump in exchange rates to which the Central Bank responded
by hikes in the overnight interest rates. In spite of this hike, actual inflation was almost the
79
double of targeted inflation at end-2006. Inflation far exceeded the targeted rate also in the
first half of 2007. Thus, the Central Bank kept the overnight interest rates high. After some
easing at the beginning of 2008, the rates were raised from 15.25% to 16.75% between May
and July 2008. The overnight interest rate was kept unchanged until November 2008.
Yet, it was known by the summer 2008 that the global crisis was already in Turkey
and industrial production has started falling. The policy of increasing the interest rate by the
Central Bank during this period may be explained by its overemphasis on inflation, its
observance of rising inflation expectations and misreading of the effects of the global crisis.
Interest rate increases of the Central Bank were carried out at a time when, for instance, in
the USA the Federal Reserve cut the overnight Federal interest rate.
The Central Bank took the following monetary measures from November 2008:
1) Between November 2008 and September 2009, it cut overnight rates eleven times; the
borrowing rate from the Central Bank was reduced from 16.75% to 7.25%.
2) Measures were taken to meet the liquidity needs of the banking system, both in terms of
TL and foreign exchange. On a few occasions, the Central Bank also injected foreign currency
into the market.
3) Dividend distribution of the banks was restricted, to strengthen their capital structures.
4) Measures were taken to help ease export financing.
b. Fiscal Policy Measures
While the global crisis was reaching Turkey, fiscal policies were already loosened and budget
deficit was on the rise. In 2007, growth was on the decline and non-interest expenditures
increased in spite of stagnant revenues; budget deficit increased. After some improvement
in the first half of 2008, there was further deterioration in public finance in the second half
of 2008 and especially in the first half of 2009.
After the introduction of some piecemeal measures, the first comprehensive stimulus
package was announced in mid-March 2009. Two more packages were unfolded at the
beginning and in mid-June 2009.
A short summary of the measures taken with reference to stimulus packages under
five headings is given below.
80
1) Measures to Promote Consumption Spending
Major reductions were made in consumption tax rates; special consumption tax and value
added tax rates were reduced effective firstly for 3 months starting on 16 March, then for
3.5 months and ending on 30 September 2009. Tax reductions encouraged sales of motor
vehicles, white goods and furniture during mid-March to mid-June 2009. Momentum was
lost in the second period, because the coverage and the degree of tax reductions were
narrowed and consumers with deferred consumption had already made their spending.
2) Measures to Promote Employment
There was a considerable reduction in social security premiums, and allowances were
made for short-time working. A substantial expenditure is planned on an employment and
training package, to deal with the problem of unemployment.
3) Measures to Promote Capital Inflows
An "Asset Peace Law" was adopted, by which there would be a tax amnesty for all
unrecorded assets. Tax exemptions were announced for incomes earned abroad.
4) Measures to Promote Investment
A comprehensive stimulus package was announced to promote investment. The promotion
scheme included corporate and income tax reductions, interest rate subsidies, payment of
workers’ social security premiums and allocation of investment locations.
5) Measures to Promote Small and Medium Scale Enterprises(SME) Production and
Exports
A loan guarantee scheme and subsidized credits were announced for the SMEs.
The estimated total burden of the fiscal measures designed to stimulate the economy,
inclusive of Government spending, on the budget, amounts to 0.8%, 2.1% and 1.6% of GDP
respectively in 2008, 2009 and 2010.
7.4. AN ASSESSMENT OF THE CRISIS
Macroeconomic instability has long been the bane of Turkey’s economy. In the past, this
instability was explained mostly by irresponsible monetary policies, unsustainable fiscal
expenditures, poor financial regulation, or inconsistent exchange-rate policies. As it came
out of the 2001 crisis, Turkey succeeded in fixing these traditional sources of fragility.
Monetary policy was pursued within an inflation-targeting framework and governed by an
independent Central Bank. Fiscal policy had been generally restrained, and the public debt81
to-GDP ratio was stable or declining. Banks had strong balance sheets, and regulation and
supervision were much tighter than before. The currency was floating.
The crisis had demonstrated, however, that a financially open economy has many
areas of vulnerability. It cannot insulate itself from the international economy, it remains
at the mercy of developments in external financial markets; crises and contagion are
endemic in an era of financial globalization. So, the first lesson is that policymakers need to
guard against not just domestic shocks, but also shocks that emanate outward from
financial instability elsewhere. This has important implications in deciding on the optimal
degree of financial integration to be aimed. It is understood that complete financial
openness is not the best policy. Governments should be able to control capital flows;
encouraging inflows when finance is scarce but discouraging them when finance is
plentiful.
A second lesson has to do with Turkey’s growth strategy. The Turkish economy
grew at quite rapid rates in the years before the recent crisis, and it had quickly reverted to
respectable growth rates following the rebound. This can be interpreted as the reward for
the solid macro-economic policies pursued since 2001. However, there are too many
disconcerting elements in this economic picture. In particular, domestic savings have
fallen, and unemployment has remained high. The external deficit has kept on widening.
Investment has remained lower than required. All of these factors put the sustainability
of the economic boom into question. Even if the global crisis had never taken place,
Turkey’s traditional pattern of growth would have run into problems. Therefore, it would be
a mistake for the country to return to the status quo ante and resuscitate a model that fails
to make adequate use of domestic resources. Most importantly, Turkey has to learn to live
with a reduced reliance on external borrowing.
When we compare the last crisis with two past crises after financial liberalization, the
main point that emerges from this comparison is that Turkey exited the last crisis with a
significantly higher level of unemployment and a greatly overvalued exchange rate in real
terms.
Turkey was a large net recipient of financial inflows at the onset of each crisis. At
their peak, net inflows amounted to somewhere between 35 percent and 50 percent of the
gross volume of exports of goods and services. In 2001 and 2008, these large inflows not
82
only quickly evaporated, but within two quarters they had been replaced by sizable net
outflows. The first three quarters of the 2001 and 2008 crises were similar.
But thereafter an interesting divergence sets in. For the 2001 crisis, it took roughly
two years for financial inflows to turn positive once again. In the 2008-09 crisis, the
resumption of capital inflows happened much more quickly, Turkey had become a sizable
recipient of inflows once again. Financial inflows continued to increase still further, and,
within three years, net inflows had reached levels that exceeded previous peaks. What
happened was that the stabilization of global financial market conditions and the policydriven sharp reduction in interest rates in the advanced economies produced a re-surgence
in capital flows to emerging markets. Turkey was among the beneficiaries. However, this
may well turn out to be a mixed blessing.
When foreign financing dries up, the current-account deficit has to be quickly
reduced and eliminated. The Turkish economy entered all the last three crises with a large
current-account deficit. And in all three cases, there was a subsequent major adjustment in
the current account over a period of five to six quarters. But the evidence from the last
three crises also shows that this adjustment tends to be temporary. Sometime after these
crises, Turkey was again running large current-account deficits. In the 2008-2009 crisis the
widening of the current account deficit has been even more spectacular (in relation to the
value of exports).
The adjustment in the external balance is achieved in part through a significant
depreciation of the real exchange rate. In the crises of 1994 and 2001, the real exchange
rate depreciated on the order of 30-40 percent. A similar depreciation took place in 2009 as
well, but it was much more short-lived. By the second quarter of 2009, the Turkish lira had
already begun to reverse its slide. This was clearly linked to the more rapid resumption of
capital inflows after the latest crisis. Additionally, Turkey entered this crisis with a stronger
lira than had been the case for either of the previous two crises. This rapid currency
appreciation is doubly problematic.
The employment side of the picture is even more problematic.
The rate of
unemployment had come down somewhat since having reached a record-breaking level,
nearly 16 percent, in the first quarter of 2009.
Nevertheless, the fact remains that
joblessness was already persisting at much higher levels at the onset of the 2008-2009 crisis
83
than in the preceding crises. Unemployment has remained above 10 percent despite rapid
growth since 2001. Going forward, any sensible growth strategy will have to make
employment creation a central plank.
