Download Economics 401 Week 6

Economics 401
Week 6
Economic policies (1960s and 70s)
 How to pursue a more coherent economic policy to
achieve steady economic growth along with a solid
industrial capacity?
 And how to achieve that while becoming less
dependent on foreign resources?
 New economic strategy started in the early 1960s
 It had two essential characteristics
 1) Planned industrialization
 Industrialization through import substitution
 Why planning?
 A more efficient allocation of scarce resources (loans
and foreign exchange)
 State would be assigned a crucial role (State Planning
Agency [Devlet Planlama Teşkilatı] established in
1960)
Economic policies (1960s and 70s)
 State Planning Agency:
 Academics and bureaucrats
 5-year plans indicating preferred areas of
economy (starting in 1963)
 The public investments took place according to
the priorities of the plan, however, the same
priorities only had an indicative effect on private
investments
 State Planning Agency derived its power from its
ability to allocate significant amount of cheap
credits and scarce foreign exchange
Economic policies (1960s and 70s)
 2) Domestic market
 For the first time in Turkey’s recent history
extended rights were given to workers (such as
collective wage bargaining through trade unions
or right to strike)
 These rights significantly improved the
purchasing power of the organized workers which
resulted in higher wages and generous benefits
 On the other hand, state also provided the
majority of population with access to affordable
education and health systems , and a generous
social security system.
 Why would the industrialists accept this
situation?
Economic policies (1960s and 70s)
 Higher wages meant higher costs of
production
 It is rational for individual producer to cut
back on costs of production by lowering wages
 However, this individual act may lead to a
collective problem because all wages constitute
substantial part of the demand for
domestically produced goods
 How to achieve the balance between wage as a
cost of production and wage as a determinant
of aggregate demand?
Economic policies (1960s and 70s)
 Foreign trade is still important
 Selective protection (restrictions on the imports of consumer
goods only)
 No barriers regarding the intermediate goods and capital
goods
 This system was based on industrialization but not
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necessarily national industrialization
Meanwhile, the same strategy also did not target less
integration with the world economy
The main idea was how to create a domestic industry that
would be competitive in international markets in the near
future
However, before becoming competitive, the same industry
would need some maturation in a protected market and be
dependent on imported machinery, raw materials and
intermediate goods during that time
The same strategy was supported by developed countries, as
well.
Economic policies (1960s and 70s)
 What about agriculture?
 Direct effects on industrialization
 Potential source of demand for domestically
produced goods especially for textile and food but
also for tractor and other inputs.
 Price support programs and subsidies regarding
important inputs (tractors, pesticide, fertilizer etc.)
continued throughout the period.
 There was steady rise in terms of trade in favor of
agricultural goods.
 Indirect effects on industrialization
 Most of the farmers kept their connections with their
villages
 They received essential food and income from their
families back in villages and therefore became part of
domestic demand as consumers
Economic policies (1960s and 70s)
 Another source of demand came from workers
 There was almost 100 percent rise in average
real wages
 However, this case was mostly observed among
organized workers in durable consumption
goods sector or automotive sector
 This group was also labeled “labor aristocracy”
 Their income was also augmented by welfare
policies of the state and official policies
regarding shanty towns (gecekondu mahalleleri)
Economic policies (1960s and 70s)
 Industrialists benefitted from high profits in
the protected markets.
 They were not required to compete with better-
quality and low-cost foreign goods.
 They received subsidized inputs (from State
Economic Enterprises) and credits.
 One other contribution to high industrial profits
came from exchange rate policy
Economic policies (1960s and 70s)
 What was the exchange rate policy?
 Artificially overvalued domestic currency
 Only those industrialist who imported
intermediate goods and machinery would get
foreign exchange at the official rate
 Excess demand for foreign exchange led to
unofficial high exchange rates in black markets
 On the other hand, the same exchange rate
policy had adverse effects on Turkish exports
Economic policies (1960s and 70s)
 There were other groups of industrialists who
were producing goods according to the
requirements of the main industrialists or to meet
the local demand
 They had to operate under competitive conditions
 Therefore both the owners and workers were subject
to fluctuations in their incomes
 Most of the workers in that group did not have any of
the rights enjoyed by the workers in the first group.
 Some of these industrialist made the transition to
the first group, however, the workers in those
industries were the absolute losers of this process.
 On the other hand, those traditional industries
positively contributed to the success of the first
growth by providing them with cheap inputs and wage
goods.
Economic policies (1960s and 70s)
 What was the role of the external finance?
 Between 1947 and 1980, Turkey ran trade deficit
 In other words, Turkey always used external
resources (other countries savings) to finance its
extra consumption and investment
 Until the 1960s, the major component of the
external finance was aid and long-term credit
supplied by the US
 Towards the end of the 1960s, worker
remittance (gurbetçi işçilerin gönderdikleri)
became much more important source of external
finance
 FDI never played a major role in external
financing.
Economic policies (1960s and 70s)
 The rate of growth depended on the availability of
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foreign exchange
Industrial sector never made the transition to the
production of internationally competitive goods, and
therefore, never generated its own foreign exchange
through exports
Consequently, economic growth and industrialization
continued with the help of foreign aid, official credits,
and remittances.
Both the oil crisis in 1973 and Cyprus war in 1974
resulted in unexpected increases in import bills.
Worker remittances financed some part of the deficit,
however, both the government and industrialists
started to search for short-term foreign loans.
Foreign exchange shortage emerged as one the most
important barriers to the industrialization process
during the last years of the 1970s.
Economic policies (1960s and 70s)
 The shortage of foreign exchange also led to
the shortages of key intermediate goods such
as oil and electricity (because oil was the main
energy used in the production of electricity)
 Given the high prices of major intermediate
goods and high wages, profits of the major
industrialists had to be cut.
 As a result of falling profits, both production
and investment in industrial sectors started to
decline in the late 1970s.
Economic policies (1960s and 70s)
 The annual growth rate for the period (1962-1976) was
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about 6.8 %. The same figure was 9.6% for
industrialization.
The share of durable consumer goods and intermediate
goods in total industrial production rose from 25 % in
1963 to 53 % in 1980.
There was indeed a shift from basic to more developed
goods production.
However, the change with respect to capital goods was
not satisfactory (from 8.4% to 7.5%).
On the other hand, trade coverage ratio
(export/import) fell from 68.5% to 34% between 1961
and 1976.
Although there was a significant intensification of
industrialization, still, the same change was oriented
towards domestic markets rather than international
markets.