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Economics 401 Week 5 Prelude to Democracy (1946-50) Economic policies in this new period were to be shaped by the way Turkey integrated into the world economy A new economic structure was established under the leadership of the United States In 1944, economists and politicians from the U.S. and the U.K laid out the framework of new economic policies in Bretton Woods The main idea was how to sustain high growth rates and full employment without disruptions in world trade and financial markets. Countries had to be specialized according to their comparative advantage and fully embrace free trade They would be allowed devaluation to some extent and provided external support in the presence of payment difficulties Prelude to Democracy (1946-50) There were limits on short-term financial flows in order to support fixed exchange rate system and promote stability in world economy Official international loans would be promoted as long as they were used in accordance with the expected position in the new division of labor Accordingly, developed countries would produce capital intensive goods (machinery and equipment) and develoing countries would specialize in agricultural goods and raw materials) Economic Policies (1946-1953) In 1946 Turkey still had a surplus in trade and more than sufficient amount of foreign exchange reserves Turkey carried out a major devaluation in 1946. The value of 1 US dollar jumped from 1.28 to 2.8 TL overnight Gradual liberalization of trade policies started in the same year Barriers to international capital were also modified in 1947 First with Truman Doctrine and then with the Marshall plan Turkey received huge economic aid from the U.S. after the war. Within the period of 1946-1950, Turkey obtained substantial foreign aid and long-term credit, amounting to 391 million $. This amount was greater than the cumulative total credit and aid of last 23 years. In return, USA made sure that public funds would be reallocated from industry into agriculture and construction. Economic Policies (1946-1953) In the period 1946 and 1953, the annual growth rate of the economy was about 10 %, mostly due to economic recovery after war years. Again, the crucial source of growth came from agricultural sector, exceeding the industrial growth in the same period This time it was the change in productivity rather than favorable prices that led to agricultural growth Availability of new technology (tractors) contributed positively to agricultural expansion. The number of tractors in 1946 barely exceeded 1000, however, the number of tractors reached 43000 by 1955. On the other hand, the cultivated land increased by 50 % whereas the population increased only by 20 percent. Access to cheap credit (mostly through state banks) helped farmers buy new tractors and benefit from agricultural expnasion Economic Policies (1946-1953) Other important import items were construction machinery, road-building equipment and motor vehicles. These resources were mostly financed by U.S. aid According to the reports prepared by famous economists, Turkey was advised to use its resources in infrastructure (mostly highways) required by agricultural exports. The relative share of agriculture rose, while the same share of industry fell. This observation was indicating the new position of Turkey in international division of labor. After running trade surplus since 1930, Turkey started to run deficits from 1947 on. Although the share of investment stayed stable throughout the period, more and more of new investments were financed through external sources. Economic Policies (1946-1953) 1953 was the last year of an another expansionary period in Turkish economic history Most of the people observed absolute improvements in their economic situation, although agricultural sector did relatively better. Although this liberal integration of Turkey with the world economy resulted in high growth rates and material prosperity for most of the people, the same process also led to a return of external deficit problem The growth process depended mostly on imported intermediate and capital goods Export revenue and foreign aid/credits were important to finance the flow of imports The “dependence” on international sources would continue in the following periods despite the reversal of liberal trade policies Economic Policies (1954-61) There was a sharp decline in agricultural output and exports in 1954 due to international prices and weather conditions. The dollar value of 1953 exports and imports was never attained in this period. As a response to external deficit and falling export revenues, government tried to put new restrictions on trade policies At the same time, high and steady growth rates were important in keeping voters content with the ruling party Democratic party under the leadership of Menderes used all available official means to keep popular support as high as possible. Credit to the agrciultural sector, price support programs and public investment were financed by printing money Inflation rose (almost 100 % between 1955 and 1959) Economic Policies (1954-61) Liberal trade regime was abandoned in 1954 and some restrictions were reinforced. After 1955, when restrictions were imposed on imports, the share of consumer goods dropped to only 10 percent. Government-induced domestic demand and protected markets provided the manufacturers with sufficient incentive to produce for the domestic market. After 1954, all domestic manufacturing output could find markets and high profits. Non-durable good (textile, food etc.) production constituted 75 % of total industrial output. Once more, there was an increase in the share of industry in total output. This was another period of disguised ISI Overall average economic growth in this period was 4.4 % However, the external deficit still remained a problem and Turkey was continuously in need for foreign aid Economic Policies (1954-61) Inflationary growth became a liability because of its distributional effects and uncertainty IMF pushed its own agenda and made Turkey to switch back to more liberal policies in return for access to international credit markets and foreign aid in 1958. Another devaluation from 2.8 TL to 9 TL took place Control over public spending In return Turkey would have its foreign debt payment postponed and gain access to new international loans. Even the industrialists were discontent and demanded for concrete strategies about the future path of Turkish economy World Bank and OECD experts urged Menderes government to form a planning board in order to impose some control over public spending and the allocation of foreign exchange. Election Results in the 1950s Election Year 1950 1954 1957 Democratic Party (DP) 52.7 (408) 57.5 (502) 47.9 (424) 35.2 (32) 41.1 (178) Republican 39.4 (69) People’s Party (CHP) Economic Policies (1954-61) The commitment of DP to free enterprise was pragmatic. In 1950 when Menderes gained power and hence etatism theoretically ended, 63 % of value-added in Turkish industry originated from private firms and 37 % from SEEs. By 1960 when Menderes government fell, 52 % of industrial value-added originated in the private sector and 48 % in the public. Internal migration started to speed up in this period Mechanization of agriculture and the rise of underempolyment in rural areas First construction sector then industry attracted more people from rural areas Between 1950 and 1960, the population of 4 major cities increased by 75 %.