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. These structural
weaknesses had been disguised by unusually favorable global liquidity conditions in the
period between 2002 and 2007. These included excessive dependence for growth on
external financial resources in the face of weak domestic savings and the inability to
channel sufficient resources to research and technological development to improve the
long-term competitiveness of the real sector.
84
CHAPTER 8
LONG-TERM GROWTH
AND STRUCTURAL CHANGE IN THE TURKISH ECONOMY
INTRODUCTION
In this chapter we will discuss; firstly, the long-term growth of the Turkish economy in a
comparative perspective; secondly, the ranking of the Turkish economy in the world and
finally, the structural change and development in Turkey, again in a comparative
perspective.
8.1. LONG-TERM GROWTH
Turkey had increased its national income (GDP) by about 60-fold and its per capita income
(PCI) by about 10-fold, between 1923 and 2008. Since the Turkish national income had
declined dramatically during the years of wars before the foundation of the Republic, 1923
is not a suitable base year to make long-term comparisons. The GDP per capita (PCI) levels
for Turkey were sharply lower than long-term trend values in the early 1920s. For this
reason, the base year selected for long-term comparisons makes a big difference and we
will use 1913, the last “normal year” before the War. Between 1913 and 2008 Turkish GDP
and PCI had increased by about 33-fold and 5.5-fold, respectively. These figures imply an
annual average increase of 4.2% for GDP and 2.25% for PCI. Since PCI is a better indicator
of the long–term growth of countries, we will use it both in intertemporal and international
comparisons.
Although a relatively high rate of average growth recorded for the 1923-1939 period,
PCI had decreased during the Second World War and the prewar level could be caught
again as late as the beginning of 1950s. Economic growth has become a permanent
phenomenon after the Second World War with some exceptional years of crisis. The
average growth rate of PCI had been 2.98% during 1950-1980 and 2.42% during 1980-2008.
Without doubt, the growth rates give valuable information about the performance of
the Turkish economy for the last 100 years, but to make a better assessment we will
compare Turkish growth performance with some selected countries, regions and the world
as a whole.
85
Comparative growth performance of Turkey for (1913-2008) period is given in Table
8.1. We make comparison for four different dates (1913, 1950, 1980 and 2008) and
calculate PCIs of selected countries, regions and the world by taking the level of Turkish
PCI=100 for each date. The figures in the table imply that the PCI of Turkey improved about
10% relative to the USA between 1913 and 2008; the improvement relative to Western
Europe is negligible; it deteriorated somewhat relative to Asia, and improved strongly
relative to the world average and other regions of the world. Turkey has strongly
improved its position relative to some countries such as Argentina, Mexico, India and
Egypt, but its position deteriorated relative to some other selected countries such as
Greece, Spain, Brazil, China, Japan, Malaysia and S. Korea.
TABLE 8.1: Relative Change in the Turkish PCI (1913-2008)
USA
30 Western European Countries
7 Eastern European Countries
Total Latin America
Total Asia
Total Africa
World
Greece
Spain
Mexico
Argentina
Brazil
China (P.R.)
India
Japan
Malaysia
S. Korea
Iran
Egypt
Turkey
1913
1950
1980
2008
437
589
462
387
285
282
327
269
140
130
144
106
123
155
135
86
57
44
50
70
53
55
38
22
126
130
112
94
131
118
223
203
169
135
229
244
143
146
157
99
313
307
204
136
67
103
129
80
46
28
26
83
55
38
23
37
114
118
334
283
74
96
91
128
72
53
102
243
82
106
99
86
74
56
51
46
1
100
100
100
100
Source: Madison, Historical Statistics, our calculation. (1) GDP per capita in the area within the present-day
borders of Turkey.
In summary, it is possible to say that, although Turkey has increased its PCI by 5.5fold in the last 100 years, it could not change its position remarkably relative to developed
86
countries. In other words, Turkish PCI had increased at about the same rate as those in
high-income countries since 1913 and Turkey has not been able to close the existing
income gap. On the other hand, increases in average income in Turkey since 1913 have been
slightly faster than the world average.
Making the comparison for 1950-2008 may be more helpful for the assessment of the
growth performance of Turkey. While Turkey’s growth record was better than the averages
for Latin America, Middle East and Africa as a whole, it has lagged well behind Southern
Europe and East Asia since 1950. The improvement in the relative position of Turkey
regarding the world average has realized after 1950; while its relative position in the world
deteriorated between 1913 and 1950, it has improved notably thereafter. The difference in
the relative performance of Turkey in these two periods is quite understandable once we
take into account of the devastating effects of the wars years on the Turkish economy. The
relative economic performance of countries in the first period had been heavily affected by
the two world wars: while some countries ruined or adversely affected in the wars, some
other countries benefited from them.
8.2. RANKING IN THE WORLD
In this section we will make an assessment of the place of the Turkish economy looking at its
ranking in the world.
In ranking the Turkish economy we will use its GDP as a criterion. GDP is an indicator
of how big an economy is. It is the total value added created within a country in a year. It
depends on the quantity and quality of the factors of production existing in the country and
how efficiently they are utilized: that is, the existing productive capacity and efficiency. A
part of production factors is given naturally and cannot be changed. We call these factors
natural resources or land. The other two main factors are labor and capital. Capital is the
means of production produced by human being and used in the production of other goods
and services. Since the quantities and qualities of natural resources are given, the only way
of increasing the productive capacity and making economic growth is to enhance both the
quantities and qualities of labor and capital. But this does not happen instantaneously, it
takes time to increase the quantities and improve the qualities of labor and capital.
87
Therefore, the productive capacity, total production and ranking depend on the past as well
as the actual performance of the economy.
Economic growth is defined as the increase in total production or GDP. Thus, the only
way of changing the economic ranking of a country is to increase its relative growth rate: If
any country grows faster than others, it could change its ranking in the long run. Thus, the
rate of growth is one of the most important criteria used in the assessment of an economy.
The primary purpose of economic policies is to raise national wealth, and it is not possible to
increase national wealth without growth.
TABLE 8.2: Ranking of GDP; the First 20 Economies of the World
(2015, current prices)
Current exchange rates
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
WORLD
USA
China
Japan
Germany
U. Kingdom
France
India
Italy
Brazil
Canada
Korea, Rep.
Australia
Russian Fed.
Spain
Mexico
Indonesia
Netherlands
TURKEY
Switzerland
Saudi Arabia
Billion dollars
73,433
17,947
10,866
4,123
3,356
2,849
2,422
2,074
1,815
1,775
1,551
1,378
1,340
1,326
1,199
1,144
862
753
718
665
646
Source: WB World Development Indicators database, 8 July 2016
Big countries or economies are more powerful and have more to say in the
establishment of international economic and political order. Therefore, the bigness or
ranking of economies is important. However, what is more important is the standard of
88
living or the level of development. GDP of any country shows how big is the economy, but
it does not give any idea about the level of development or the standard of living. A country
with a large area and population may have a big GDP, but GDP per capita and the standard
of living may be lower. For this reason, countries are also ranked according to their PCIs.
The World Bank calculated the Turkish GDP in 2015 as calculated as $718 billion,
using current exchange rates. The ranking of the Turkish economy in the world is the 18th
(see Table 8.2). The ranking of the Turkey regarding to the per capita income (PCI) is much
more behind. The Turkish PCI for 2015 was $9,130 and it was 62th in the world.
