Download “Transformation of 1980” in economic policy (continued)

Fundamental Transformation
in Turkish Economic Policy
“Export-Led Growth”
Plan
Economic depression and search for a new policy
“Transformation of 1980” in economic policy
Properties of the transformation
Opening process
Pricing process
Expectation of Foreign Investments
Macroeconomic policies
Qualitative aspects of the transform
“Transformation of 1989” in economic policy
Properties of the transformation
Domestic financial liberalization and macroeconomic issues
External financial liberalization and macroeconomic issues
Export-Led Growth


Turkish economy has faced a new depression in
the mid-1970s.
To cope with the deepening depression, a new
economic policy was set in 24th of January,
1980.
Economic depression and search for a
new policy


Causes of economic depression;
 Structure of the production,
 Domestic and external developments and factors.
Some of the external factors;
 Cyprus issue,
 Five-fold rise in crude oil prices by OPEC in 1974,
 Deep economic depression in the partner countries
of Turkey.
Economic depression and search for a
new policy (continued)


Economic depression: is the sum of unfavorable
developments in the production and consumption
processes of a national economy.
Indicators of the depression;
 increases in the price level,
 increases in unemployment,
 trade deficits,
 difficulties in refunding.
Economic depression and search for a
new policy (continued)


Policies implemented to overcome the depression:
 Conventional
industrialization
approach
was
maintained,
 Determination in the precautions.
In the mid-1970s import substitution policy was
extended by following the policies below;
 Domestic production of intermediate and capital
goods,
 Generalizing the possession of the capital.
Economic depression and search for a
new policy (continued)

In order to improve the production of intermediate and capital
goods, enterprises whose names were ended with “SAN” were
established;


Domestic production of electronic goods, machinery and
equipments,
Main purpose was to balance the regional distribution of
industries in Turkey.
Economic depression and search for a
new policy (continued)

Reasons for the failure of the “SAN enterprises”:


They were established without enough research which
would enable the decision-makers to decide whether they
were economically feasible.
Domestic and external economic conditions were not mature
enough to allow them to complete their development:
 financing of the public sector,
 difficulties in refunding made it almost impossible to
borrow from foreign markets to make new industrial
investments.
Economic depression and search for a
new policy (continued)

The approach of generalizing the possession of capital;




Copartnerships established by the savings of labor abroad.
Cooperative enterprises.
Urban-village type (köy-kent tipi) implementations
This approach has ended up with failure as well due to
premature social and economic conditions.
“Transformation of 1980” in
economic policy
Main properties;



A new economic policy was implemented in 24th of
January, 1980.
This new policy has transformed into the permanent
economic policy of Turkey.
Monetary policy was regarded as superior to the fiscal
policy then.
“Transformation of 1980” in
economic policy (continued)




Prevailing prices were regarded as the sole factors to
direct the market economy. Deviations from the
equilibrium price level would be eliminated by the
market system.
Economy was left to supply and demand conditions.
Prevailing prices would predominate not only in a
national basis but also in an international level.
Government shoud adjust the expenditures to create a
balance between supply and demand.
“Transformation of 1980” in
economic policy (continued)



Using banknotes as legal tender instead of gold.
The policy recommendations of the monetarists have a purpose
of maintaining the market system. In the case of inflation,
money supply, bank loans, and budget deficits should be
decreased to limit the aggregate demand.
When a developing economy faces a depression, institutions
like IMF would ask for certain precautions;



Money supply, bank loans, and budget expenditures should be diminished,
Devaluation of the national currency and diminishing the wage rates.
Such precautions were taken after the 24th of January, 1980.
“Transformation of 1980” in
economic policy (continued)
Pricing process:


Pricing process was left to the hands of market conditions,
The effects of the pricing process on various markets can be
analyzed by relying on the theoretical differences:



Markets for goods and services
Markets for factors of production
Value of the TL in foreign markets.
“Transformation of 1980” in economic
policy (continued)
In goods and services markets, there were 2 kinds
of price in 1978; (i) market price, (ii) black-market
price.
this distorted type of pricing has led to huge profits.
benefits of the market economy:
 It prevents the distortion in pricing,
 It leads to increases in prices due to limited domestic
production,
 It increases the competitive power of domestically produced
goods.
“Transformation of 1980” in economic
policy (continued)
 In labor and capital markets,
Wages; the idea behind the low-wage policy:
 To induce the private investments by increasing profits,
 To decrease costs so as to increase the competitive
power in the foreign markets,
 To limit the domestic demand.
“Transformation of 1980” in economic
policy (continued)
Consequences of the low-wage policy:
 emigration of the qualified labor force,
 fall in the motivation and productivity
of labor that has
led to increases in the cost of production.
however, more effective policies (such as developing advanced
technologies or investing in R&D) should have been
implemented to show substantial progress in diminishing the
costs.
“Transformation of 1980” in economic
policy (continued)
The government had an aim of increasing the interest rates.
The main purposes of the high interest rate policy;
 Making
the labor-intensive technologies more favorable
by increasing the cost of the capital,
 To increase the funds in the banking system.
“Transformation of 1980” in economic
policy (continued)
 Value
of TL: during the implementation of the program,
devaluation of TL was the primary policy.
The main purposes of this policy in the short run:
 To decrease the difference between the prevailing and
black-market prices of TL in the foreign markets.
 To facilitate borrowing.
 To prompt the labor employed abroad to bring more foreign
exchange.
The main purposes of this policy in the long run:
To increase exports.
“Transformation of 1980” in economic
policy (continued)
The process of opening:

Exports was increased to diminish the trade deficits.

To increase exports;

Devaluation when necessary; devaluation
makes the domestically produced goods cheaper
and increases exports accordingly, however it
increases the prices of imported inputs and costs of
production at the same time.
“Transformation of 1980” in economic
policy (continued)

To induce exports;
• Freedom to hold more foreign currency by the exporters,
• Imported inputs used in exported goods have exempted from
taxation,
• Exporters were subsidized,
• Free zones were established and the transactions were facilitated,
• Monetary support to exporters.
 Imports
were not constrained at all just as exports. The idea
behind this policy was to increase the competitive power of
domestic industries against the foreign ones. Though these two
policies may seem contradictory, the government has aimed to
ameliorate the cost structure of the exporting industries by
opening them to foreign competition.
“Transformation of 1980” in economic
policy (continued)
Expextation of FI:
 Foreign capital enactment to induce foreign private capital;
 To minimize the bureaucratic transactions,
 Foreign investors can invest up to $ 50 million,
 The share of the foreign investor should be at least $ 1 million,
 Certain part of the production made by foreign investors should
be exported,
 In addition to these, the above conditions would be relaxed for
the investors of oil producing countries (like Iran and the
countries in the Arabian Peninsula) and for other tourism
investments.
“Transformation of 1980” in economic
policy (continued)


By other similar enactments to induce foreign private
capital;
 Foreign investments were allowed to enter the banking
sector,
 The access of foreign investments to agriculture,
tourism, and other sectors was facilitated,
 Foreign
investments to crude oil industry were
facilitated as well.
In this program, foreign private capital has played a key
role to overcome the problems such as balance of
payments deficits, insufficient domestic savings, and the
transfer of technology.
“Transformation of 1980” in economic
policy (continued)
Macroeconomic policies:
Constraints imposed on the public sector:


The main purpose of the policy implemented after the 24th of
January was to limit the public sector. By implementig such a
policy, a rapid development was aimed for the private sector.
This new policy was the symbol of the predominance of the
private sector in the national economic climate.
“Transformation of 1980” in
economic policy (continued)
Optimum rate of increase in price level:


In that period, there was a slowdown in price level. Increase in
production level and profits were closely related with this
downward movement in prices.
However, it was quite difficult for a developing country to
maintain such an optimal price level which would stimulate
economic growth.
“Transformation of 1980” in
economic policy (continued)
Qualitative aspects of the transformation:

According to the investigations held by IMF;
 Stability programs do not have any effect over the
growth or inflation rates at all.
 Stability programs affect the distribution of income.
 These
programs may help to increase the
employment rate.
 These programs would help to overcome difficulties
in refunding and to regain credibility which would
enable the country to borrow from foreign markets.
“Transformation of 1980” in
economic policy (continued)
What were the demands on Turkey?
 The WB wanted the developing countries to produce
in accordance with the comparative advantages theory
thus, it strictly recommended Turkey not to deal with
heavy industries.


Similarly, Turkey should have adopted labor intensive
techniques as far as the WB was concerned.
If Turkey had followed the abovementioned policies, it
would
have
helped
her
to
increase
her
competitiveness in the foreign markets.
“Transformation of 1980” in
economic policy (continued)


According to Anne O. Krueger;
 If Turkey had made industrial investments in
accordance with her sectoral distribution of capital,
growth and employment rates would have been
greater.
 Moreover, she might have had smaller trade
deficits.
 Finally, the export-led growth strategy would have
contributed more on the process of membership to
the EEU.
However, one may claim that the recommendations of
Krueger do not match to today’s theories of economic
development and international trade.
“Transformation of 1980” in
economic policy (continued)

Consequences of the policies determined on the 24th of
January 1980;



Shrinking public sector,
Capital and labor markets were left to market forces,
Liberalization of domestic and foreign markets.
“Transformation of 1980” in
economic policy (continued)
Social aspects of the issue may be summarized
in two dimentions;