8.3. STRUCTURAL CHANGE AND DEVELOPMENT
a. Structural Change
Turkey has experienced far-reaching economic and social changes since the early 1920s. The
primarily rural and agricultural economy of the early twentieth century has transformed
TABLE 8.3: Structural Change in Turkey (1923-2000)
Population (million people)
Per Capita Income(1)
Composition GDP(%)(2)
Agriculture
Industry
Services
Composition of employment(%)(2)
Agriculture
Industry
Services
Electric power generation(GWh)
Urbanization ratio (%)
Adult literacy ratio (%)(3)
Composition of Exports
Agricultural products
Mining products
Industrial products
1924
13.6(4)
846
1940
17.8
1,814
1960
27.7
2,247
1980
44.7
4,015
2000
67.8
6,597
2010
73.7
8,066(5)
45
11
44
38
19
43
37
18
45
25
20
55
10
23
57
8
20
60
89
4
7
45
24
10
86
6
8
400
24
20
71
8
21
2,815
32
38
51
14
35
23,275
44
66
43
17
40
124,922
65
87
25
20
55
210,285
71
94
86
5
9
88
7
5
81.5
5.5
13
56
7
37
6
2
92
4
2
93
Source: TURKSTAT, Development Ministry, Angus Maddison: Historical Statistics. Notes: (1)1990 International
Geary-Ghamis dollars. (2)The average of three years: 1923-24-25, 1939-40-41, 1959-60-61, 1979-80-81, 199900-01, 2009-10-11; current prices. (3)15 ages and more. (4)1927. (5) 2008.
89
into a mostly urban one. In the 1920s, less than 25 percent of Turkey’s population lived in
urban centers (see Table 8.3). The rural–urban shares remained little changed until after the
Second World War, but Turkey has been experiencing rapid urbanization since then. The
proportion of the population living in urban centers had increased to 71 percent by 2010.
Rapid urbanization has been accompanied by large shifts within the labor force. Agriculture’s
share in total employment had declined from 89 percent in 1920s to 25 percent in 2010,
while industry’s share had risen from about 4 to 20 percent, and that of services had
increased from 7 to 55 percent. Similarly, agriculture’s share in GDP had declined from about
45 percent in 1920s to about 8 percent in 2010. The share of industry had increased from
about 11 percent to 20 percent and the share of services had increased from 44 to 60
percent during the same period.
b. Development
Although PCI may be considered the most important indicator of human development there
are other indicators. For this reason, the human development index (HDI) was introduced
by the United Nations in 1990 as a broader measure. The HDI is a summary measure for
assessing long-term progress in three basic dimensions of human development: a long and
healthy life, access to knowledge and a decent standard of living. A long and healthy life is
measured by life expectancy. Access to knowledge is measured by two indicators: i) mean
years of education among the adult population; and ii) expected years of schooling for
children of school-entry age. Mean years of education is the average number of years of
education received in a life-time by people aged 25 years and older, and expected years of
schooling is the total number of years of schooling a child of school-entry age can expect to
receive. The standard of living is measured by Gross National Income (GNI) per capita.
Turkey’s record in human development has been weaker than its record in
economic growth. Changes in life expectancy at birth provide a dramatic example of
changes in twentieth-century Turkey. The estimated life expectancy for the 1930s was only
thirty years. Life expectancy at birth had increased to forty-seven years by 1950, to sixty-two
years by 1980, and over seventy five years in 2013. Adult literacy in the early years of the
Republic was about 10 percent. It has gradually increased to 94.1% in 2011.
90
Levels and improvements in life expectancy in Turkey have been comparable to those
in other developing countries with similar levels of income. However, education levels in
Turkey as measured by literacy, years of schooling and school enrolment have been
lagging significantly behind education levels in developing countries with similar levels of
GDP. Turkey also lags behind developing countries with comparable levels of per capita
income in indices aiming to measure gender equality and the socio-economic development
of women. One other reason why many of Turkey’s human development measures have
been lagging behind is the large interregional differences. The country report for Turkey
prepared by United Nations Human Development Program for the year 2002 indicates, for
example, that the top ten high-income, western and north-western provinces in the country,
including Istanbul, had an average HDI equal to 0.825, which was close to the HDI for EastCentral European countries such as Croatia or Slovakia. On the other hand, the poorest ten
provinces in the south-eastern 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.
1) Turkey’s HDI value and rank
Countries are categorized in four different groups according to their human development
levels: very high human development (HDI value, 0.800 or greater), high human
development (HDI value, 0.700-0.799), medium human development (HDI value, 0.5500.699), and low human development (HDI value, less than 0.550).
TABLE 8.4: Turkey’s HDI Values for 2014 Relative to Selected Countries and Groups
HDI
value
Very high HDI
High HDI
Medium HDI
Low HDI
World
Turkey
Serbia
Azerbaijan
Rank
Life
expectancy
at birth
80.5
75.1
68.6
60.6
71.5
75.3
74.9
70.8
72.3
0.896
0.744
0.630
0.505
0.711
0.761
72
0.771
66
0.751
78
(1)
ECA
0.748
Source: UNDP, HDR 2015. (1) Europe and Central Asia
91
Mean
years of
schooling
11.8
8.2
6.2
4.5
7.9
7.6
10.5
11.2
10.0
Expected
GNI per capita
years of
(2011 PPP, $)
schooling
16.4
41,584
13.6
13,961
11.8
6,353
9.0
3,085
12.2
14,301
14.5
18,677
14.4
12,190
11.9
16,428
13.6
13,961
Turkey is a high-human development country with its HDI value of 0.761 for 2014
and it is ranked at 72 out of 188 countries. HDI values of Turkey and selected countries and
groups of countries for 2014 are given in Table 8.4. Turkey’s 2014 HDI of 0.761 is above the
average for countries in the high human development group (0.744) and the average for
countries in Europe and Central Asia (0.748). Ranks of Serbia and Azerbaijan in the Europe
and Central Asia Group are comparable to Turkey regarding both their population and
proximity to Turkey: 66 and 78, respectively.
As mentioned above, the human development level of Turkey is behind its economic
development. While its human development level is close to high HDI group, Serbia and
Azerbaijan, its PCI is remarkably higher than theirs (see last column in Table 8.4). Turkey is
especially below the similar countries regarding its average years of schooling, 7.6 years.
2) Inequalities in human development
Another feature of Turkey regarding to its human development is the relatively high
interregional and gender inequalities compared with similar countries. Turkey’s inequalityadjusted human development index (IHDI), gender inequality index (GII), and gender
development index (GDI) are given Table 8.5.
The HDI is an average measure of basic human development achievements in a
country. Like all averages, the HDI masks inequality in the distribution of human
development across the population at the country level. The Inequality-Adjusted HDI (IHDI)
takes into account inequality in all three dimensions of the HDI by ‘discounting’ each
dimension’s average value according to its level of inequality. The IHDI is basically the HDI
discounted for inequalities. The loss in human development due to inequality is given by the
difference between the HDI and the IHDI, and can be expressed as a percentage. As the
inequality in a country increases, the loss in human development also increases. The
coefficient of human inequality is a direct measure of inequality which is an unweighted
average of inequalities in three dimensions.
The second column of Table 8.5 gives a measure of inequalities (IHDI). The higher the
inequality the higher is the difference between HDI and IHDI, and the lower is the IHDI.
While the loss of Turkey because of the inequalities is lower than the average of the high HDI
countries, it is higher than Serbia and Azerbaijan, and the average of the Europe and Central
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Asia. Turkey’s HDI for 2014 is 0.761. However, when the value is discounted for inequality,
the HDI falls to 0.641. Losses of Serbia and Azerbaijan due to inequality are less than Turkey,
and their IHDI are higher than Turkey, 0.693 and 0.652 respectively. The average losses due
to inequality for high HDI countries and for Europe and Central Asia are also lower than
Turkey.
TABLE 8.5: Turkey’s Inequalities for 2014 Relative to Selected Countries and Groups
Very high HDI
High HDI
Medium HDI
Low HDI
Turkey
Serbia
Azerbaijan
ECA(1)
IHDI(2)
0.788
0.600
0,468
0.343
GII(3)
0.199
0.310
0.506
0.583
GDI(4)
0.978
0.954
0.861
0.830
0.641
0.693
0.652
0.651
0.359
0.176
0.303
0.300
0.902
0.966
0.942
0.945
Source: UNDP, HDR 2015. (1) Europe and Central Asia, (2) Inequality-adjusted HDI, (3) Gender Inequality index,
(4) Gender development index.
The third column of the Table 8.5 gives the Gender Inequality Index (GII) values. The
GII reflects gender-based inequalities in three dimensions: reproductive health,
empowerment, and economic activity. Reproductive health is measured by maternal
mortality and adolescent birth rates; empowerment is measured by the share of
parliamentary seats held by women and attainment in secondary and higher education by
each gender; and economic activity is measured by the labor market participation rate for
women and men. The GII can be interpreted as the loss in human development due to
inequality between female and male achievements in the three GII dimensions. The higher
the index value, the higher is the difference between the human development levels of men
and women.
Turkey has a GII value of 0.359, ranking it 71 out of 155 countries in the 2014 index.
In comparison, Serbia and Azerbaijan are ranked at 38 and 59 on this index, respectively.
The GII value is 0.176 for Serbia and 0.303 for Azerbaijan. The average GII values for high HDI
and Europe and Central Asia Countries are 0.310 and 0.300, respectively.
The last column of Table 8.5 gives the Gender Development Index (GDI) values. The
GDI is based on the sex-disaggregated Human Development Index, defined as a ratio of the
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female to the male HDI. The GDI measures gender inequalities in achievement in three basic
dimensions of human development: health, education, and command over economic
resources. Health is measured by female and male life expectancy at birth. Education is
measured by female and male expected years of schooling for children and mean years for
adults aged 25 years and older. Command over economic resources is measured by female
and male GNI per capita. Country rankings are based on absolute deviation from gender
parity in HDI: that means ranking takes into consideration inequality in favor of men or
women equally.
The lower the GDI, the higher is the difference between the human development of
males and females. The GDI for Turkey is the lowest among countries and group averages
included in the table. The GDI is calculated for 161 countries. The 2014 female HDI value for
Turkey is 0.716 in contrast with 0.793 for males, resulting in a GDI value of 0.902. In
comparison, the GDI values are 0.966, 0.942 and 0.945 and 0.954 for Serbia, Azerbaijan, and
Europe and Central Asia Countries, respectively. The average for HDI countries is 0.954.
94
CHAPTER 9
SECTORAL OUTLOOK OF THE CURRENT TURKISH ECONOMY
INTRODUCTION
In this lesson we will analyze the agriculture and manufacturing sectors. Before this, let’s
have a look at the gross domestic product (GDP) by kind of economic activity. Shares of
each sector in GDP in 2015 are given in Table 9.1. The GDP of Turkey was about 1,954
million liras at current prices in 2015. The shares of sectors as a percentage of total GDP are:
agriculture 7.6, industry 18.3, construction 4.4 and services 58.0. These figures imply that
the Turkish economy is a service and industry economy. This is a result of a radical
structural transformation in the economy.
TABLE 9.1: GDP by Kind of Economic Activity, 2015 (%, current prices, NACE Rev.2)
AGRICULTURE (Agriculture, forestry and fishing)
INDUSTRY
Mining and quarrying
Manufacturing
Electricity, gas, steam and air conditioning supply
Construction
SERVICES
SECTORAL TOTAL
Financial intermediation services indirectly measured
Taxes-subsidies
GROSS DOMESTIC PRODUCT (PURCHASER'S PRICE)
Million TL
(%)
148,288
7.6
357,128 18.3
24,626
1.3
304,438 15.6
28,064
1.4
85,883
4.4
1,135,035 58,0
1,726,384 88.4
-29,319 -1.5
256,496 13.1
1,953,561 100.0
Source: TURKSTAT.
9.1. AGRICULTURE
a. Overview
Agriculture includes all types of produce, animal husbandry, forest products and water
products. Although the share of agriculture in total production and employment is declining
it is still indispensible for the economy and our living. Agricultural products are necessary for
the satisfaction of our basic needs. Industry also uses them in the production of many
95
industrial products. Additionally, agricultural sector is an important market for industrial
products; many industrial products are used as inputs in agricultural production.
In the first half of the twentieth century, agriculture accounted for more than 80
percent of employment and about one half of the GDP in Turkey. These shares now stand at
about 22 percent and 7 percent, respectively. Despite the rapid decline in the share of the
agriculture in GDP, this share is still higher than developed and some developing countries: it
is 1-2% in the USA, Japan, and French, and 3-4% in Spain, Poland and Mexico. The situation is
similar for the share of agriculture in employment: it is less than 5 percent in developed
countries. Actually, about 5.5 million people are working in agriculture in Turkey.
Agricultural output has increased at a decreasing rate since the beginning of the
Republican Era. The annual rate of increase was about 3 percent during the first quarter,
about 2.5 percent during the second quarter and about 1.7 percent during the third quarter
of the Republican era. The increase in total agricultural product had slowed to about 1.4
between 1999 and 2011. Agricultural output had increased mostly as a result of increases
in labor and cultivated land before the 1960s. After the cultivatable 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 highyielding varieties of seeds. Despite some improvement, dependence of the agricultural
production on weather conditions has continued, however.
b. Production Structure in Agriculture
In Turkey soil products have a high share in land and labor usage, and total value of
agricultural production. The contribution of the soil products to total output value of the
sector is about 3/4, while the shares of animal products, forestry and water products are
about 20%, 4% and 5% respectively. This contrasts with the European Countries, in most of
which the shares of the animal products, forestry and water products are remarkably higher
than in Turkey.
Labor and land inputs have declined in the agriculture recently, and the increase in
productivity and production is a result of increases in capital stock. But the capital stock in
agriculture is relatively lower in Turkey, compared to developed countries. In the 2000-
96
2007 less than 5 percent of the total capital stock was in agriculture. The average capital
stock per worker in the agriculture was calculated as about 15,700 dollars for the same
years. This figure was 137,000 dollars in France, 79,000 dollars in Italy, 69,500 dollars in
Spain and 29,500 dollars in Hungary. The continuation of the increase in agricultural
productivity and total agricultural production necessitates much more investment than in
the past. In the past the share of the agricultural investments in total investments has been
less than the sector’s share in GDP, and has declined continuously. The share of the
agricultural investments in total investments was about 9 percent in 1980s, about 5 percent
in 1990s and just over 4 percent since 2000. The annual average growth rate in the
agricultural capital stock had been 0.8% between 1990 and 2007.
Despite the mechanization drive that has been carried out in Turkey since the second
half of the 1940s, average machinery per worker and per unit of cultivated land in Turkish
agriculture is still lower than in developed, and more importantly, some similar
Mediterranean countries.
Inputs other than capital, such as chemical fertilizers, developed seeds, pesticides,
processed animal feeds and irrigation, play a vital role for increasing the land and labor
productivity. Increases in the usage of these inputs accelerated in the 1970s, thanks to the
agricultural support policies. Consumption of chemical fertilizers, for example, increased
from about 800 thousand tons in 1965 to more than 11.4 million tons in 2013. But, the
consumption of these inputs per hectare in Turkey is still relatively low.
About one half of total land in Turkey is agricultural land. And about 55% of the
agricultural land or 28% of total land is arable. Total sown area has declined since the 1980s
(see Table 9.2). Cultivated lands reached their natural border in the 1970s, more than 26
million hectares cultivated in those years. In the 2000s the total cultivated area declined to
about 20 million hectares as a result of the falling agricultural population and inefficiency of
the very small scale production.
The share of cereals in both the cultivated land and farming output is more than 50%
in Turkey. About 80-85 percent of total cultivated area is used for cereals and other crop
products, 2-3 percent for vegetable gardens, and 13-14 percent for fruit, beverage and spice
crops.
97
A trend similar to total cultivated land has been observed in the total number of
livestock: the number of cattle, sheep and goats has been declined since 1980. Since the
statistics of milk and meat productivity of TURKSTAT are highly questionable, it is not easy to
make and reliable assessment of the development in the livestock production and
productivity.