Distribution of income: wage rates have fallen
substantially since the determination of price has
been left in the hands of the market economy.
Opportunities for development in the long
run: export-led growth strategy relies mainly on
the foreign capital. However, that kind of policy
cannot be sufficient to maintain economic growth in
the LR.
“Transformation of 1989” in
economic policy
Main properties of the transformation:



Financial liberalization was adopted after 1989.
Financial liberalization enabled the capital to flow freely to
Turkey.
Due to a substantial fall in the interest rates in most of the
developed countries, developing countries had the opportunity
to attract the capital in 1989, because they offer higher interest
rates compared to the world level.
“Transformation of 1989” in
economic policy
Domestic financial liberalization and macroeconomic
issues:



Savings and investments were affected by the increase in
interest rates during 1989 in Turkey.
Interest rates and savings:
As mentioned before, interest rates were determined by the
market conditions.
The plan was that high interest rates were expected to
stimulate domestic savings and foreign capital and provide the
needed capital to finance the economic growth.
“Transformation of 1989” in
economic policy
Criticism of that strategy;



In order that this strategy to be successful, substitution effect
should have exceeded the income effect. .
The increase in interest rates did not affect the private and
public savings the way it has been planned.
High interest rates have led to a transfer of wealth from the
poor to the rich and thus gave rise to a fall in the overall
savings.
“Transformation of 1989” in
economic policy
Interest rates and investments:

When interest rates go up:




It leads to the diversification of the financial instruments.
It creates financial deepening.
It helps to equalize the sectoral rate of returns.
Increase in savings would diminish the cost of capital and
increase the investments accordingly.
“Transformation of 1989” in
economic policy

Increase in interest rates;
 increases the costs: leads to an increase in the cost of
investments and stimulates the inflation rates.
 increases
the risks and stimulates speculative
investments: in order for the financial deepening to lead to
an efficient functioning of the market, the funds should
transform into investments.
“Transformation of 1989” in
economic policy
Increasing interest rates and the uncertainty have increased
the costs and risks of the banks and led to an equal increase
in the cost of the capital.

It hampers the implementation of selective
industrialization policy: increasing interest rates makes it
difficult to implement selective credit policy.
“Transformation of 1989” in
economic policy
External financial liberalization and macroeconomic
issues:



External financial liberalization includes the policies to be
implemented after the liberalization of the trade and financial
markets.
The most crucial point in financial liberalisation is that it
enables the inflow of not only the long run foreign investments
but also the short run speculative ones.
In financial liberalization, domestic transactions can be made in
terms of foreign currency.
“Transformation of 1989” in
economic policy
Neoclassical expectations and criticism:


Neoclassical theory stresses that the foreign savings may be
crucial when domestic savings fall short of financing new
domestic investments.
This view has 2 bases:


Financial markets should function efficiently,
Financial liberalization should equalize the interest rates all
over the world by capital flows.
“Transformation of 1989” in
economic policy
External balance:
 Capital inflows lead to current account deficits. Capital
investments are used to finance current account deficits.
 Portfolio investments and short run capital inflows have risen
substantially in Turkey in 1990.
 However, short run speculative capital inflows create some
problems due to structural weaknesses in the emerging
economies.
 The most important of all is that the national currency has been
appreciated during the liberalisation period.
“Transformation of 1989” in
economic policy

Appreciation of the national currency would have several
effects on the trade balance,
 Exporting industries has lost competitive power.
 Turkish economy has become more dependent to foreign
economies as the volume of imports were increasing
ceaselessly.
 International competitiveness has diminished in Turkey.
 Manufactures which is an open sector has been affected
negatively from that process in Turkey.
“Transformation of 1989” in
economic policy
Public balance:
 Public sector debts have increased during that period.


Excess public borrowing has led to an unsustainable increase in
public debts which has given rise to a roll-over process.
Combination of high interest rates and the appreciated TL has
transformed Turkish financial system into a speculative heaven!
“Transformation of 1989” in
economic policy

The purchase of securities on one market for immediate resale
on another market in order to profit from a price discrepancy is
called as “arbitrage”.
arbitrage rate = (1+i/1+e)-1
i= interest rate
e= devaluation rate
This concept has led to another paradoxical process in Turkish
economy then.
“Transformation of 1989” in
economic policy
Investments-savings balance:


In that peiod, the emerging economies have lost considerable
amount of foreign capital due to expectations of devaluation of
the national currency.
This sort of uncertainty has affected the foreign direct
investments negatively as well.
“Transformation of 1989” in
economic policy
Money markets:



In that period monetary base has expanded enormously which has
led to an increase in the inflation rates.
Foreign exchange deposits has increased in the accounts of the
central banks.
In the developing economies where the regulatory institutions
function inappropriately, there has been an incosistency in terms of
maturity between liabilities and assets of the private banks.