TABLE 9.2: Allocation of Agricultural Land (Thousand Hectares, %)
Area of cereals and other
crop products
Sown area Fallow land
1990
(%)
2000
(%)
2010
(%)
2011
(%)
2012
(%)
2013
(%)
18,868
68
18,207
69
16,333
67
15,692
66
15,464
65
15,618
66
Area of
vegetable
gardens
5,324
19
4,826
18
4,249
17
4,017
17
4,286
18
4,148
17
635
2
793
3
802
3
810
3
827
3
808
3
Area of fruits,
beverage
and spice crops
3,029
11
2,553
10
3,011
12
3,091
13
3,213
14
3,232
14
TOTAL
27,856
100
26,379
100
24,394
100
23,614
100
23,795
100
23,811
100
Source: TURKSTAT.
Per capita daily protein production in Turkey was 105 gram in 2007-2009. It was
higher than the world average, which was 78 gr. But, the share of the animal protein in
Turkey is lower than the world average; 28 gram per capita and 27 percent. These figures
imply that production of animal protein in Turkey is not sufficient to feed its population
properly. Per capita total and animal origin protein production in some other countries in
the same interval was 91 and 41 gram in S. Korea, 77 and 37 gram in Bulgaria, 112 and 72
gram in France, 102 and 63 gram in Germany, 111 and 61 gram in Italy, 112 and 62 gram for
Greece, and 108 and 67 gram for Spain.
Turkey is one of the leading producers of fruits and vegetables such as apricot, fig,
cherry, quince, hazelnut, olive, peach, lemon, grapefruit, apple, grapes, tomatoes, carrot and
onions.
98
The share of the forestry products is about 5 in total agricultural value added and
less than one percent in GDP.
Despite a large potential in water products with a coast of about 8,300 Km and a
large area of sea, natural lakes and dams (about 25 million hectares), Turkey could have not
been able to exploit this potential. Its annual production of water products is about 700
thousand tons; about 600 thousand tons fish and about 100 thousand tons of other water
products. Average per capita fish consumption in Turkey is about one half of the world
average; 7.6 KG and 14.4 Kg, respectively. Average per capita fish consumption is 40Kg in
Spain, 23 Kg in Greece, 28Kg in Morocco, 11.2 Kg in Egypt and 9.3 Kg in Tunisia. The share of
the water products is about 2.9 percent in total agricultural value added and 0.2 percent in
GDP in Turkey.
c. Problems of the Turkish Agriculture
Institutional organization, production structure and relatively backward technologies are
the essence of the agricultural problems. Most of the agricultural enterprises are small-scale
family businesses using non-wage family labor and traditional techniques on farms broken
to pieces. Agricultural producers are unorganized. Despite the developments the average
productivity both in the production of soil products and animal husbandry is still lower
than developed countries. Especially production of the field products is still dependent on
natural conditions: Changes in natural conditions cause fluctuations in productivity and total
product. While the average productivity per hectare for cereals in 2008-2011 period was
8,430 Kg in Holland, 7,145 Kg in France, 6,900 Kg in the USA, 5,390 Kg in Italy, it was only
2,720 Kg in Turkey.
In addition to small-scale production and dependence on natural conditions, the low
level of education of agricultural labor, backward technology, and insufficiency in the
usage of modern inputs are among the factors leading low productivity, low quality
production. Low productivity causes high costs, low agricultural income and impedes the
competitiveness of Turkey in the international markets. For example, while the production
cost per ton of wheat was estimated at 240 dollars in Turkey in 2007, the average price in
the same year was about 140-150 dollars in the World markets. While the milk productivity
per cattle was 2,000Kg in Turkey between 1990 and 2000, it was 5,766 Kg in EU Countries
99
and 6,740 Kg in the USA. The world average was 2,050 Kg in the same period. Similarly there
was a big difference in the meat productivity per cattle between Turkey and the developed
world: it was 306 Kg in the USA, 263 KG in the EU, and the world average was 199 Kg, while
197 Kg in Turkey.
9.2. MANUFACTURING INDUSTRY
a. Overview
The term “industry” is generally used to include manufacturing, mining, energy and gas,
and water sectors. In this section we will discuss only the manufacturing industry. In the
past, the relative size of the manufacturing sector was considered as the most important
indicator of the level of industrialization in a country. The relative size of the manufacturing
sector was measured by the share of the sector in GDP and in total employment. It has
been observed, however, that the share of manufacturing sector has declined in developed
countries, as the share of services has been increasing. Now, the compositions of the
manufacturing output and manufacturing employment may be considered as better
indicators of the level of industrialization. Developed countries use high-tech production
methods and employ more qualified labor.
Nonetheless, for developing countries like Turkey, the relative size of the
manufacturing sector is still important, in addition to the composition of production and
employment. The share of manufacturing in GDP has declined in the 2000s. The share of
manufacturing value added in sectoral total was 24.4% in 1998, in current prices. In 2015, it
fell to 23.8% in 1998 constant prices, and to 17.6% in current prices. The remarkable
difference between the falls in current and constant prices reflects the rapid relative decline
in the prices of manufactured goods. These figures imply that the manufacturing lost its
driving force function for the economy as a whole. Considering that Turkey has not still
completed its industrialization process, this development may be seen as a premature
deindustrialization.
After the 1990s manufacturing sector in Turkey has been shaped by the international
economic developments such as the customs union with EU and the integration of China
and India to the world economy in the process of accelerated globalization trends,
increasing competition in international markets. Both import and export dependence of
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the sector has increased; now, manufacturing is using relatively more imported inputs and is
exporting relatively more output than in the past. As a result, the sensitivity of the sector to
the international economic developments has increased remarkably.
Another factor that enhanced this sensitivity is that during this process more open
industries, that is the industries importing relatively more inputs and exporting a higher ratio
of their products, have grown relatively more quickly than other industries, increasing
foreign connections and dependence of the manufacturing sector as a whole. Rising
sensitivity and dependence is related to not only the demand and supply conditions in the
international commodity markets but also money markets; fluctuations in the exchange
rates now influence the sector much more than in the past.
b. Structure of Manufacturing
We examine the structure of the manufacturing sector by scale, and the level of technology.
1) Scale
Total number of enterprises was 321,652 in 2008 in the Turkish manufacturing sector (see
Table 9.3). Of these enterprises about 94% are very small, with 1-19 workers; only 6%
employ 20 and more workers, and only 2.50% employ 50 and more workers. The total
number of enterprises employing 250 and more workers and accepted as the large-scale
enterprises is about 1,350 and constitutes only 0.42% of the total. In sum, 99.5% of the total
enterprises in the Turkish manufacturing are very small, small and medium.
Table 9.3: The Structure of the Manufacturing Sector; Number of Enterprises, Workers and
Value Added (2008)
Scale
Number of
enterprises
Total
1-19
20-49
50-99
100-249
250+
321,652
%94.1
%3.5
%1.2
%0.8
%0.4
Wage
workers
Value added
Billion TL
2,538,318
%23.6
%14.4
%10.0
%16.2
%10.9
Source: Şahin; 370.
101
153.7
%10.2
%8.9
%7.0
%14.6
%59.2
Value of
production
Billion TL
477.1
%11.6
%10.0
%7.7
%15.2
%55.5
Fixed capital
investment
Billion TL
69.5
%11.1
%8.1
%7.9
%18.1
%54.8
Very small enterprises, despite their numerical majority, have very low shares in total
value added, employment and fixed capital investments. In 2008, only 21.8% of employment
and only 11.7% of value added were provided by the very small enterprises.
2 million 860 thousand people were employed in manufacturing in 2008 and about 2
million 540 thousand of these employees were wage laborer. 97.6% of employees in large
enterprises were wage laborer, while this ratio was 75.5% for enterprises with employees of
(1-49). In other words, out of four people working in small enterprises one was either owner
or family member working without wage. Value added per person in small enterprises was
¼ of that in the large enterprises. These findings show that small enterprises were not
equipped properly and their productivity was low. 19.2% of the total fixed investment in
manufacturing was made in small enterprises with (1-49) employees. The scale structure of
the manufacturing sector has not changed considerably since 2008.
2) Technology
Industries with low and middle technologies are dominant in the Turkish manufacturing
sector. Industries with low and middle technologies provided about 72% of the total
production in 2014. The share of the same industries was about 64% in export incomes. The
share of high-tech industries was 3.8% in production and about 3.5% in total exports. The
general technological level of the Turkish manufacturing is far from being enough to increase
the competiveness of the sector.
c. Structural Change in Manufacturing
Determination of the relative weight of industries producing consumer goods, intermediate
goods and investment goods and examination of how these are changing in time would
facilitate understanding of the structural change and deepening in manufacturing. With the
progress in industrialization, there is a shift from the production of consumer goods to the
production of intermediate and investment goods.
The share of the industries producing mostly consumer goods was 35% in the early
1980s, and fell to less than 30% in the 2000s. Meanwhile, the relative share of the industries
producing intermediate goods has increased from 46.8% in 1983 to 50% in 2010. The share
of the industries producing investment goods has increased more slowly. During the period
between 2010 and 2015, while the total industrial production had increased by 24.3%, this
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rate was 20.7% for intermediate goods. The rate of increase in the production of consumer
durables, consumer non-durables and capital goods had been 25.3%, 22.2% and 42.6%,
respectively. Despite this relatively higher increase in the production of capital goods, Turkey
is heavily dependent on imports in investment goods: Intermediate and investment goods
constitute about 85% of the total import value.
d. Employment and Productivity in Manufacturing
Employment in manufacturing increased at a relatively slow rate in the 2000s; in the period
between 1998 and 2014 manufacturing employment increased by 42.5%. In the same period
increase in total employment had been 46.4%. That is, the rate of increase in manufacturing
employment remained behind the general employment increase.
In the period between 2005 and 2015, manufacturing employment, hours worked,
value added, and value added per hour increased by 20.8%, 13.1%, 50.8%, and 33.5,
respectively (see, Table 9.4). The average annual increase was 1.9%, 1.2%, 4.2%, and 2.9% in
employment, hours worked, value added and value added per hour.
TABLE 9.4: Employment and Productivity Index in Manufacturing (2010=100)
Years
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Employment
99.9
102.4
106.2
105.8
95.4
100.0
106.9
112.2
116.6
120.2
120.7
Hours
Manufacturing
Worked
Value Added1
101.9
82.8
103.9
89.8
108.4
94.8
107.5
94.7
95.3
87.9
100.0
100.0
106.5
110.0
110.9
111.9
113.7
116.1
115.8
120.3
115.2
124.9
Value Added
Per Hour2
81.2
86.4
87.5
88.1
92.2
100.0
103.2
100.9
102.1
103.9
108.4
Source: TURKSTAT, (1) is the total value of manufacturing in GDP. (2) is calculated by dividing
manufacturing value added index by hours worked index.
Table 9.4 indicates two different tendencies for manufacturing employment and
productivity in two different sub-periods. In the first sub-period (2005-2010) while there
was almost no change in manufacturing employment, labor productivity (value added per
hour) increased by 23.2% cumulatively. In the second sub-period (2011-2015) just the
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opposite happened: while the increase in manufacturing employment accelerated (a
cumulative increase of 20.7%), increase in labor productivity more than halved (a cumulative
increase of 8.4% only).
What is needed, however, is a rapid increase in both manufacturing employment (to
lower the rate unemployment) and productivity (to enhance the competitiveness of the
economy, urgently wanted to narrow foreign trade deficit).
Labor productivity is relatively higher in industries with large scale such as coke and
petroleum products and nuclear fuel; basic metals, tobacco products; chemical and chemical
products; radio, TV, telecommunication equipment, and motor vehicles and trailers. Labor
productivity is very low in the following industries: furniture and other manufacturing; wood,
cork (except furniture); wearing apparel; leather, shoes; and fabricated metal products,
except machinery and equipment.
e. Property Structure in Manufacturing
The public economic enterprises (SEE) had been the driving force in the industrialization
efforts of Turkey between the 1930s and 1980. There had been a division of labor between
the SEE and private enterprises. The SEE enterprises were established mainly in the areas
which are not profitable enough to attract private business, where the private enterprises
were not able to invest because of the lack of capital, technological knowledge or
infrastructures, or in backward regions of the country with a mission of establishing a more
even economic development all over the country. In 1980 industrialization policy had been
changed radically: most of the SEE enterprises have been privatized or closed down.
Although some of the SEE are still active in Turkish economy their relative share in
production, employment and investments has been reduced remarkably. In 2000s, public
investments intensified in infrastructures such as transportation, telecommunication and
energy.
Table 9.5 shows how the share of the public sector has been reduced since 1985. This
process accelerated in the 2000s. Comparing the share of SEE in value added and
employment, we can easily see that the average productivity per worker is significantly
higher in public enterprises.
104
TABLE 9.5: The Share of the Public Sector in Manufacturing Sector
(In Manufacturing Enterprises Employing 10 and More Workers, %)
Years
1985
1990-1992
1993-1999
2000
2005
Source: Şahin; 378
Share in value
added
Share in
employment
38.9
30.6
24.3
20.1
23.0
32.6
24.2
16.2
11.0
8.0
105
Share in fixed
capital
investment
31.3
26.7
14.2
8.2
5.8
CHAPTER 10
FOREIGN ECONOMIC RELATIONS
INTRODUCTION
The relative importance of foreign economic relations has been increased since 1980. The
most important indicators of this increase are the rises in (foreign trade/GDP) ratio, capital
inflows and outflows, and increase in foreign debts.
Foreign trade has been liberalized gradually since 1980. Elimination of import
barriers gained momentum after 1984. Quantitative restrictions were rapidly phased out,
and tariff rates were reduced remarkably. The output-weighted average nominal tariff rate
for the manufacturing industry declined from 76.9 percent in 1984 to 40 percent in 1990, to
20.7 percent in 1994 and to 3.3 percent in 2005.
The most important change in the trade regime of Turkey in the 1990s was initiated
by the customs union (CU) between the EU and Turkey which came into effect on January
1st of 1996. With the CU Turkey accepted the Union’s common customs policy and thus
common tariffs against third countries. The integration of the Turkish economy into the
world economy gained momentum again after the 2001 crisis.
Both exports and imports have increased sharply until recently and the ratios of
exports and imports to GDP have gone up. While the average exports/GDP and imports/GDP
ratios were 3% and 6.8% in the 1970s, they increased to 17.9 and 28.4% between 2008 and
2014, respectively. The ratio of the foreign trade volume (exports plus imports) to GDP was
about 15% in 1980. It has more than tripled in the last 35 years, %49 in 2015.
The liberalization in foreign trade after 1980 was followed by the liberalization of
capital movements in August 1989. Foreign direct investment (FDI), portfolio investments,
and foreign borrowing increased rapidly since then. Total foreign debt of Turkey increased
from $16.2 billion in 1980 to $411.5 billion in 2016. The annual average FDI inflows were 168
million dollars in the 1980s, 771 million dollars in the 1990s, and 10,686 million dollars
between 2000 and 2015.
106
The residents’ direct investments abroad have been increased recently to
considerable amounts. Total value of those investments has reached about $40 billion by the
end of 2015.
Tourism sector has recently developed rapidly. Annual tourism revenues which were
just over $300 million in 1980 reached $3.2 billion in 1990, to $23.4 billion in 2008, and after
falling both in 2009 and 2010 recovered and reached $29.5 billion in 2014. In 2015, however,
total tourism income fell to $26.6 billion. Turkey’s annual tourism expenditures are more
than $5 billion.
The current account deficit (CAD) has been one of the main problems of the Turkish
economy for a long time. Deficits have been cresulted mostly from the structural reasons.
Despite some ups and downs depending on the fluctuations in growth rate and speculative
capital movements, the CAD continued to increase and reached $40.4 billion in 2008. As the
Turkish economy contracted, the CAD fell to $12.1 billion in 2009. The CAD enlarged again
rapidly with the recovery. The high growth rate of 9.2% in 2010 could be possible at the
expense of a high CAD, $45.4 billion. After reached at a record level of $74.4 billion, the CAD
has a falling trend in last three years: in 2013, 63.6 billion dollars; in 2014, 43.6 billion
dollars, and in 2015, 32.2 billion dollars.
Having an overview of the evolution of the Turkish foreign economic relations since
1980, now we are going to examine the balance of payments, external debts and external
trade in more details.
10.1. BALANCE OF PAYMENTS AND SAVING GAP IN TURKEY
a. The Balance of Payments: Definition
The balance of payments is a statistical statement that systematically records all economic
transactions between residents of an economy (General Government, Monetary
Authority, Banks and Other Sectors) and nonresidents for a specific time period. Economic
transactions among countries consist of those involving;
– goods, services, and income,
– transactions of financial claims and liabilities,
– transfers between residents and non-residents.
107
The balance of payments statistics measure all economic flows between residents
and nonresidents for a specific time period, such as a month, a quarter or a year. The
balance of payments statistics are classified under two major categories: while the current
account covers all transactions that involve real sources (goods, services, income) and
current transfers; the capital and financial account shows how these transactions are
financed.
In the remainder of this chapter, firstly, we will have a look at the balance of
payments, and then, examine Turkish foreign economic relations.
b. The Balance of Payments of Turkey
In most of the years during the last seven decades, Turkey had current account deficits
(CAD). The years of current account surpluses were generally the years of crisis where the
lessening in the GDP decreased the imports for considerable amounts and narrows the trade
deficit. Since the country’s large trade deficit resulting in CAD with the rest of the world
accumulates over time and frequently ends up with a crisis, these deficits are one of the
main concerns for the Turkish economy.
In the 14 years after 2001 Turkey has had always a CAD. The CAD had increased
rapidly from 2002 and reached a record level of more than $74 billion in 2011. The only
exceptional year in that period in which the CAD fell sharply was 2009, the year of crisis, and
it was still more than $12 billion. During the two years following the crisis the CAD exploded,
reaching the highest point in 2011. In the last four years the CAD has been below the 2011
peak, mostly because of the decreasing rate of growth and the fall in oil prices, but still
considerable: $47,961 million in 2012, $63,608 million in 2013, $43,552 million in 2014, and
$32,238 in 2015.
The current account includes three main items: foreign trade in goods and services,
incomes, and transfers.
The main factor in the CAD is foreign trade in goods. Without any exception, Turkey
has had trade deficits in all of the years. Its imports have been higher than its exports.
Annual deficit of trade in goods fluctuated approximately between 25 and 90 billion dollars
between 2008 and 2015.
108
Turkey foreign currency revenues are higher than its expenditures in services, mainly
as a result of the tourism revenues.
Incomes include wages and investment income (interest and profit). Incomes item is
another factor for affecting current account balance negatively; factor income revenues are
short of expenditures. It has been always in deficit as that was the case for foreign trade.
Since Turkey is a debtor country in international markets, its net interest income and profits
are negative.
Balance of current transfer is generally positive. Transfers are entries that
correspond to the provision of real resources or financial assets, without a give and take,
across countries.
To sum up, the CAD of Turkey is mainly the result of the foreign trade deficits. These
kinds of deficits are more dangerous in terms of sustainability and more prone to balance
of payment crises since they indicate structural weaknesses in international trade and
competitiveness. The structural weaknesses are permanent problems and cannot be solved
easily since changing the production process and technological level of firms require long
term planning and investments in education, infrastructure, research and development.
Turkey imports particularly investment and intermediate goods and exports final
consumption goods. Hence, the CAD can be considered as a structural problem; exports
largely depend on imported goods. When the industries are ordered according to their
volume of exports, it can be seen that top exporters are generally the top importers at the
same time.
Additionally, in Turkey, there is a close relationship between the rate of growth and
the CAD. Turkey can accelerate its rate of growth only at the expense of increasing the CAD.
Therefore, the sustainability of the CAD is critical for the future of the economy.
The CAD expands especially in the years of high growth and contracts only after
causing severe crises, stagnation and exchange rate correction. However, recent deficits
cannot be explained only by the acceleration of growth. Although the rate of growth slowed
down in 2006, 2007 and 2008, the CAD continued to increase and reached more than $40
billion in 2008. Despite the contraction by 4.7%, the Turkish economy had a CAD of more
than $12 billion in 2009. The high growth rate of 9.2% in 2010 could be possible at the
109
expense of still more increase in the CAD reaching $45.4 billion. The CAD in 2011 was still
higher, $74.4 billion. As we mentioned above, despite the low rate of growth after 2011,
Turkey had experienced large current account deficits.
On the other hand, the increase in the speculative hot money enlarges the CAD by
appreciating TL. The way of financing the CAD stimulates the demand for imported inputs
at the expense of domestic inputs making economic growth more dependent on the entry
of foreign resources. Economic growth since 2002 has been possible with current account
deficits broader than what were realized in 1990s.
Financial account shows how the current account deficit is financed. It is financed
by two different sources: equity investment by foreigners in Turkey and borrowing.
During the period of eight years (2008-2015) the total direct investment in Turkey by
foreigners was $108.9 billion, direct investment abroad by Turkish residents was $27.8
billion, and net foreign direct investment was about $81.1 billion. The sum of the total net
recorded resources used in the same period was $369.4 billion. That means $288.3 billion of
finance was either in the form of foreign debt or portfolio investment creating short term
liabilities. In the same period the total CAD was $357.2 billion. There was also an unrecorded
net inflows (net errors and omissions) 21 of $23.5 billion, in the same period.
The net result of the sum of the three main items (the current account, financial
account and the net errors and omissions) gives us the change in official reserves. The
increase in official reserves between 2008 and 2015 was $35.3 billion.
In summary, in this period of eight years, total net resources entered into Turkey was
about $392.9 billon; of which about $81.1 billion was FDI, $23.5billion was entrance from net
errors and omissions and about $288.3 billion was from sources creating short term
liabilities. The $392.9 billion was used to finance current account deficit ($357.2 billion), and
to increase official reserves ($35.3 billion).
21
There are some imperfections in the sources and compilation of data. The collection of data from different
sources leads to differences in valuation, measurement and time of recording. As a result, this imbalance is
reflected in “Net Errors and Omissions” item. This item is derived residually from the financial account minus
the current and changes in reserves.
.
110
c. Saving Gap in Turkey
Behind the Turkey’s structural and pertinent CAD there is saving gap. The increasing private
saving gap has become the main source of the CAD after the improvement in public savings
in 2004 and thereafter (see Table 10.1).
TABLE 10.1: The Saving Gap in Turkey: Saving and Investment as a Ratio to GDP
Public
saving
Private
saving
Total
domestic
Savings
Gross fixed
Investment
Saving gap
2000-2004
-4.1
21.4
17.4
18.5
-0.9
2005-2009
2.0
13.5
15.6
20.6
-5.0
2010
1,6
12,3
13,9
19,1
-5.2
2011
3.7
10.7
14.4
24.1
-9.7
2012
2.9
11.7
14.6
20.7
-6.1
2013
3.4
9.9
13.4
20.6
-7.2
2014
3.1
11.9
15.0
20.5
-5.5
20151
4.4
11.2
15.6
20.7
-5.1
SOURCE: Ministry of Development. (1) Realization estimate
In an open economy with free capital movements, foreign and the domestic savings
are the sources of investment and growth. However, a capital accumulation and growth
process based on foreign savings is not sustainable in the long run.
d. The Way and the Quality of Financing the Deficits
Although sustaining the CAD for countries can be feasible in the short run as long as finding
external borrowing, the ability of the country to service its debt by referring to further
borrowing is likely to be questioned once the deficit become persistent. A large and
persistent CAD tends to cause serious problems for a country and may require a policy
response.
Hence, instead of emphasizing the CAD of a country at any particular point in time,
we should concern more with its sustainability and the way of financing. How and at what
conditions this deficit is financed is an important concern, because a fast growing CAD can
cause fragility. Composition of international financial obligations has strong influence on the
ability of an economy to sustain its deficits. Equity financing such as Foreign Direct
111
Investment (FDI) and portfolio investments22 do not require payments to investors and
share the burden of negative shocks between the borrower country and international
investors, in the short run. However, debt financing such as bonds and other loans require
payments at specific dates and debtor country bears the whole burden of negative shocks.
Thus, the lower the stream of payments that is required to international investors, the
longer the country can run a CAD. The structure and composition of these financing
alternatives are also important. In case of equity financing; FDI are more stable and have
long term structure than portfolio investment. Higher FDI can have positive impact on
sustainability whereas excessive dependence on portfolio investment increases the potential
of a crisis. However, both FDI and portfolio investment increase the CAD through profit
transfers, in the long run.
TABLE 10.2: Current Account Deficit and Its Financing
Million Dollars
1990-2000
2001-2008
2009-2015
Current Account Deficit(CAD)
-23,410
-150,056
-317,735
Annual average CAD
-2,128
-18,757
-45,391
Net direct investment (NDI)
6,204
72,403
63,678
Net portfolio investment(NPO)
8,837
22,051
108,120
Net other investments(NOI)
25,483
86,449
134,039
Financing Current Account Deficit (%)
NDI/CAD
26.5
48.3
20.0
NPI/CAD
37.7
14.7
34.0
NOI/CAD
108.9
57.6
42.2
Memo: Shares of equity securities and debt securities in gross portfolio investment %)
Equity securities
18.7
43.5
11.1
Debt securities
81.3
56.5
88.9
Source: Calculated from balance of payments data of the CBRT.
22
Portfolio investment is a passive investment in securities, which entails no active management or control of
the issuing company by the investor. The purpose of the investment is solely financial gain. This is in contrast to
direct investment, which allows an investor to exercise a certain degree of managerial control over a company.
For international transactions, equity investments where the owner holds less than 10% of a company's shares
are classified as portfolio investment.
Portfolio investment covers a range of securities, such as stocks and bonds, as well as other types of
investment vehicles.
112
Table 10.2 shows how the CAD of Turkey changed in three sub periods since 1990
and how they were financed. The average annual CAD rose from 2,128 million dollars in
1990-2000 to 18,757 million dollars in 2001-2008, and to 45,391 million dollars in 20092015.
While the financing quality improved from the first period (1990-2000) to the second
period (2001-2008), it deteriorated after 2008. The ratio of the net direct investment to the
CAD was 26.5% in the first period, increased to 48.3% in the second, and fell to 20.0% in the
last. The ratio of the net portfolio investment to the CAD followed an opposite trend; first
fell from 37.7% in the first period to 14.7% in the period and increased again to 34.0% in the
last. Moreover, as it is seen in lower part of the Table 10.2, the share of the debt securities
fell from 81.3% in the first period to 56.5% in the second, but increased to 88.9% in the last.
That is, the share of the debt creating finance increased remarkably in the last period: the
finance quality of the CAD deteriorated significantly between 2009 and 2015. Both debts
securities and net other investments create foreign debt. When the ambiguity on the
liquidation time of the equity component of portfolio investment is also considered, the
fragility of the financing of the CAD in the last period becomes more apparent.
This fragility would increase further in the case of an international liquidity
contraction because capital inflows have been mostly the result of ample global liquidity.
Additionally, these types of capital inflows are more likely to lead the CAD in the future,
causing over-valuation of the TL.
Two developments after world economic crisis have raised doubts about the
sustainability of the CAD in Turkey; short term debt of the private sector has sharply
increased (see Table 10.3) and the share of FDI in financing the CAD was much lower than
the pre-crisis years (see Table 10.2).
10.1. EXTERNAL DEBTS
The increasing CAD and its financing mostly by debt creating foreign resources have been
resulted in higher foreign debt stock. The total foreign debt stock of Turkey has an
increasing trend. It increased by 837% between 1989 and 2016 (see Table 10.3). As a
percentage of GDP total foreign debts increased from 30.8% to 58.1%, in the same period.
On the other hand, while the share of the public sector in total debt stock had declined
113
from 85% to 29%, the share of the private sector had increased from 15% to 71% in the
same period. Additionally, the share of the short-term debts had increased from 13% to
26%.
10.2. EXTERNAL TRADE
As mentioned before, the foreign trade deficits of Turkey is the main source of the CAD.
Trade balance of each decade since 1980 and the recent six years is given in Table 10.4.
Although both exports and imports have risen steadily in absolute terms and relative to
GDP, the average yearly export/import ratios have been between 60-69 percent and the
trade deficit enlarged absolutely. In fact, there is interdependence between exports and
imports: Turkey mostly exports final consumption goods whereas it imports intermediate
goods. When the industries are ordered according to their volume of exports, it can be seen
that top exporters are generally the top importers at the same time. The import
dependence of the Turkish industry has increased further since 2001. In this period, the
imports/production rates in manufacturing industries have increased.
TABLE 10.3: The Term Structure of Foreign Debt Stock (Billion USD, %)
Year
1989
1993
1994
2000
2001
2002
2008
2009
2011
2012
2013
2014
2015
2016/1Q
Total Debt
Total Debt
(%) of GDP
Short Term
Public (%)
Short Term
Private (%)
Long Term
Public (%)
Long Term
Private (%)
43,911
70,512
68,705
118,602
113,592
129,601
280,919
268,874
303,895
339,705
390,167
402.431
397,872
411,502
30.8
29.6
38.8
44.7
57.7
56.2
37.9
43.6
39.3
43.2
47.4
50.3
55.3
58.1
2
1
1
3
2
2
2
2
3
4
5
5
4
4
11
25
15
21
13
11
17
16
24
26
29
28
22
22
83
66
74
51
61
65
31
34
31
29
26
25
25
25
4
8
10
25
24
23
50
48
42
41
40
42
49
49
Source: Undersecretariat of Treasury
114
As the trade deficit is the main source of the CAD, the CAD is a permanent problem
in Turkey, and it cannot be solved easily since changing the production process and
technological level of firms require long term planning and investments. In order to
eliminate the CAD by decreasing import and trade deficits smoothly, Turkey has faced with a
slow growth period during the last four years, but the probability of a balance of payment
crisis is still present as it was in the past.
A vital consideration for Turkish exports is to increase the country’s competitiveness
in international market. Turkey could not manage to reach the high-tech production level.
About two-third of its exports consist of primary and low-tech products. During the last
decade, there has not been a meaningful increase in the share of medium-and high-tech
products in total exports.
TABLE 10.4: Foreign Trade Balance (Million Dollars, %)
1980-1989
Total
Annual average
1990-1999
Total
Annual average
2000-2009
Total
Annual average
2010-2015
Total
Annual average
Exports
Imports
Balance
E/M, %
75,112
7.,511
112,411
11,241
-37,299
-3,730
67
199,402
19,940
333,406
33,341
-134,004
-13,400
60
706,041
70,604
1,083,640
108,364
-377,599
-37,760
65
908,024
151,337
1,310,544
218,346
-402,520
-67,009
69
Source: TURKSTAT
After the 1970s there had been an ongoing transformation in exports from
agricultural products towards manufacturing products. While this process was more or less
completed in the late 1990s, another transformation process started in the early 2000s.
That was the transformation in exports from the low-tech manufacturing products to
medium-tech and high-tech products. But that transformation process has not been a
success story.
While Turkey has lost ground in competition for traditional export items, especially
after China’s accession to the World Trade Organization (WTO) in 2001, it could not have
been successful in developing its general technological ability to such a level that would be
115
sufficient to compensate the lost competitiveness in traditional exporting fields with the
increasing competitive power in medium and high-tech products.
116